Legislature(2017 - 2018)HOUSE FINANCE 519

01/30/2018 09:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time Change --
+= HB 287 APPROP: EDUCATION/STUDENT TRANSPORTATION TELECONFERENCED
Heard & Held
+= HB 213 PUBLIC SCHOOL TRUST FUND TELECONFERENCED
Heard & Held
-- Public Testimony --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 30, 2018                                                                                           
                         9:08 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:08:45 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Foster  called the House Finance  Committee meeting                                                                    
to order at 9:08 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Neal Foster, Co-Chair                                                                                            
Representative Paul Seaton, Co-Chair                                                                                            
Representative Les Gara, Vice-Chair                                                                                             
Representative Jason Grenn                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Mark Neuman (alternate)                                                                                          
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Tammie Wilson                                                                                                    
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Arnold  Liebelt, Staff,  Representative Paul  Seaton; Alexei                                                                    
Painter, Analyst, Legislative  Finance Division; Tim Parker,                                                                    
President, NEA  Alaska; Chris Benshoof,  Teacher, Fairbanks;                                                                    
James Harris,  Teacher, Soldotna;  Amy Jo  Meiners, Teacher,                                                                    
Juneau;    Patrick    Mayer,    Superintendent,    Wrangell;                                                                    
Representative  Justin Parish,  Sponsor;  Lisa Worl,  Staff,                                                                    
Representative  Justin  Parish;   Alexei  Painter,  Analyst,                                                                    
Legislative   Finance   Division;  Mike   Barnhill,   Deputy                                                                    
Commissioner, Department of Revenue.                                                                                            
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Paul  Kendall,  Self,  Anchorage; Brian  Bjorkquist,  Senior                                                                    
Assistant Attorney General, Department of Law.                                                                                  
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 213    PUBLIC SCHOOL TRUST FUND                                                                                              
                                                                                                                                
          HB 213 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
HB 287    APPROP: EDUCATION/STUDENT TRANSPORTATION                                                                              
                                                                                                                                
          HB 287 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
Co-Chair Foster reviewed the meeting agenda.                                                                                    
                                                                                                                                
HOUSE BILL NO. 287                                                                                                            
                                                                                                                                
     "An Act making appropriations  for public education and                                                                    
     transportation   of  students;   making  appropriations                                                                    
     under art.  IX, sec.  17(c), Constitution of  the State                                                                    
     of  Alaska,  from  the  constitutional  budget  reserve                                                                    
     fund; and providing for an effective date."                                                                                
                                                                                                                                
9:10:05 AM                                                                                                                    
                                                                                                                                
Co-Chair  Foster relayed  that his  office had  not received                                                                    
any amendments from committee members.                                                                                          
                                                                                                                                
ARNOLD   LIEBELT,   STAFF,   REPRESENTATIVE   PAUL   SEATON,                                                                    
introduced himself.                                                                                                             
                                                                                                                                
ALEXEI  PAINTER,  ANALYST,   LEGISLATIVE  FINANCE  DIVISION,                                                                    
introduced himself.                                                                                                             
                                                                                                                                
Co-Chair  Foster noted  the  testifiers  were available  for                                                                    
questions.                                                                                                                      
                                                                                                                                
9:11:23 AM                                                                                                                    
                                                                                                                                
Representative Thompson  stated the bill concept  was a good                                                                    
idea, but he  believed it had not  been sufficiently vetted.                                                                    
He thought it was premature  to force the legislature into a                                                                    
three-quarter  vote  to  use Constitutional  Budget  Reserve                                                                    
(CBR) funds  before the legislature  had determined  what it                                                                    
wanted to  do with  the entire budget.  He stated  there had                                                                    
not been many  meetings on the bill where  the committee had                                                                    
been able to hear from the  entire public. He noted the only                                                                    
testimony had been invited,  such as school superintendents.                                                                    
He thought the bill usurped  the budget process. He asked if                                                                    
the committee was doing the  finance subcommittee's work. He                                                                    
reiterated that  it was a good  idea, but it was  too early.                                                                    
He asked for the current CBR balance.                                                                                           
                                                                                                                                
Mr. Painter replied that that  the CBR balance was projected                                                                    
to be $2.146 billion at the end of FY 18.                                                                                       
                                                                                                                                
Representative   Thompson  reiterated   that   he  was   not                                                                    
comfortable  with considering  the legislation  so early  in                                                                    
the legislative  session, which would force  a three-quarter                                                                    
vote [by the legislature].                                                                                                      
                                                                                                                                
Representative  Pruitt believed  the funding  amount in  the                                                                    
bill was the same amount  proposed by the governor. He asked                                                                    
for the accuracy of his statement.                                                                                              
                                                                                                                                
Mr. Liebelt replied in the affirmative.                                                                                         
                                                                                                                                
Representative Pruitt  asked if  anyone had spoken  with the                                                                    
Senate to determine if the amount was a bone of contention.                                                                     
                                                                                                                                
Co-Chair Seaton replied  that he had spoken  with members of                                                                    
the  other   body,  including   finance  members,   who  had                                                                    
indicated they did not plan  further cuts to K-12 education.                                                                    
He stated  that the amount  in the legislation was  the same                                                                    
funding level as the prior  year. He remarked that the other                                                                    
body had  not taken any action  on the issue because  it had                                                                    
not  received the  budget. The  charts  in member's  packets                                                                    
showed a slight  drop in the budget from  the preceding year                                                                    
due  to lower  than projected  pupil enrollment.  The FY  18                                                                    
management plan  was estimated to  be the  governor's number                                                                    
and the number  in HB 287 based on the  actual amount funded                                                                    
in FY  17. The charts  showed a slight  dip, but it  did not                                                                    
represent a real  dip because it was the  actual number paid                                                                    
out based on the precise student count.                                                                                         
                                                                                                                                
Representative  Pruitt did  not  propose  cuts to  education                                                                    
either. He  believed the  only argument  for the  passage of                                                                    
the  bill  was  related  to expectation  there  would  be  a                                                                    
failure   in  understanding   the  amount   that  would   be                                                                    
available.  He   stated  the  committee   had  heard   in  a                                                                    
presentation the  prior week that  there were  several dates                                                                    
associated with  education budgets,  including May  15 (pink                                                                    
slip  deadline for  nontenured teachers)  and  May 31  (pink                                                                    
slip  deadline for  tenured teachers).  He thought  the bill                                                                    
represented an expectation of failure  by the legislature to                                                                    
get a budget passed in 90  days. Yet, the legislature had an                                                                    
understanding on education. He  agreed that the budget could                                                                    
be planned  on the data  in the  bill. He also  believed the                                                                    
legislature would  finish its work  in 90 days.  He believed                                                                    
the  bill  was  unnecessary.  He  thought  the  bill  merely                                                                    
bifurcated the budget and he wondered was next.                                                                                 
                                                                                                                                
Representative  Pruitt questioned  whether other  items such                                                                    
as  health  and  public  safety would  be  pulled  from  the                                                                    
overall  budget for  separate consideration.  He noted  that                                                                    
the   budget  would   be  piecemeal.   He  added   that  the                                                                    
[Department  of   Revenue]  spring  forecast,   which  would                                                                    
provide a better representation  of the state's full revenue                                                                    
source would not come out  until April. He noted the release                                                                    
date also  depended on whether  the administration  chose to                                                                    
hold onto the  forecast longer as it had  the previous year.                                                                    
He  asked what  the need  for the  bill was  at present.  He                                                                    
stated that  if there  was alignment  he did  not understand                                                                    
the need for the bill.                                                                                                          
                                                                                                                                
Co-Chair  Seaton discussed  early  funding  of education  in                                                                    
order for  municipalities and school districts  to construct                                                                    
their  budgets.  He  did  not  believe  there  was  complete                                                                    
agreement  on all  budgetary items,  knowledge  of what  the                                                                    
spring forecast would  be, or agreement on the  amount to be                                                                    
taken  from the  [Permanent Fund]  Earnings Reserve  Account                                                                    
(ERA).   He   did   not   believe   school   districts   and                                                                    
municipalities could  plan their  budgets around  the belief                                                                    
that the  House and  Senate and the  governor all  agreed on                                                                    
what the number would be.  He compared the unknown situation                                                                    
to a scenario  where the legislature passed a  bill that was                                                                    
signed  by the  governor. He  noted that  signed legislation                                                                    
was security that  had not been provided  by the legislature                                                                    
in the past, which had been a problem.                                                                                          
                                                                                                                                
9:19:15 AM                                                                                                                    
                                                                                                                                
Co-Chair   Seaton   continued  to   address   Representative                                                                    
Pruitt's question.  There had always been  the insecurity of                                                                    
leaving  the  education  budget  to the  last  item  [to  be                                                                    
negotiated].  He  stated that  unless  a  separate bill  was                                                                    
passed  with money  attached that  the governor  could sign,                                                                    
the  legislature  would  not  be  early  funding  education.                                                                    
Assuming there would  be agreement on the  amount that would                                                                    
be passed  was not  the same  thing as  a passed  budget. He                                                                    
stated that until legislators voted  on something it was not                                                                    
possible to know what would  happen. The purpose of the bill                                                                    
was to take  the issue off the table and  prevent layoffs or                                                                    
districts  from  having  to construct  two  budgets  because                                                                    
things  changed   in  midstream.  He  stated   that  if  the                                                                    
legislature  wanted to  early  fund  education, they  should                                                                    
early  fund it;  if not,  education  should be  left in  the                                                                    
regular  budget.  He  believed  education  should  be  early                                                                    
funded. He stated that education  funding was vital, and the                                                                    
bill would fund it at the last year's level.                                                                                    
                                                                                                                                
9:21:12 AM                                                                                                                    
                                                                                                                                
Representative Pruitt  surmised that  it sounded  like there                                                                    
was  a  failure to  communicate.  He  clarified he  had  not                                                                    
stated there was  alignment on everything, but  from what he                                                                    
understood,  there was  alignment on  education funding.  He                                                                    
did not understand the need  to push the bill from committee                                                                    
at  present when  it sounded  like there  had been  multiple                                                                    
conversations  with  members  from the  Senate  about  their                                                                    
alignment  on the  topic.  He did  not  understand why  they                                                                    
could not  wait a  few days to  determine whether  there was                                                                    
alignment in the Senate as a  whole. He cited May 15 and May                                                                    
31  as  failure   dates,  which  were  30   days  after  the                                                                    
legislature was supposed to be finished with its work.                                                                          
                                                                                                                                
Representative  Pruitt remarked  the  bill  would pull  $800                                                                    
million more from the CBR  than the estimate provided in the                                                                    
initial presentations. He stated  that it would mean pulling                                                                    
more money  out of an  account than was  potentially needed.                                                                    
He stated that on July 1  it would mean pulling $1.2 billion                                                                    
out of an  account that earned 1.86 percent  in 2017 instead                                                                    
of using money from the  General Fund, which could be pulled                                                                    
out over  the course  of the year.  He detailed  the General                                                                    
Fund had  made 1.56  percent in 2017.  He remarked  that the                                                                    
difference  may  not  seem substantial,  but  1  percent  of                                                                    
billions  was  significant.  He thought  they  were  pushing                                                                    
forward on  something without  communicating with  the other                                                                    
body.  He reasoned  that  if there  was  alignment the  bill                                                                    
reflected an  expectation of failure.  He requested  to hold                                                                    
off  on  taking action  for  several  days  in order  for  a                                                                    
discussion to take place with the Senate.                                                                                       
                                                                                                                                
9:23:30 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:26:51 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Foster noted there were  several questions and that                                                                    
a  slide had  been  put up  on the  screen.  He relayed  his                                                                    
intent was to hold the bill  a couple of days to hear public                                                                    
testimony  on Thursday.  He wanted  to allow  extra time  to                                                                    
communicate any concerns.                                                                                                       
                                                                                                                                
Vice-Chair   Gara    stated   that   the    most   important                                                                    
professionals in  the state were becoming  demoralized. They                                                                    
were  leaving   positions  with   the  University   and  the                                                                    
education  system because  they  did not  know whether  they                                                                    
would have  jobs the  following year.  He remarked  that the                                                                    
past few  years there  had been  legislators asking  for $67                                                                    
million in  education cuts at  the last minute.  He believed                                                                    
if legislators were all agreeable  that no one would do that                                                                    
during  the  current  session, they  should  deal  with  the                                                                    
education  budget at  present. He  spoke to  the concept  of                                                                    
passing  a  budget  on  time. He  supported  that  goal  but                                                                    
pointed  out that  there had  not  been a  great history  of                                                                    
passing a  budget on time in  recent years. He did  not want                                                                    
to send  pink slips  to teachers. He  stressed that  some of                                                                    
the best teachers  were leaving the state.  He reasoned that                                                                    
when  those  individuals  were lost  it  meant  the  state's                                                                    
education system suffered.                                                                                                      
                                                                                                                                
Vice-Chair Gara  lauded Co-Chair Seaton for  filing the bill                                                                    
because it  reflected a discussion the  legislature had been                                                                    
having  for  a  long  time.  He  spoke  about  threats  that                                                                    
individuals would  lose their jobs.  He supported  the bill.                                                                    
He  stated that  unfortunately with  the differing  opinions                                                                    
about a fiscal  plan something had not  passed. He supported                                                                    
a  fiscal  plan.  He  pointed   to  decisions  made  by  the                                                                    
legislature the  previous year when the  savings account had                                                                    
been drawn down substantially.  He stated that the remaining                                                                    
sources of revenue were very  controversial. He believed the                                                                    
bill had  to pass. He was  glad to hear that  others did not                                                                    
want  to further  cut education.  He supported  an inflation                                                                    
adjustment for the losses in  education funding. He believed                                                                    
the bill was something all legislators could agree on.                                                                          
                                                                                                                                
9:31:28 AM                                                                                                                    
                                                                                                                                
Co-Chair Foster  repeated that he  planned to hold  the bill                                                                    
until  Thursday for  more  public  testimony. The  committee                                                                    
would hear  public testimony during  the current  meeting as                                                                    
well.                                                                                                                           
                                                                                                                                
Representative  Neuman  thanked   Co-Chair  Foster  for  the                                                                    
opportunity  to ask  questions. He  asked how  to prioritize                                                                    
funding of  teachers over state troopers  and everyone else.                                                                    
He spoke  about decisions  that needed  to be  made included                                                                    
what funds  to use to  fund a  budget. He detailed  that the                                                                    
previous year  there had been  a decision made by  the House                                                                    
Majority not to fund any budgets  until taxes and use of the                                                                    
Permanent  Fund Dividend  bills were  passed. He  stated the                                                                    
legislature  could pass  a bill  like  HB 287  and it  would                                                                    
still not matter. He asked  about how to utilize the current                                                                    
fund. He agreed that giving  industry and schools an idea of                                                                    
what the  funding would be  would be  helpful as soon  as it                                                                    
was possible to  do so; however, the  state was experiencing                                                                    
difficult financial times and  the decisions were difficult.                                                                    
He thought  tying up  the available  funds in  the different                                                                    
pots of money  could be very difficult  for the legislature.                                                                    
He wanted to get more information on the topic.                                                                                 
                                                                                                                                
Representative Neuman  spoke about personnel costs  - it had                                                                    
been mentioned  that the bill  was highly supported  by many                                                                    
members.  He  was  not  able  to support  the  bill  due  to                                                                    
questions  he had.  He stated  there was  no reason  why the                                                                    
Senate and  House could  not get together  early on  to give                                                                    
the education  industry an  idea of  what the  funding would                                                                    
be. He  reiterated his thanks  for the time to  consider the                                                                    
bill.                                                                                                                           
                                                                                                                                
Co-Chair Foster  reiterated that  public testimony  would be                                                                    
reopened later in the meeting and on Thursday.                                                                                  
                                                                                                                                
9:35:01 AM                                                                                                                    
                                                                                                                                
Representative   Tilton   echoed   comments  made   by   her                                                                    
colleagues. She  wondered about  the funding  priorities for                                                                    
the different  departments and  agencies. She  mentioned the                                                                    
education  subcommittee process  and questioned  whether the                                                                    
bill  put  the cart  before  the  horse.  She spoke  to  the                                                                    
remaining  CBR balance  and available  funding and  asked if                                                                    
figures accounted for increased oil prices.                                                                                     
                                                                                                                                
Mr. Painter replied in the  negative. The projections of the                                                                    
CBR balance at  the end of FY 18 assumed  the [Department of                                                                    
Revenue] fall  forecast, which  he believed  used a  $56 per                                                                    
barrel price in FY 18.                                                                                                          
                                                                                                                                
Representative Tilton  remarked that  the projection  was at                                                                    
$56 per  barrel, but the  other day  the price was  $70. She                                                                    
asked if her statement was accurate.                                                                                            
                                                                                                                                
Mr. Painter replied in the affirmative.                                                                                         
                                                                                                                                
Representative Tilton surmised there  was an opportunity for                                                                    
some increased balances in state savings accounts.                                                                              
                                                                                                                                
Mr.  Painter answered  that if  prices held  at $70  for the                                                                    
remainder of  the fiscal year  there would be  an additional                                                                    
$200 million in  the CBR; the balance would  be $2.3 billion                                                                    
instead of $2.1 billion.                                                                                                        
                                                                                                                                
Co-Chair Seaton  spoke to an earlier  question about whether                                                                    
the legislation  was taking over  the responsibility  of the                                                                    
finance  subcommittee. The  portions  included  in the  bill                                                                    
were in statute including  the Base Student Allocation (BSA)                                                                    
and pupil  transportation, which were not  considered by the                                                                    
finance  subcommittee. He  clarified that  the bill  did not                                                                    
fund the  entire education  budget including  pre-K, teacher                                                                    
mentor programs,  and the Department of  Education and Early                                                                    
Development  (DEED)  -  those items  were  still  under  the                                                                    
purview of the education subcommittee.                                                                                          
                                                                                                                                
Co-Chair  Seaton furthered  that  the  bill also  considered                                                                    
other portions where people were  required to receive layoff                                                                    
notices by  state law including  boarding schools  and Mount                                                                    
Edgecumbe. The  bill funded basic K-12  education, which was                                                                    
where  the  agreement  resided.   He  stated  there  was  no                                                                    
agreement  on  things  like   bond  debt  reimbursement  for                                                                    
schools.  The bill  addressed the  portion of  education and                                                                    
employees  that  were  different  than  state  troopers.  He                                                                    
detailed that  state troopers were  not required  to receive                                                                    
layoff  notices May  15  through June.  Troopers  may go  on                                                                    
furlough on  July 1 if  a budget  was not finished,  but the                                                                    
bill  pertained  to the  only  segment  of government  where                                                                    
there  was  a law  requiring  advanced  layoff notices.  The                                                                    
bill's  purpose  was  to ensure  the  school  districts  and                                                                    
municipalities  working  to  fulfill   state  law  were  not                                                                    
negatively impacted.                                                                                                            
                                                                                                                                
Co-Chair Seaton clarified there  were four groups within the                                                                    
legislature (two  in the  Senate and two  in the  House). He                                                                    
elaborated that  no caucus had  a three-quarter  vote within                                                                    
its membership. He explained that  if the items were left in                                                                    
the operating  budget they would need  agreement between the                                                                    
four groups without a vote. He  did not know that the option                                                                    
was a  secure way to  ensure the funding for  education. The                                                                    
purpose was  to identify a  funding source and agree  or not                                                                    
agree to  fund education early.  He explained it  would mean                                                                    
the education funding  would be a known  amount, which would                                                                    
be attached to the funds  identified in the budget bill. The                                                                    
way to gain full knowledge and  security was to have a vote.                                                                    
He appreciated Co-Chair Foster reopening public testimony.                                                                      
                                                                                                                                
9:41:18 AM                                                                                                                    
                                                                                                                                
Representative Ortiz responded to  an earlier question about                                                                    
whether the bill bypassed the  subcommittee. He relayed that                                                                    
the  subcommittee had  discussed the  issue and  had already                                                                    
heard  all portions  of the  sections included  in the  bill                                                                    
with the exception of Mount  Edgecumbe. The subcommittee was                                                                    
scheduled to  hear about Mount Edgecumbe  the following day.                                                                    
He relayed the subcommittee had not been bypassed.                                                                              
                                                                                                                                
Representative    Neuman   stated    that   generally    the                                                                    
supplemental  budget could  get rolled  into the  capital or                                                                    
operating  budget. He  asked if  the bill  was a  standalone                                                                    
appropriations bill.                                                                                                            
                                                                                                                                
Co-Chair Seaton replied  in the affirmative. The  bill was a                                                                    
complete budget  bill that  identified the  funding sources.                                                                    
He explained that  if it passed it would go  to the governor                                                                    
for his  signature. The bill's  passage would result  in the                                                                    
removal of the sections in  the general operating budget. He                                                                    
detailed that HB 287 was  an operating budget bill for basic                                                                    
K-12 education. The bill was a way to fund education early.                                                                     
                                                                                                                                
Representative  Neuman  stated   that  the  legislature  was                                                                    
statutorily required  to pass an operating  budget. He noted                                                                    
there  were  ways  to  interrupt the  bill  if  desired.  He                                                                    
elaborated  that the  legislature  had statutorily  required                                                                    
budgets it  had to  pass every  year. He  asked if  the bill                                                                    
would fall under the same statutory requirement.                                                                                
                                                                                                                                
Co-Chair Seaton answered in the  affirmative. The bill was a                                                                    
portion  of the  operating budget  and would  have the  same                                                                    
qualifications as any other.                                                                                                    
                                                                                                                                
9:44:10 AM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  remarked that the committee  was not really                                                                    
supposed  to talk  about what  the Senate  would do  per the                                                                    
Mason's Manual.  He emphasized that individuals  impacted by                                                                    
the  legislature's failure  to pass  a budget  on time  were                                                                    
angry.  He  stated  that  for  three  years  in  a  row  the                                                                    
legislature had  told teachers they would  possibly face $67                                                                    
million   in  education   cuts.  The   legislature  had   an                                                                    
opportunity to  tell teachers  they would  not face  cuts in                                                                    
the  current  year. He  shared  that  a teacher  friend  was                                                                    
leaving the state because he was  fed up with the threats of                                                                    
cuts and  receiving pink slip  notices. He  underscored that                                                                    
the state  was losing  its best  teachers. He  detailed that                                                                    
state  employees   receiving  pink  slips  took   the  issue                                                                    
seriously. The  bill provided an opportunity  to communicate                                                                    
to the  education system  that they would  not face  cuts in                                                                    
the current year.  He underscored that the  state was losing                                                                    
its teachers.  The bill  was an attempt  to ensure  that the                                                                    
best teachers  remained in Alaska. He  hoped the legislature                                                                    
could  come  together  in agreement  that  further  cuts  to                                                                    
education were not appropriate.                                                                                                 
                                                                                                                                
9:46:25 AM                                                                                                                    
                                                                                                                                
Representative  Guttenberg remarked  that the  committee had                                                                    
ample opportunity to have discussions.  He requested to hear                                                                    
public testimony if people were waiting.                                                                                        
                                                                                                                                
Representative Grenn asked about the  timing and need to get                                                                    
the bill passed and to the  governor as soon as possible. He                                                                    
stated  that May  15 was  the  statutory deadline  regarding                                                                    
nontenured teachers.  He relayed  that the  Anchorage School                                                                    
District had  to report  its budget  to the  municipality by                                                                    
March 1.  He believed securing  funding by that  point would                                                                    
provide morale for the district  to know the legislature was                                                                    
focused on education  as a priority for  Alaska. He detailed                                                                    
that  due to  years of  pink slips  the morale  was low.  He                                                                    
believed  the  bill would  go  a  long  way in  showing  the                                                                    
legislature's support.  He supported moving  the legislation                                                                    
quickly.                                                                                                                        
                                                                                                                                
Representative Pruitt  spoke to  a comment about  an earlier                                                                    
statement about trying to get  the four caucuses together on                                                                    
a CBR  vote. He thought  the bill  appeared to be  trying to                                                                    
take the CBR  discussion off the table at  present, which he                                                                    
viewed as a usurpation of the  power of the Minority in some                                                                    
cases. He recalled  a letter written on May  20, 2015 signed                                                                    
by several members including  the co-chairs, which indicated                                                                    
that  five days  after  the pink  slip  date for  nontenured                                                                    
teachers they  wanted to continue the  negotiations with the                                                                    
Minority  caucus to  obtain the  number of  votes needed  to                                                                    
access the CBR  instead of using the ERA. He  noted that the                                                                    
ERA would  be utilized  without the vote  of the  people for                                                                    
which they requested.                                                                                                           
                                                                                                                                
Representative  Pruitt continued  that even  then there  had                                                                    
been an  argument from  members of  the House  that usurping                                                                    
the power of  the Minority was not something  they wanted to                                                                    
go forward with. He believed what  he had heard about HB 287                                                                    
was the desire  to get the issue off the  table so there was                                                                    
an  ability in  the  long  run to  (after  $800 million  was                                                                    
pulled  from the  CBR -  more  than was  necessary based  on                                                                    
prior testimony)  go forward without  the need  or necessity                                                                    
of having the voices of  the people that may find themselves                                                                    
not in  the Majority. He  believed the issue should  be laid                                                                    
on the  table if it was  a concern from the  past. He stated                                                                    
that  the  House Majority  [in  2015]  had taken  the  other                                                                    
members' concerns into account  and had allowed the Minority                                                                    
to  continue to  play  the role  everyone  would expect.  He                                                                    
believed  it was  important to  take into  consideration. He                                                                    
reiterated the current discussion  seemed like an attempt to                                                                    
eliminate  the House  Minority's ability  to participate  in                                                                    
the full budget process.                                                                                                        
                                                                                                                                
9:50:31 AM                                                                                                                    
                                                                                                                                
Co-Chair Seaton spoke  to the $800 million  and reminded the                                                                    
committee that they were talking  about a potential ERA draw                                                                    
that was  unsustainable, which was  based on a  6.95 percent                                                                    
annual return. He elaborated that  the Alaska Permanent Fund                                                                    
Corporation  (APFC)  Board  of   Trustees  had  adopted  the                                                                    
actuarial amount  of 6.5 percent, which  was essentially 0.5                                                                    
percent down  in the board's long-term  projection in return                                                                    
on  investment.  He  wanted  to  make  sure  the  issue  was                                                                    
considered.                                                                                                                     
                                                                                                                                
Representative Pruitt  stated that Co-Chair Seaton  had just                                                                    
highlighted  why the  issue  was  challenging. He  continued                                                                    
that  the bill  tried to  put  together pieces  of a  puzzle                                                                    
without knowing  what the puzzle  looked like.  He explained                                                                    
that  going  forward  with  the   bill  would  make  certain                                                                    
assumptions and force certain things  to be the reality when                                                                    
it came time to put the  budget together. It was part of the                                                                    
reason  he  believed  the  budget  needed  to  move  forward                                                                    
together  instead of  in pieces.  He reasoned  they did  not                                                                    
know exactly what the revenue  or spending pictures would be                                                                    
all at  the same time, which  made it very difficult  to put                                                                    
the whole thing together.                                                                                                       
                                                                                                                                
9:52:23 AM                                                                                                                    
                                                                                                                                
Representative Thompson remarked on  a statement made by Co-                                                                    
Chair Seaton that if the  bill passed, the sections would be                                                                    
removed from the full budget.  He wondered what would happen                                                                    
if the  legislature decided it  needed to add more  money to                                                                    
the    education   budget    for   something    like   pupil                                                                    
transportation.  He  reasoned it  would  mean  the need  for                                                                    
another standalone bill. He  stated the subcommittee process                                                                    
had not  been completed  to determine whether  changes would                                                                    
be needed.  He was  concerned about  pulling the  items from                                                                    
the budget.                                                                                                                     
                                                                                                                                
Co-Chair Seaton clarified that  nothing precluded the budget                                                                    
from  having additional  money on  the topics.  For example,                                                                    
the  legislature  could  choose   to  add  additional  pupil                                                                    
transportation funding if it chose  to do so. The bill would                                                                    
fund  the BSA  and pupil  transportation at  the prior  year                                                                    
levels.  He   explained  that  the  legislature   could  put                                                                    
something else in  the budget if decided to do  so. The bill                                                                    
would be  signed by  the governor  as the  specific amounts,                                                                    
but  nothing prevented  additional  funds  in the  operating                                                                    
budget.                                                                                                                         
                                                                                                                                
Representative Neuman  had heard  from the sponsor  that the                                                                    
bill  would be  a standalone  operating appropriations  bill                                                                    
that  would be  required statutorily  just as  the operating                                                                    
budget was. He asked for verification of his understanding.                                                                     
                                                                                                                                
Co-Chair  Seaton  answered  that   the  bill  had  the  same                                                                    
parameters  as  a supplemental  bill.  He  explained that  a                                                                    
supplemental  could change  or add  additional money.  There                                                                    
was  no  constitutional  or statutory  requirement  for  the                                                                    
operating budget to be passed as one piece.                                                                                     
                                                                                                                                
Representative  Neuman  believed  a statutory  change  would                                                                    
require  a three-quarter  vote  on the  floor  and a  public                                                                    
vote.  Alternatively,  he  wondered   if  the  bill  was  an                                                                    
operating  budget bill  that  was  statutorily required.  He                                                                    
believed Co-Chair  Seaton had  answered in  the affirmative.                                                                    
He  stated that  if the  bill was  like a  supplemental that                                                                    
rolled into another  budget or was included  in an operating                                                                    
budget, the legislature  could decide to fund it  or not (as                                                                    
had  occurred the  previous year  with other  appropriations                                                                    
bills in the operating budget).  He stated that the governor                                                                    
could  decide to  fund the  bill at  a lesser  value as  had                                                                    
happened with  the Permanent Fund  Dividend in the  past. He                                                                    
did not know if it was possible and requested to find out.                                                                      
                                                                                                                                
Co-Chair Seaton  clarified that  it would  be a  budget bill                                                                    
just like the fast  track supplemental the legislature could                                                                    
pass. He  did not mean  that the legislature could  not pass                                                                    
an appropriation  without a statutory  requirement. However,                                                                    
the  bill under  consideration  in the  Senate  looked at  a                                                                    
statutory  requirement  that  future  legislatures  to  pass                                                                    
budgets by certain  times. He explained that HB  287 was the                                                                    
mechanism to accomplish the goal in the current year.                                                                           
                                                                                                                                
Co-Chair Foster recognized  that Representative Kawasaki had                                                                    
joined the meeting.                                                                                                             
                                                                                                                                
Mr. Liebelt clarified  there was an error on  the last slide                                                                    
of  a  presentation  [slide  8] he  had  provided  ["HB  287                                                                    
Education  and Pupil  Transportation:  An  Early and  Stand-                                                                    
alone Appropriation  Bill" dated  January 25, 2018  (copy on                                                                    
file)].  He  corrected  that  the  slide  should  read  that                                                                    
nontenured teachers  had to  receive notices  by May  15 and                                                                    
tenured teachers  had to be  notified the end of  the school                                                                    
year.                                                                                                                           
                                                                                                                                
9:58:10 AM                                                                                                                    
                                                                                                                                
Co-Chair  Foster OPENED  public testimony  [public testimony                                                                    
had also been heard the preceding week].                                                                                        
                                                                                                                                
TIM PARKER,  PRESIDENT, NEA  ALASKA, spoke  in favor  of the                                                                    
legislation. He thanked the co-chairs  and bill sponsors for                                                                    
the  opportunity   to  express   support.  He   stated  that                                                                    
educators in Alaska  cared a lot about  student learning, it                                                                    
was the  driving force  that pushed  educators. He  spoke to                                                                    
the positive motivation in the  classroom. He argued that HB                                                                    
287  was poised  to fix  some problems  with the  particular                                                                    
situation.  He recalled  the delay  in funding  the previous                                                                    
year and how  it had impacted school  districts and specific                                                                    
schools.  Districts  had handed  out  pink  slips in  record                                                                    
numbers, with the thought that  unfortunately the pink slips                                                                    
would be rescinded, which they had been.                                                                                        
                                                                                                                                
Mr. Parker detailed  that between the time  they issued pink                                                                    
slips  and rescinded  them many  of the  best and  brightest                                                                    
teachers had left  the state. He noted  the ramifications of                                                                    
passing out those  slips. He wanted to see the  focus on the                                                                    
necessary  things  that  were  important  to  education.  He                                                                    
mentioned  the Alaska  Education Challenge  and noted  there                                                                    
would  be a  press  conference  later in  the  day with  the                                                                    
commissioner; NEA was trying to  lean into things that would                                                                    
help districts  make better decisions about  how to increase                                                                    
and  maximize   student  learning.  Delayed   funding  meant                                                                    
districts were not focused on  what they should be. He spoke                                                                    
to  the  importance  of   providing  funding  stability.  He                                                                    
reiterated NEA's support for HB 287.                                                                                            
                                                                                                                                
10:01:57 AM                                                                                                                   
                                                                                                                                
Representative  Grenn  stated   that  the  Anchorage  School                                                                    
District submitted  its budget to the  municipality by March                                                                    
1.  He asked  if it  was  a common  deadline throughout  the                                                                    
state.                                                                                                                          
                                                                                                                                
Mr. Parker  responded that that  deadlines were not  all the                                                                    
same, but it  was common for budgets to be  submitted by the                                                                    
districts early  and then funding mechanisms  were addressed                                                                    
with  their  boroughs.  There   had  been  discussion  about                                                                    
whether  April   1st  was  the   right  date.   Experts  had                                                                    
communicated  that  going  anywhere  after  April  1  risked                                                                    
putting schools  in positions of  providing pink  slips. Due                                                                    
to the various steps required  in the school budget process,                                                                    
NEA had  been told  that April  1 was  an important  date to                                                                    
make sure  the legislature had  acted by that time.  In past                                                                    
years education  funding had  been passed  a bit  later than                                                                    
April 1 and districts had managed to avoid pink slips.                                                                          
                                                                                                                                
Co-Chair Seaton remarked that there  had been some confusion                                                                    
on  when  tenured  and  nontenured  teachers  needed  to  be                                                                    
notified  about  layoff.  He believed  tenured  [nontenured]                                                                    
teachers had to  be notified by May 15. He  asked if many of                                                                    
the contracts required that nontenured  teachers be laid off                                                                    
prior  to tenured  teachers. He  surmised that  new teachers                                                                    
were laid off prior to laying off tenured teachers.                                                                             
                                                                                                                                
Mr.  Parker replied  in the  affirmative.  He detailed  that                                                                    
different  districts had  different contracts,  but the  net                                                                    
result was the same in  most districts. The other factor was                                                                    
the number  of nontenured  teachers versus  tenured teachers                                                                    
in a particular district - it varied by district.                                                                               
                                                                                                                                
10:05:14 AM                                                                                                                   
                                                                                                                                
PAUL KENDALL, SELF, ANCHORAGE  (via teleconference), did not                                                                    
believe   the  past   speaker  should   qualify  as   public                                                                    
testimony.  He  addressed  the concept  of  pink  slips.  He                                                                    
thought it  was malfeasance  or corruption. He  stated there                                                                    
were  secret negotiations  of public  employees. He  did not                                                                    
support unions.  He stated that  the legislature  had stolen                                                                    
the  dividend  from  residents. He  believed  the  education                                                                    
industry was  corrupt. He  thought wages  should be  cut. He                                                                    
thought the entire system was mismanaged.                                                                                       
                                                                                                                                
Co-Chair  Foster asked  testifiers  to  not disparage  other                                                                    
testifiers and to stick to the legislation.                                                                                     
                                                                                                                                
10:09:51 AM                                                                                                                   
                                                                                                                                
CHRIS BENSHOOF, TEACHER, FAIRBANKS,  spoke in support of the                                                                    
legislation. He  shared that a fellow  teacher had routinely                                                                    
been given  pink slips  - she  had been  teaching for  11 or                                                                    
more  years and  the routine  pink slips  were demoralizing.                                                                    
The uncertainty  meant teachers and students  were uncertain                                                                    
about   the  following   year.   The   uncertainty  led   to                                                                    
significant testimony  to the local school  board - teachers                                                                    
were concerned  about their positions and  programs and then                                                                    
students and families heard about  the issues as well, which                                                                    
caused uncertainty  for students.  He referenced  the Alaska                                                                    
Education  Challenge  -  one of  the  commitments  was  that                                                                    
schools  were  safe places  for  students  where safety  and                                                                    
well-being was cultivated.                                                                                                      
                                                                                                                                
Mr. Benshoof  believed the instability students  had to deal                                                                    
almost  annually  with was  difficult.  He  shared that  the                                                                    
previous year the  district had been asked to  create a plan                                                                    
for how to deal with flat  funding. He detailed the plan had                                                                    
been two to four staff  fewer, an increase in parent/teacher                                                                    
ratio, and  a decrease  in enrollment.  About one  week into                                                                    
that  process they  had been  asked to  make a  plan b  that                                                                    
would  include an  additional teacher  cut. Ultimately,  the                                                                    
district had been asked  to come up with a plan  c, d, and e                                                                    
over the remainder of the year.  He was in favor of the bill                                                                    
and appreciated the committee's time and attention.                                                                             
                                                                                                                                
10:13:02 AM                                                                                                                   
                                                                                                                                
JAMES HARRIS,  TEACHER, SOLDOTNA, testified in  favor of the                                                                    
bill. He shared  that he was the 2017 Alaska  teacher of the                                                                    
year  and he  had  spent most  of the  year  focused on  the                                                                    
issue.  He explained  that  it was  an  issue for  teachers,                                                                    
students,  and communities.  The Soldotna  School Board  had                                                                    
been   faced   with    developing   multiple   budgets   and                                                                    
administrators had  made multiple  plans. He  discussed that                                                                    
the Soldotna  High School had numerous  initiatives it would                                                                    
like to offer,  but it did not ever know  if the ability was                                                                    
there. The high  school did not ever know  how many teachers                                                                    
may need to  be cut and whether electives  could be offered.                                                                    
He recalled  that two  years back the  school had  not known                                                                    
whether  it could  offer  AP  [advanced placement]  classes,                                                                    
which  created instability  for  students.  He believed  one                                                                    
thing that all Alaskans wanted  was to provide stability for                                                                    
kids. He  stated that  kids felt  undervalued -  he believed                                                                    
the current  generation of students  needed to  feel valued.                                                                    
He relayed  that the borough  assembly also had to  hold off                                                                    
on its budget  because it did not know how  much it would be                                                                    
able to  give to  help the school  district. He  thanked the                                                                    
committee for its work. He  supported stability for students                                                                    
in the long-term.                                                                                                               
                                                                                                                                
Representative  Guttenberg  thanked  Mr.  Harris  for  being                                                                    
teacher of  the year  and for  the efforts  he had  put into                                                                    
education.                                                                                                                      
                                                                                                                                
10:15:29 AM                                                                                                                   
                                                                                                                                
AMY  JO MEINERS,  TEACHER, JUNEAU,  testified in  support of                                                                    
the bill.  She shared that  she was the 2016  Alaska teacher                                                                    
of the  year and a  mother of  three daughters who  had gone                                                                    
through the  Juneau school system.  She recognized  that the                                                                    
school calendar  did not fit  neatly into a  fiscal calendar                                                                    
or a  January/December timeline. She stated  that pink slips                                                                    
went  out in  May, but  job fairs  were held  in March.  She                                                                    
explained that  teachers booked travel  in February  for the                                                                    
March job fairs. The instability  played out for students in                                                                    
many  ways. She  shared  that her  youngest  daughter was  a                                                                    
senior and  had given  tours to  incoming freshman  who were                                                                    
deciding between  the two Juneau  high schools. Many  of the                                                                    
questions had been about what  courses were offered and what                                                                    
teachers would be  there. All the instability  played out in                                                                    
the spring.  She thanked  the sponsor  for putting  the bill                                                                    
forward and  thanked the legislature  for the  discussion it                                                                    
was having  about education. She  hoped the  headlines would                                                                    
read  about  the  positive   movement  for  education  going                                                                    
forward. She thanked the committee  for its consideration of                                                                    
passing an  education bill that would  stabilize the options                                                                    
for children.                                                                                                                   
                                                                                                                                
10:17:33 AM                                                                                                                   
                                                                                                                                
PATRICK  MAYER, SUPERINTENDENT,  WRANGELL, spoke  in support                                                                    
of the  legislation. He thanked  everyone who had a  hand in                                                                    
sponsoring the bill. He stressed  the importance of the bill                                                                    
for  the stability  of education  in  Alaska. Early  funding                                                                    
allowed  districts to  get  teacher  contracts signed  early                                                                    
enough so  they were not lost  to other states. He  spoke to                                                                    
statistics  suggesting  that  if teachers  were  given  pink                                                                    
slips   they  would   leave  for   jobs  in   other  states.                                                                    
Additionally,  there were  fewer job  candidates. He  shared                                                                    
that  he had  been in  Alaska  since 1982  and believed  the                                                                    
discussion was long overdue. He  applauded the committee for                                                                    
taking the issue  on. He urged the committee  to support the                                                                    
bill.                                                                                                                           
                                                                                                                                
Representative  Guttenberg spoke  to  the  process of  going                                                                    
through a  school district budget.  He asked if  the delays,                                                                    
teacher pink slips,  and other had a measurable  cost to the                                                                    
school district.                                                                                                                
                                                                                                                                
Mr.  Mayer  answered that  the  district  currently had  two                                                                    
vacant  positions in  math and  art. The  lack of  budgetary                                                                    
certainty  was causing  the district  to  delay filling  the                                                                    
positions. Other districts  throughout the state experienced                                                                    
the  same problem.  The issue  was  especially important  in                                                                    
small districts  because they may  have access to  a smaller                                                                    
pool  of  candidates.  The issue  was  a  continual  concern                                                                    
throughout its budget drafting process.                                                                                         
                                                                                                                                
10:20:50 AM                                                                                                                   
                                                                                                                                
Co-Chair  Foster  CLOSED  public testimony  with  intent  to                                                                    
reopen it on Thursday afternoon.                                                                                                
                                                                                                                                
HB  287  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
10:21:33 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:25:29 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
HOUSE BILL NO. 213                                                                                                            
                                                                                                                                
     "An Act relating to  the investment, appropriation, and                                                                    
     administration of the public school trust fund."                                                                           
                                                                                                                                
10:25:37 AM                                                                                                                   
                                                                                                                                
Co-Chair  Foster  noted  the committee  had  heard  a  brief                                                                    
introduction on the bill on January 25.                                                                                         
                                                                                                                                
Co-Chair  Seaton  MOVED  to  ADOPT  the  proposed  committee                                                                    
substitute  for  HB  213, Work  Draft  30-LS0765\R  (Glover,                                                                    
1/26/18).                                                                                                                       
                                                                                                                                
Co-Chair  Foster  OBJECTED  for  discussion.  He  asked  the                                                                    
sponsor to address the changes in the work draft.                                                                               
                                                                                                                                
REPRESENTATIVE  JUSTIN  PARISH,  SPONSOR, provided  a  brief                                                                    
introduction  of the  bill.  The bill  changed  the way  the                                                                    
state managed the  Public School Trust Fund  and would allow                                                                    
it  to realize  capital gains  as income  where appropriate,                                                                    
always  preserving the  principal of  the fund  and allowing                                                                    
for  growth  into  the  future.  Moving  to  a  more  modern                                                                    
management system  would mean continued growth  in the fund,                                                                    
realize higher dividends, and a  higher rate of earning. The                                                                    
CS  had several  changes -  one  practical and  a couple  of                                                                    
substantive  changes. He  deferred to  his staff  to address                                                                    
the details.                                                                                                                    
                                                                                                                                
LISA  WORL, STAFF,  REPRESENTATIVE JUSTIN  PARISH, addressed                                                                    
the summary of changes:                                                                                                         
                                                                                                                                
     Page 2, line 10:                                                                                                           
     Delete "previous 10 fiscal years"  and add "five fiscal                                                                    
     years preceding he previous fiscal year."                                                                                  
                                                                                                                                
     Page 2, line 31:                                                                                                           
     Add  "Section  6.  This Act  Takes  effect  immediately                                                                    
     under AS 01.10.070(c).                                                                                                     
                                                                                                                                
Ms. Worl addressed  the bill in its entirety  by providing a                                                                    
sectional analysis:                                                                                                             
                                                                                                                                
     Section 1  (page 1, line  4):  Amends AS  37.14.110 (c)                                                                    
     to state  the commissioner  of revenue  shall determine                                                                    
     the  net   income  of  the  fund   in  accordance  with                                                                    
     accounting principles  and that the principal  shall be                                                                    
     perpetually  retained   in  the  fund   for  investment                                                                    
     purposes.    The   distinction  between  principal  and                                                                    
     income  and  defining  and maintaining  the  difference                                                                    
     between the funds is deleted.                                                                                              
                                                                                                                                
     Section  2.  (page  2,  line 9):    AS  37.14.160  adds                                                                    
     section (5)  to the  duties to direct  the commissioner                                                                    
     to  determine  the  average  monthly  balance  for  the                                                                    
     public school  trust fund based on  the monthly average                                                                    
     market value  of the  fund for  the previous  10 fiscal                                                                    
     years.                                                                                                                     
                                                                                                                                
Ms. Worl  elaborated that  Section 2  added a  lag-year with                                                                    
the word  preceding. She continued  to review  the sectional                                                                    
analysis:                                                                                                                       
                                                                                                                                
     Section 3. (page  2, line 11   16):   Adds new section,                                                                    
     AS 37.14.165  relates to  the use  of the  public trust                                                                    
     fund  allowing  the  legislature  to  appropriate  4.75                                                                    
     percent of the amount determined by the commissioner.                                                                      
                                                                                                                                
     Section  4.  (page  2,  line  19  and  line  23):    AS                                                                    
     37.14.170 further defines investment  of the trust fund                                                                    
     management.                                                                                                                
                                                                                                                                
     Section  5.  (page  2,  line  30):    AS  37.14.140  is                                                                    
     repealed.  This section had  stated that the net income                                                                    
     of  the fund  could  not be  appropriated or  expended.                                                                    
     This section was repealed as  it did not allow for fund                                                                    
     to be managed with the POMV method.                                                                                        
                                                                                                                                
     Section 6.  (page 2, line  31): Adds section 6  for Act                                                                    
     to take effect immediately.                                                                                                
                                                                                                                                
Ms. Worl  communicated she was  available for  questions and                                                                    
listed others available in the room and online.                                                                                 
                                                                                                                                
10:31:01 AM                                                                                                                   
                                                                                                                                
Representative  Guttenberg relayed  that  he had  previously                                                                    
asked  for the  history of  the fund.  He requested  to hear                                                                    
from the Legislative Finance Division (LFD).                                                                                    
                                                                                                                                
ALEXEI  PAINTER,  ANALYST,   LEGISLATIVE  FINANCE  DIVISION,                                                                    
asked  if Representative  Guttenberg would  like information                                                                    
on the history of the fund.                                                                                                     
                                                                                                                                
Representative Guttenberg answered in the affirmative.                                                                          
                                                                                                                                
Mr.  Painter obliged.  He  relayed that  the  fund had  been                                                                    
established in  1913 as  a land  trust from  a congressional                                                                    
grant to the territory of  Alaska for public schools. In the                                                                    
1970s the land  trust had been converted into  a cash trust,                                                                    
creating the  fund as it is  at present. At that  point, all                                                                    
the  public  school trust  lands  were  merged into  general                                                                    
state  lands.  A  cash  trust  had  been  created  that  was                                                                    
invested and 0.5 percent of  royalties from minerals were to                                                                    
be deposited into the trust in  an attempt to make the trust                                                                    
whole.  Since then,  the fund  had initially  been used  for                                                                    
capital projects,  but was now  mainly used in  the formula.                                                                    
Given investment  strategies in  the 1970s  at the  time the                                                                    
statute was  written, there was deleted  language in Section                                                                    
1, such that the only  spendable amount coming from the fund                                                                    
was  dividends  and other  income.  He  stated that  capital                                                                    
gains could not be spent.                                                                                                       
                                                                                                                                
Mr.  Painter  explained  that dividends  and  capital  gains                                                                    
(gains  from selling  stocks) went  into the  Permanent Fund                                                                    
Earnings  Reserve Account  (ERA).  The  Public School  Trust                                                                    
Fund did not  allow capital gains to be spent.  As a result,                                                                    
less was spendable every year  and the Department of Revenue                                                                    
(DOR)  managed  the fund  in  a  way  that perhaps  did  not                                                                    
maximize the  total return of  the fund since  stocks tended                                                                    
to be where  much of the value resided  at present. Changing                                                                    
the  management of  the fund  to a  percent of  market value                                                                    
(POMV)  would likely  increase the  expected returns  of the                                                                    
fund because the management could  be shifted away from some                                                                    
of  the dividend  earning  investments that  may  not be  as                                                                    
strong.  Additionally, the  change  would allow  more to  be                                                                    
spent  every year  because  the state  could  not spend  the                                                                    
dividends but could spend a  more stable market value of the                                                                    
fund. He noted there were also several lawsuits.                                                                                
                                                                                                                                
10:34:13 AM                                                                                                                   
                                                                                                                                
Representative  Neuman  referenced Mr.  Painter's  testimony                                                                    
that the fund had changed from  a land trust to a cash fund.                                                                    
He asked about the process.                                                                                                     
                                                                                                                                
Mr.  Painter answered  that at  the  time in  the 1970s  the                                                                    
lands were managed as school  trust lands and when the sales                                                                    
happened the  revenue was  spent by  schools. At  that point                                                                    
the new sales from land were  deposited into a new fund. The                                                                    
land trust had been liquidated  and the lands had been added                                                                    
to  general state  land. There  was  no distinction  between                                                                    
school  and other  state lands,  except  for some  post-1980                                                                    
that were  transferred. The royalty deposit  was intended to                                                                    
take the place  of trust lands that no longer  belong to the                                                                    
trust. He explained  it had been the subject of  part of the                                                                    
Kasayulie  law suit.  At the  time  as part  of the  court's                                                                    
ruling (which had  been preempted by a  consent decree later                                                                    
on), the  judge had determined  that it was not  possible to                                                                    
determine whether the  trust had been made  whole by putting                                                                    
the royalties instead  of the lands unless the  value of the                                                                    
lands was known.  The value of the lands was  not known - it                                                                    
was impractical to survey hundreds  of thousands of acres in                                                                    
small parcels  across the state.  The trust would  remain in                                                                    
perpetuity as long as the value  of the lands was not known,                                                                    
but if  the state could  spend in  a sustainable way  on the                                                                    
correct  things,  it seemed  to  be  fulfilling the  trust's                                                                    
purpose. He remarked that the  Department of Law (DOL) could                                                                    
provide further detail on the legal aspects.                                                                                    
                                                                                                                                
Representative  Neuman  referenced  the first  paragraph  in                                                                    
section changes that  read: "language that was  removed in a                                                                    
manner that preserves the  distinction between principal and                                                                    
income and  excludes capital  gains." He  believed it  was a                                                                    
major  change  in  the  way management  had  been  done.  He                                                                    
requested to  hear from  DOL. He  stated the  change allowed                                                                    
the principal to  be used for management  purposes. He asked                                                                    
for more detail.                                                                                                                
                                                                                                                                
10:37:02 AM                                                                                                                   
                                                                                                                                
Representative Parish deferred to DOL.                                                                                          
                                                                                                                                
BRIAN   BJORKQUIST,  SENIOR   ASSISTANT  ATTORNEY   GENERAL,                                                                    
DEPARTMENT  OF  LAW  (via teleconference),  responded  there                                                                    
were  several  mischaracterizations  of  the  Public  School                                                                    
Trust, which  he intended to clarify.  He addressed Co-Chair                                                                    
Neuman's question  about what happened with  eliminating the                                                                    
capital gains  in Section 1  of the bill. He  explained that                                                                    
the  section still  had the  DOR commissioner  determine the                                                                    
net income  and still preserved  the principal of  the fund,                                                                    
which was perpetually retained  for investment purposes. The                                                                    
section  changed  that  the capital  gains  or  losses  were                                                                    
retained as part of the principal  of the fund - the capital                                                                    
gains  would add  to what  could  be spend  or losses  could                                                                    
detract from what could be spent.                                                                                               
                                                                                                                                
Representative  Neuman stated  that the  change would  allow                                                                    
access  to the  principal  for management  of  the fund.  He                                                                    
reasoned  if there  was a  downturn for  several consecutive                                                                    
years  of  -4.75,  it  could   be  taken  out  of  the  fund                                                                    
principal. He  believed it went against  the original intent                                                                    
of the language.                                                                                                                
                                                                                                                                
Mr.  Bjorkquist  disagreed.  He   explained  that  the  bill                                                                    
specified that the  principal of the fund  shall be retained                                                                    
for  investment purposes.  The principal  of the  fund could                                                                    
not be spent for  any purpose including administrative costs                                                                    
of the fund.                                                                                                                    
                                                                                                                                
Representative Neuman  suggested that  the state  would have                                                                    
to use part of the fund  principal to fund the change in the                                                                    
bill  if   the  fund  had  negative   investment  years.  He                                                                    
questioned whether  it was a  change the  legislature wanted                                                                    
to make.                                                                                                                        
                                                                                                                                
10:39:47 AM                                                                                                                   
                                                                                                                                
Representative Pruitt was trying  to understand how the fund                                                                    
was currently managed  and how the change would  be made. He                                                                    
referenced  a handout  in members'  packets provided  by DOR                                                                    
dated January 23, 2018 (copy  on file). The handout showed a                                                                    
table of  projected payouts from FY  19 to FY 25.  He looked                                                                    
at  a column  labeled  "status quo"  and  observed that  the                                                                    
amount in [FY 25] would  be $825 million. Alternatively, the                                                                    
5-year endowment proposed  in the CS, the  fund amount would                                                                    
be $776 million  [in FY 25]. He noted there  was a change of                                                                    
about  $10 million  per  year in  the  amount available  for                                                                    
spending. He asked  how the money was  currently managed. He                                                                    
wanted to  understand how DOR  was currently limited  in its                                                                    
ability to manage the fund and  how the bill would allow the                                                                    
fund to make more money.                                                                                                        
                                                                                                                                
Representative Parish deferred to DOR.                                                                                          
                                                                                                                                
MIKE BARNHILL,  DEPUTY COMMISSIONER, DEPARTMENT  OF REVENUE,                                                                    
provided a background on the  evolving law and theory on the                                                                    
management  of trust  funds and  endowments. He  believed it                                                                    
was fair  to say that  the approach to managing  trust funds                                                                    
and endowments  had changed substantially  over the  past 50                                                                    
years.  The state's  statutes governing  the Permanent  Fund                                                                    
and  the Public  School Trust  Fund reflected  a theory  and                                                                    
common law  of managing trust  funds that had been  in place                                                                    
quite some  time ago.  Since that  time numerous  things had                                                                    
taken  place. First,  was the  recognition that  the overall                                                                    
objective  of managing  a  trust fund  or  endowment was  to                                                                    
preserve   the  inflation   adjusted  value   of  the   fund                                                                    
indefinitely. Previously, the idea  had been to preserve the                                                                    
notional value  of principal indefinitely. The  approach had                                                                    
been modernized to make sure  the principal adjusts with the                                                                    
value of inflation. Preserving the  value of principal alone                                                                    
did not accomplish the objective.                                                                                               
                                                                                                                                
Mr.  Barnhill  elaborated  that  over  time  the  investment                                                                    
theory  regarding investment  of trusts  and endowments  had                                                                    
evolved  from the  notion that  there  should be  relatively                                                                    
risk-free  securities,  meaning   the  investment  portfolio                                                                    
would be  heavily dominated  with fixed  income instruments,                                                                    
had  given way  to  a more  aggressively invested  portfolio                                                                    
more  weighted towards  equities  and growth  in value.  The                                                                    
idea of  what could  be appropriated or  spent from  a trust                                                                    
had evolved from the concept of  income (cash in the case at                                                                    
hand)  delivered through  dividends from  equity instruments                                                                    
and coupons from fixed income  instruments, had given way to                                                                    
the  idea of  delivering some  distribution percentage  from                                                                    
the fund  (in some cases  5 percent,  or 4.75 percent  in HB                                                                    
213). The idea  was to produce an  inflation adjusted income                                                                    
stream for the trust's beneficiaries.  Over time there was a                                                                    
stream of income that was  relatively consistent and did not                                                                    
erode the inflation adjusted value of the trust.                                                                                
                                                                                                                                
Mr. Barnhill  expounded that much of  the conversation about                                                                    
the Permanent  Fund had  been focused on  how to  evolve the                                                                    
management and the  law governing the fund to  a more modern                                                                    
theory of  endowments, which was  equally applicable  in the                                                                    
case  of HB  213.  The statute  regarding  the exclusion  of                                                                    
capital gains in  the public trust fund was  also similar to                                                                    
the  Permanent Fund  context. In  1981 or  1982, instead  of                                                                    
retaining  net capital  gains in  the  principal, the  gains                                                                    
were allowed to  flow to the income fund. At  that time, the                                                                    
Permanent Fund  had adopted inflation proofing.  He spoke to                                                                    
Representative  Neuman's point  about eroding  the inflation                                                                    
adjusted  value  of  the trust.  The  way  endowments  avoid                                                                    
eroding the  inflation adjusted value  of the trusts  was to                                                                    
set  a distribution  percentage in  a way  that ensured  the                                                                    
payment to beneficiaries was  sufficient without eroding the                                                                    
inflation adjusted value of the trust.                                                                                          
                                                                                                                                
Mr. Barnhill  addressed how the fund  was managed currently.                                                                    
In  general, the  asset allocation  was heavily  weighted to                                                                    
fixed income  compared to other trust  funds administered by                                                                    
DOR (55  percent equity/45 percent  fixed income).  Over the                                                                    
past couple  of years  the allocation  had been  adjusted to                                                                    
add in a  real estate investment trust  (REIT). He explained                                                                    
that  a REIT  is a  cash generating  instrument that  looked                                                                    
like  equities but  delivered cash  like  fixed income.  The                                                                    
department  had  also added  in  a  bit  of high  yield.  He                                                                    
detailed  that  if the  bill  passed,  the department  would                                                                    
shift  the  asset  allocation  to  be  more  heavily  equity                                                                    
weighted in order  to generate a higher  return profile over                                                                    
time.   The  numbers   on  the   DOR   table  mentioned   by                                                                    
Representative  Pruitt reflected  the  idea  that DOR  would                                                                    
shift  closer  to  a  70/30  asset  allocation  (70  percent                                                                    
equity/30  percent fixed  income) with  some adjustments  to                                                                    
have continued exposure to REITs and high yield.                                                                                
                                                                                                                                
10:47:30 AM                                                                                                                   
                                                                                                                                
Representative  Pruitt   spoke  to  the  bill's   intent  to                                                                    
maintain the  trust principal at an  inflationary amount and                                                                    
to allow for the amount to  be spent to also increase at the                                                                    
inflationary amount.  The CS  made a  change from  a 10-year                                                                    
POMV  to  a 5-year  POMV.  He  asked  Mr. Barnhill  for  his                                                                    
opinion on the change.                                                                                                          
                                                                                                                                
Mr.  Barnhill answered  that one  of the  challenges in  the                                                                    
midterm investment environment (the  next ten years) was the                                                                    
current   long  running   bull  market   in  equities.   The                                                                    
department's  advisors, Callan  Associates,  and many  other                                                                    
advisors  were concerned  the market  may  be entering  some                                                                    
period of correction.  He noted it was not  possible to know                                                                    
the  timing -  it could  be any  day or  in three  years. It                                                                    
seemed plausible that at some  point over the next 10 years,                                                                    
the frothy  returns the equity  market had enjoyed  over the                                                                    
past  several   years  would  come   to  an  end   at  least                                                                    
temporarily.  The  department  was being  cautioned  against                                                                    
being optimistic  about continuing  to see  the double-digit                                                                    
equity return over the next 10 years.                                                                                           
                                                                                                                                
Mr. Barnhill  explained that the  10-year averaging  made it                                                                    
easier  for   the  department  to   hit  the   objective  of                                                                    
preserving the  inflation adjusted  value of the  trust over                                                                    
that period.  The 5-year averaging made  it more challenging                                                                    
if there  was a period of  market correction in the  next 10                                                                    
years. He  added that Callan  Associates and  others present                                                                    
their capital  market assumptions  on a 10-year  basis (they                                                                    
were more  optimistic on a  30-year basis). While  there was                                                                    
some pessimism  over the  next 10  years about  whether they                                                                    
could  hit their  numbers with  a 5-year  averaging, over  a                                                                    
longer period  it should be  doable assuming  basic elements                                                                    
and performance of the equity markets persist over time.                                                                        
                                                                                                                                
Mr. Barnhill clarified that as  drafted, the bill did not go                                                                    
all the  way to the  legal structure of what  was considered                                                                    
to be  the modern way  to manage endowments and  trusts. The                                                                    
reason was because it continued  to preserve the distinction                                                                    
between principal and income.  The objective of an endowment                                                                    
is to  preserve the  inflation adjusted  value of  the trust                                                                    
over  time.  The  technical  application  of  principal  and                                                                    
income  may not  succeed in  that objective,  which was  the                                                                    
reason laws  had been updated  to eliminate  the distinction                                                                    
between principal  and income so  the manager  understood it                                                                    
was not  their job  to preserve  principal, but  to preserve                                                                    
the inflation adjusted  value of the trust. He  cited a 2010                                                                    
law passed  by the  legislature as an  example. The  law was                                                                    
called  the  Uniform  Prudent  Management  of  Institutional                                                                    
Funds Act  under AS 13.65.  He detailed  it was a  model law                                                                    
drafted by  a professor  with expertise  in the  legal rules                                                                    
governing the  administration of  endowments and  trusts. He                                                                    
stated  that AS  13.65  made the  transition completely.  He                                                                    
read from statute:                                                                                                              
                                                                                                                                
     If  a   trust  is  created  with   the  distinction  of                                                                    
     principal  and income  for purposes  of  this law,  its                                                                    
     interpreted  to   mean  a  trust  fund   of  indefinite                                                                    
     duration.                                                                                                                  
                                                                                                                                
Mr. Barnhill  explained that the distinction  was eliminated                                                                    
in the modern law of trusts.                                                                                                    
                                                                                                                                
10:52:20 AM                                                                                                                   
                                                                                                                                
Representative Pruitt  stated asked  where to put  weight in                                                                    
terms of  a long-term goal  if the objective was  to receive                                                                    
more money at present or preserve the value of the fund.                                                                        
                                                                                                                                
Mr. Barnhill answered that the  policy embedded in laws like                                                                    
the Uniform  Prudent Management  of Institutional  Funds Act                                                                    
was the concept of  balancing the interests of beneficiaries                                                                    
today  with  the interest  of  beneficiaries  in the  future                                                                    
(preserving intergenerational  equities). He  explained that                                                                    
it  preserved  the inflation  adjusted  value  of the  trust                                                                    
while   maximizing   a   stream   of   income   to   current                                                                    
beneficiaries.  He explained  that the  numbers [on  the DOR                                                                    
table]   reflected  the   view   that   by  investing   more                                                                    
aggressively  the  fund  would grow  faster,  the  inflation                                                                    
adjusted  value of  the trust  would be  preserved, and  the                                                                    
stream of revenue to beneficiaries would be maximized.                                                                          
                                                                                                                                
Vice-Chair  Gara referenced  the  DOR  handout. He  observed                                                                    
that  it  did not  look  like  an either/or  scenario  where                                                                    
either  principal  or  rate of  return  were  protected.  He                                                                    
referred to the 10-year endowment  model and noted the value                                                                    
of the fund went from $697  million in FY 19 to $808 million                                                                    
[in FY 25]. He asked if his understanding was accurate.                                                                         
                                                                                                                                
Mr. Barnhill answered in the affirmative.                                                                                       
                                                                                                                                
Vice-Chair Gara  stated that the  other goal of  the sponsor                                                                    
was to  increase the amount  of funding that went  to public                                                                    
education.  While the  fund value  increased, by  FY 24  the                                                                    
annual  payout under  the 10-year  endowment portion  of the                                                                    
bill would  mean $31.5  million compared  to the  status quo                                                                    
payout of $23.9 million per  year. He asked for verification                                                                    
that it  would mean approximately  $7.5 million per  year in                                                                    
additional funds for education.                                                                                                 
                                                                                                                                
Mr. Barnhill answered in the affirmative.                                                                                       
                                                                                                                                
Vice-Chair  Gara stated  that a  $100 increase  in the  Base                                                                    
Student Allocation (BSA) was about  $30 million and an extra                                                                    
$7.5 million  was an increase  to the  BSA of about  $25. He                                                                    
stated that in endowments if  a certain amount was taken out                                                                    
annually,  there may  be some  years where  money had  to be                                                                    
taken  from  the  principal,  but  over  the  long-term  the                                                                    
principal and  payout grew.  He asked why  there would  be a                                                                    
limitation that  prevented dipping  into the principal  in a                                                                    
bad year.                                                                                                                       
                                                                                                                                
10:56:54 AM                                                                                                                   
                                                                                                                                
Mr.  Barnhill  referenced  the table  provided  by  DOR  and                                                                    
replied that  10-year endowment was the  department's way of                                                                    
reflecting  the   averaging  or   lookback.  The   bill  had                                                                    
initially  included  a  10-year  lookback,  which  had  been                                                                    
changed to  a 5-year lookback  in the CS. He  explained that                                                                    
the  3-year  was  the  lookback  for  multiple  trust  funds                                                                    
administered by the department.  Modern endowment theory did                                                                    
not  ask  whether  the  value of  the  principal  was  being                                                                    
invaded,  but whether  the inflation  adjusted value  of the                                                                    
trust  was  being  preserved.  He  pointed  to  the  10-year                                                                    
endowment column  with a starting  balance of  $697 million.                                                                    
He  spoke   to  the   inflation  adjusted   value  preserved                                                                    
indefinitely   through  time.   He   detailed  that   Callan                                                                    
Associates  had  a  10-year  inflation  projection  of  2.25                                                                    
percent, which had recently been  increased to 2.26 percent.                                                                    
He explained  that the 10-year endowment  approach preserved                                                                    
the $697 million  on an inflation adjusted basis  for the 5-                                                                    
year timeline and indefinitely.                                                                                                 
                                                                                                                                
Mr. Barnhill reported  that it was plausible  there would be                                                                    
a down market in the future.  He noted there would be points                                                                    
in  time   when  the  inflation   adjusted  value   was  not                                                                    
preserved.  The overall  objective of  endowment law  was to                                                                    
preserve  the  inflation  adjusted  value  indefinitely.  He                                                                    
stated there were  multiple ways to correct for  a period of                                                                    
time  where there  was a  drawdown  or a  correction in  the                                                                    
markets  and  the  inflation adjusted  value  of  the  trust                                                                    
decreases.  Options included  staying  the  course with  the                                                                    
understanding that the market may  come back, which it often                                                                    
did,  or  the  distribution  percentage  could  be  adjusted                                                                    
temporarily  from  4.75 percent  downward  for  a couple  of                                                                    
years to see  if the inflation adjusted  value corrected. It                                                                    
was not fatal.  There were other ways of  correcting for the                                                                    
issue. The fact  there was a period where  the current value                                                                    
was  less than  the inflation  adjusted value.  He explained                                                                    
the situation was not fatal.                                                                                                    
                                                                                                                                
11:00:16 AM                                                                                                                   
                                                                                                                                
Vice-Chair Gara shared that he was  in favor of the bill. He                                                                    
asked Mr. Barnhill to provide  a written document specifying                                                                    
the impact  of doing  a traditional endowment  model seeking                                                                    
long-term gains and where there  was not significant concern                                                                    
over one or two years of a decline in principal.                                                                                
                                                                                                                                
Mr. Barnhill  answered that  if it was  a legal  question he                                                                    
preferred  to defer  to DOL.  He stated  if it  was a  trust                                                                    
question...                                                                                                                     
                                                                                                                                
Vice-Chair   Gara   interjected   that  it   was   a   trust                                                                    
administration question.                                                                                                        
                                                                                                                                
Mr.  Barnhill  responded  the easiest  thing  was  to  refer                                                                    
members to AS  13.65, which set out the  factors to consider                                                                    
in distributing  from an endowment.  The model  statute said                                                                    
that  evaluating  the  prudency  of  how  the  factors  were                                                                    
evaluated and applied  in a given year depended  on what was                                                                    
known to the manager at the time.                                                                                               
                                                                                                                                
Vice-Chair Gara asked whether it  would cause DOR concern if                                                                    
he were to  propose an amendment that  removed the provision                                                                    
specifying that  the principal could  never be  dipped into,                                                                    
meaning the fund would just be run as an endowment.                                                                             
                                                                                                                                
Mr.  Barnhill  answered  that  the  committee  could  delete                                                                    
Section 1, which would mean  converting from a principal and                                                                    
income fund  to an endowment  fund, which he  believed would                                                                    
be appropriate.                                                                                                                 
                                                                                                                                
Representative  Parish pointed  to the  language on  page 2,                                                                    
lines   12  and   13:  "Each   year,  the   legislature  may                                                                    
appropriate 4.75  percent..." He  stated that if  there were                                                                    
ever a concern that the growth  of the fund was hindered, it                                                                    
would  be the  legislature's prerogative  to allocate  funds                                                                    
from other sources.  Given the high rate  of returns enabled                                                                    
by  the  legislation  and   the  conservative  4.75  percent                                                                    
proposed  POMV  draw over  a  5-year  lookback, he  did  not                                                                    
anticipate  any  erosion  of  value  except  in  exceptional                                                                    
market   circumstances.   He   reiterated  that   in   those                                                                    
circumstances  the legislature  had  the  option of  drawing                                                                    
less.                                                                                                                           
                                                                                                                                
11:03:23 AM                                                                                                                   
                                                                                                                                
Representative  Neuman  stated   he  was  having  difficulty                                                                    
because land  was a  real property asset  with a  value that                                                                    
increased  and  decreased. He  recalled  losing  money on  a                                                                    
property  in  the 1980s  because  the  value had  gone  down                                                                    
considerably. He had  no idea when looking  at the forecasts                                                                    
what the prior  performance had been. He asked  how the fund                                                                    
had performed in the past 10 years  - he did not know how to                                                                    
make  the  comparison  without   the  numbers.  He  wondered                                                                    
whether the change would put more  money in the fund or not.                                                                    
He  spoke  to the  value  of  the  land and  understood  the                                                                    
concept of going  to cash, but the committee  had heard from                                                                    
LFD that  the state did not  know the value of  the property                                                                    
when it had  been changed from a land trust  to a cash fund.                                                                    
He wondered  if it  could be a  potential lawsuit.  He asked                                                                    
how the funds currently went  into the system. He questioned                                                                    
whether  the funds  came in  as  unrestricted general  funds                                                                    
(UGF). He  reasoned that it  would be difficult to  see what                                                                    
the funds were if they came  in as UGF and were converted to                                                                    
designated general funds (DGF).                                                                                                 
                                                                                                                                
Representative Parish  relayed that the Public  School Trust                                                                    
Fund was a dedicated fund;  it was a pre-statehood fund that                                                                    
was a federal program. He  deferred to Mr. Painter to answer                                                                    
any concerns  about the  transition from a  land trust  to a                                                                    
cash  trust.  He  asked  Mr.  Barnhill  to  respond  to  the                                                                    
question about long-term earnings.                                                                                              
                                                                                                                                
11:06:13 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill answered that as  indicated by Mr. Painter, the                                                                    
fund had  started out in 1913  as a land trust.  In 1978 the                                                                    
land trust  element was extinguished by  the legislature and                                                                    
it  was  converted  entirely  to  a  cash  asset  portfolio.                                                                    
Currently there  was no land  in the  trust fund -  the fund                                                                    
was  roughly  allocated between  55  percent  equity and  45                                                                    
percent fixed  income. The  fund was  also invested  in REIT                                                                    
securities  (which   was  not  land)  and   high  yield.  He                                                                    
discussed unaudited returns as of  December 31, 2017. The 1-                                                                    
year return  was 13.79 percent,  the 3-year return  was 6.74                                                                    
percent, the 5-year return was 7.36 percent, and the 10-                                                                        
year  return was  6.23 percent.  He offered  to compare  the                                                                    
returns  to the  Power Cost  Equalization (PCE)  Fund, which                                                                    
DOR  administered  more  on an  endowment  approach.  As  of                                                                    
December 31, 2017, the 1-year  PCE return was 16.02 percent,                                                                    
the 3-year  return was  7.7 percent,  the 5-year  return was                                                                    
10.3 percent,  and the 10-year  return was 7.04  percent. He                                                                    
offered  to  provide  a  copy to  the  Co-Chair  Foster  for                                                                    
distribution.                                                                                                                   
                                                                                                                                
Representative  Neuman  requested  the past  performance  in                                                                    
writing.  He remarked  on the  difference between  investing                                                                    
the $1 billion  PCE Fund compared to the  $22 million Public                                                                    
School Trust Fund.                                                                                                              
                                                                                                                                
Mr.  Barnhill clarified  that the  Public School  Trust Fund                                                                    
was a $670 million fund.  He recognized the fund was smaller                                                                    
than the PCE Fund, but not that much smaller.                                                                                   
                                                                                                                                
11:08:46 AM                                                                                                                   
                                                                                                                                
Mr.  Painter responded  to Representative  Neuman's question                                                                    
about how funding appeared in  the budget. He explained that                                                                    
the  0.5 percent  of royalties  dedicated to  the fund  were                                                                    
appropriated but  did not appear  in the budget just  as the                                                                    
royalties going to  the Permanent Fund did not  show up. The                                                                    
spending  from the  fund as  a dedicated  fund showed  up as                                                                    
"other," which would not change  in the bill. Both the Mount                                                                    
Edgecumbe  and K-12  formula components  showed up  as other                                                                    
funds.  There  was  no  UGF  because  of  the  pre-statehood                                                                    
dedication.                                                                                                                     
                                                                                                                                
Co-Chair Neuman  asked if the  [indecipherable] used  UGF of                                                                    
DGF.                                                                                                                            
                                                                                                                                
Mr. Painter answered "other."                                                                                                   
                                                                                                                                
Co-Chair  Seaton referenced  Mr.  Barnhill's testimony  that                                                                    
the   10-year  endowment   model  preserved   the  inflation                                                                    
adjusted value  over a  10-year period. He  asked if  the 5-                                                                    
year  lookback that  was  used by  the  Permanent Fund  also                                                                    
preserve the  inflation adjusted value over  the same amount                                                                    
of time.                                                                                                                        
                                                                                                                                
Mr.  Barnhill answered  that for  the  10-year lookback  the                                                                    
inflation  adjusted  value   at  current  Callan  Associates                                                                    
capital market assumptions was preserved  for all periods of                                                                    
time.  For  the 5-year  approach  and  10-year window  using                                                                    
current  Callan capital  market  assumptions, the  inflation                                                                    
adjusted value of the trust  fund narrowly missed. Inflation                                                                    
adjusted value  was restored in Callan's  30-year projection                                                                    
for capital  markets was closer  to 8 percent as  opposed to                                                                    
6.5 percent.  The pessimism  embedded into  Callan's 10-year                                                                    
projections created  the issue  for the 5-year  approach. He                                                                    
added that the issue was also true for the 3-year approach.                                                                     
                                                                                                                                
11:11:19 AM                                                                                                                   
                                                                                                                                
Representative Guttenberg considered  the interest earned in                                                                    
a year  over the  payout plus  inflation proofing.  He noted                                                                    
that Mr.  Barnhill had discussed  that in some of  the years                                                                    
it was  considerably higher. He  asked if the  interest that                                                                    
went back into the fund was considered principal.                                                                               
                                                                                                                                
Mr. Barnhill replied there were  two paradigms he was trying                                                                    
to  distinguish.   He  referred  to  the   principal  income                                                                    
paradigm  as  the legacy  paradigm.  In  the Permanent  Fund                                                                    
context there  was familiarity and comfort  with the concept                                                                    
of inflation  proofing because  the legislature  had decided                                                                    
to explicitly inflation proof  through an appropriation back                                                                    
from the ERA  to principal. In the Public  School Trust Fund                                                                    
the legacy approach  did not do that  explicitly because the                                                                    
statutory  definition of  principal included  capital gains.                                                                    
He  speculated that  the drafters  of the  approach believed                                                                    
the retention  of capital gains  was some form  of inflation                                                                    
proofing. In  other words,  in the  legacy approach  for the                                                                    
Public  School  Trust  Fund,  there  was  not  any  explicit                                                                    
inflation proofing because capital  gains and principal were                                                                    
retained, which was different than the Permanent Fund.                                                                          
                                                                                                                                
Mr. Barnhill  addressed the modern  paradigm the  bill tried                                                                    
to move towards and  explained that the inflation adjustment                                                                    
was  implied through  the  distribution  percentage of  4.75                                                                    
percent.  The notion  was to  balance the  payouts in  a way                                                                    
that  preserved the  inflation adjusted  value of  the trust                                                                    
over periods of time.                                                                                                           
                                                                                                                                
Representative Guttenberg  asked what Callan  Associates and                                                                    
two of  their competitors would  recommend on the  5-year or                                                                    
10-year endowment concepts.                                                                                                     
                                                                                                                                
Mr. Barnhill  did not want  to put words in  Callan's mouth.                                                                    
He  speculated  that  Callan would  observe  that  that  the                                                                    
principal  and  income structure  to  trust  funds was  long                                                                    
outdated  and  the majority  (if  not  all) endowment  funds                                                                    
operate  on an  endowment methodology  or POMV  approach. He                                                                    
referenced the 10-year, 5-year,  and 3-year lookback periods                                                                    
and  ventured  that Callan  would  observe  that with  their                                                                    
current  capital market  assumptions for  the next  10 years                                                                    
that the  10-year averaging approach worked,  and the 5-year                                                                    
approach narrowly  missed, but  over longer periods  of time                                                                    
would  restore inflation  adjusted  value and  the same  was                                                                    
true for the 3-year approach.                                                                                                   
                                                                                                                                
Representative Guttenberg surmised that  Callan would say it                                                                    
was up to the client.                                                                                                           
                                                                                                                                
11:15:07 AM                                                                                                                   
                                                                                                                                
Co-Chair Foster  WITHDREW his OBJECTION  to the  adoption of                                                                    
the work draft.                                                                                                                 
                                                                                                                                
Representative  Neuman  asked  why  the  approach  had  been                                                                    
changed from 10 to 5 years.                                                                                                     
                                                                                                                                
Representative  Parish  answered   that  he  had  originally                                                                    
proposed the 10-year  lookback. On advice by  Mr. Painter he                                                                    
had included  a lag-year  to provide  greater predictability                                                                    
to  know what  level of  funding was  coming. He  recognized                                                                    
going to  a 5-year  lookback was  a more  aggressive option,                                                                    
but it  was familiar to  the bulk of the  Alaskan population                                                                    
through the Permanent  Fund program and it was  more in line                                                                    
with what the  other body [Senate] may be  supportive of. He                                                                    
stated that  for the past  20 years the Public  School Trust                                                                    
Fund  had  tripled in  nominal  value.  He believed  it  was                                                                    
fantastic and  that robust growth  in the state's  funds was                                                                    
valuable;   however,  he   thought  that   it  fundamentally                                                                    
departed from the purpose of  a trust, which was to preserve                                                                    
the inflation adjusted value,  while maximizing dividends to                                                                    
beneficiaries. He believed either  the 5-year or the 10-year                                                                    
lookback  achieved   the  objective.  There  was   a  strong                                                                    
argument to be made that  the 5-year lookback did a superior                                                                    
job, if at  the expense at limiting the  rate that inflation                                                                    
adjusted value was beat.                                                                                                        
                                                                                                                                
11:18:00 AM                                                                                                                   
                                                                                                                                
Representative Neuman  requested to  see the  numbers behind                                                                    
the  reasoning the  change  had  been made  to  5 years.  He                                                                    
mentioned  perhaps a  7-year or  8-year  approach should  be                                                                    
considered.  He noted  there was  a reason  the sponsor  had                                                                    
changed  to  the  5-year  approach and  he  assumed  it  was                                                                    
because the numbers looked better.                                                                                              
                                                                                                                                
Representative Parish  was sensitive  to the  concern, which                                                                    
was  the  reason  he  had   originally  proposed  a  10-year                                                                    
lookback.  He would  provide  the  requested information  in                                                                    
writing.                                                                                                                        
                                                                                                                                
Co-Chair  Foster wanted  to  make sure  there  was time  for                                                                    
public  testimony.  He  noted  that no  one  was  signed  up                                                                    
online.                                                                                                                         
                                                                                                                                
Vice-Chair Gara  referenced discussion  about going  back to                                                                    
the Callan  model with  POMV and  no ban  on going  into the                                                                    
principal in one year or another.  He asked if it would mean                                                                    
deleting Section 1 of the bill.                                                                                                 
                                                                                                                                
Mr.  Barnhill  replied that  if  the  legislature wanted  to                                                                    
convert  the trust  from a  principal and  income fund  to a                                                                    
modern endowment fund,  it would mean deleting  Section 1 of                                                                    
the bill.                                                                                                                       
                                                                                                                                
Vice-Chair  Gara  requested  the information  asked  for  by                                                                    
Representative Neuman. He was  interested in the numbers for                                                                    
a 7-year and 8-year approach.                                                                                                   
                                                                                                                                
Representative  Parish replied  that  he  would provide  the                                                                    
information.                                                                                                                    
                                                                                                                                
11:20:21 AM                                                                                                                   
                                                                                                                                
Representative  Pruitt remarked  that the  CS also  made the                                                                    
changes effective  immediately. He asked if  it would enable                                                                    
DOR to shift the asset allocation immediately.                                                                                  
                                                                                                                                
Mr.  Barnhill believed  the intention  was two-fold.  First,                                                                    
DOR would  shift the asset  allocation as soon  as prudently                                                                    
possible  from a  55  percent  [equities]/45 percent  [fixed                                                                    
income]  to  a  70   percent  [equities]/30  percent  [fixed                                                                    
income] allocation.  There could  be difficulties  in making                                                                    
the shift  immediately depending  on the  market conditions;                                                                    
the shift should not be done  at the wrong time. He believed                                                                    
the other  intention was to  appropriate for purposes  of FY                                                                    
19  pursuant to  the distribution  percentage as  opposed to                                                                    
the current method.                                                                                                             
                                                                                                                                
Representative Parish  added that the primary  objective was                                                                    
realizing  a  high  rate  of return  from  its  assets.  The                                                                    
state's asset managers had  communicated that higher returns                                                                    
could  be achieved  on the  $670 million  fund if  they were                                                                    
provided  more management  discretion.  He  believed it  was                                                                    
better  done sooner  rather than  later.  The difference  in                                                                    
earnings would  be in  the thousands of  dollars per  day if                                                                    
the market  behaved as was expected.  The difference between                                                                    
an  immediate effective  date versus  90 days  after passage                                                                    
would be measured  in the hundreds of  thousands of dollars,                                                                    
which he believed merited  consideration by the legislature.                                                                    
He thanked the committee.                                                                                                       
                                                                                                                                
11:22:53 AM                                                                                                                   
                                                                                                                                
Co-Chair Foster  WITHDREW his OBJECTION  to the  adoption of                                                                    
the work draft.                                                                                                                 
                                                                                                                                
There  being NO  further OBJECTION,  Work Draft  30-LS0765\R                                                                    
(Glover, 1/26/18) was ADOPTED.                                                                                                  
                                                                                                                                
Co-Chair  Foster  OPENED  and CLOSED  public  testimony.  He                                                                    
relayed that amendments were due on Friday.                                                                                     
                                                                                                                                
HB  213  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair  Foster addressed  the schedule  for the  following                                                                    
meeting.                                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
11:24:55 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 11:24 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
HB 213HFIN CS WORKDRAFT V.R.pdf HFIN 1/30/2018 9:00:00 AM
HB 213
HB 287 Anchorage School District - Bishop. Deena - Public Testimony 012518.pdf HFIN 1/30/2018 9:00:00 AM
HB 287
HB 213 Summary of Changes Ver. U to Ver. R.pdf HFIN 1/30/2018 9:00:00 AM
HB 213
Sectional Analysis HB 213 - version 30-LS0765-R.pdf HFIN 1/30/2018 9:00:00 AM
HB 213
HB 287 PublicTestimonyPiazza20180125.pdf HFIN 1/30/2018 9:00:00 AM
HB 287
HB 287 NEA-Alaska letter of support HB287.pdf HFIN 1/30/2018 9:00:00 AM
HB 287
HB 213 Response Qs HFIN-DOR re HB 213 2-3-2018.pdf HFIN 1/30/2018 9:00:00 AM
HB 213