Legislature(2017 - 2018)HOUSE FINANCE 519

02/08/2018 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 213 PUBLIC SCHOOL TRUST FUND TELECONFERENCED
Moved CSHB 213(FIN) Out of Committee
+= HB 142 UNEMPLOYMENT COMPENSATION BENEFITS TELECONFERENCED
Moved CSHB 142(FIN) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                     February 8, 2018                                                                                           
                         1:33 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:33:05 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Foster  called the House Finance  Committee meeting                                                                    
to order at 1:33 p.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 Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Kendra,  Kloster, Staff,  Representative  Chris Tuck;  Patsy                                                                    
Wescott,  Chief  of   Unemployment  Insurance,  Division  of                                                                    
Employment and  Training Services,  Department of  Labor and                                                                    
Workforce  Development;  Caroline Schultz,  Policy  Analyst,                                                                    
Office of Management and  Budget; Kelly Cunningham, Analyst,                                                                    
Legislative Finance Division;  Representative Justin Parish,                                                                    
Sponsor; Mike  Barnhill, Deputy Commissioner,  Department of                                                                    
Revenue;  Alexei   Painter,  Analyst,   Legislative  Finance                                                                    
Division.                                                                                                                       
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 142    UNEMPLOYMENT COMPENSATION BENEFITS                                                                                    
                                                                                                                                
          CSHB 142 (FIN) was REPORTED out of committee with                                                                     
          a "do pass" recommendation and with a new zero                                                                        
          fiscal  note  by  the   Department  of  Labor  and                                                                    
          Workforce    Development    and   with    a    new                                                                    
          indeterminate  fiscal note  by the  Office of  the                                                                    
          Governor.                                                                                                             
                                                                                                                                
HB 213    PUBLIC SCHOOL TRUST FUND                                                                                              
                                                                                                                                
          HB 213  was REPORTED  out of committee  with three                                                                    
          "do     pass"    recommendations,     three    "no                                                                    
          recommendation"    recommendations,   and    three                                                                    
          "amend" recommendations  and with one  zero fiscal                                                                    
          note  and  with two  fiscal  impact  notes by  the                                                                    
          Department of Education and Early Development.                                                                        
                                                                                                                                
Co-Chair  Foster  reviewed  the   agenda  for  the  day.  He                                                                    
intended to move both bills on the agenda.                                                                                      
                                                                                                                                
HOUSE BILL NO. 142                                                                                                            
                                                                                                                                
     "An Act relating to unemployment insurance benefits;                                                                       
     increasing the maximum weekly unemployment insurance                                                                       
    benefit rate; and providing for an effective date."                                                                         
                                                                                                                                
1:34:44 PM                                                                                                                    
                                                                                                                                
Co-Chair Foster  reported that  the bill  was last  heard on                                                                    
February 2,  2018 at  which time  the committee  took public                                                                    
testimony.  There was  one amendment  that would  be offered                                                                    
for the bill. He invited testifiers to the table.                                                                               
                                                                                                                                
KENDRA, KLOSTER,  STAFF, REPRESENTATIVE CHRIS  TUCK, relayed                                                                    
Representative Tuck's  apologies for  not being  present. He                                                                    
was chairing another committee  currently. She was available                                                                    
for questions.                                                                                                                  
                                                                                                                                
Representative  Wilson  understood  the amounts  were  being                                                                    
changed  to  be  closer  to  the  fiftieth  percentile.  She                                                                    
wondered why the scale stopped at $59,500.                                                                                      
                                                                                                                                
PATSY WESCOTT, CHIEF OF  UNEMPLOYMENT INSURANCE, DIVISION OF                                                                    
EMPLOYMENT AND  TRAINING SERVICES,  DEPARTMENT OF  LABOR AND                                                                    
WORKFORCE  DEVELOPMENT,  explained  that the  current  scale                                                                    
determined the  amount at which the  department stopped. The                                                                    
scale  increased  the  benefit  in  $2  increments,  and  it                                                                    
increased  the   qualifying  base   period  wages   in  $250                                                                    
increments.  The  department  stopped   the  scale  when  it                                                                    
reached  $510,  approximately  50  percent  of  the  state's                                                                    
average weekly wage.                                                                                                            
                                                                                                                                
Representative Wilson  asked about the  indeterminate fiscal                                                                    
note. The  estimated cost  difference, had  it been  done in                                                                    
2017, was $456,600. In order  to determine the state's share                                                                    
of increase, she wondered if  she would calculate 76 percent                                                                    
of $456,600. Ms. Wescott responded  that the fiscal note was                                                                    
prepared by the  Office of Management and  Budget (OMB). She                                                                    
thought it  would be  better to  have a  representative from                                                                    
OMB speak to the fiscal note.                                                                                                   
                                                                                                                                
1:37:29 PM                                                                                                                    
                                                                                                                                
CAROLINE SCHULTZ,  POLICY ANALYST, OFFICE OF  MANAGEMENT AND                                                                    
BUDGET, introduced  herself and asked  Representative Wilson                                                                    
to repeat her question.                                                                                                         
                                                                                                                                
Representative  Wilson  relayed  that the  fiscal  note  was                                                                    
indeterminate because the state did  not know what the wages                                                                    
would be  or who would  qualify. She supposed it  was merely                                                                    
an estimate. Again,  she referred to the  cost difference of                                                                    
$456,600.   She   asked    for   clarification   about   the                                                                    
calculation.                                                                                                                    
                                                                                                                                
Ms.  Schultz  responded  that  the   state  paid  for  state                                                                    
employee unemployment  insurance (UI) claims  by associating                                                                    
a  rate   with  every   state  employee.   The  unemployment                                                                    
insurance rate  was .4 percent  which went into  the working                                                                    
reserve account. The state paid  out terminal leave cash-ins                                                                    
and UI claims from the  terminal leave account. The fund was                                                                    
underwritten  by the  .4 percent  which  came from  personal                                                                    
services. She  explained that about  50 percent  of personal                                                                    
services  costs were  undesignated general  funds (UGF),  36                                                                    
percent were  designated general funds (DGF),  and the other                                                                    
14  percent  were  federal  funds.  She  continued  that  of                                                                    
$456,600,  about  $228,000 was  UGF,  $164,000  was DGF  and                                                                    
other,  and  $64,000   were  federal  funds.  Representative                                                                    
Wilson  asked  her  to  restate   her  answer.  Ms.  Schultz                                                                    
repeated the figures.  Representative Wilson appreciated the                                                                    
information.                                                                                                                    
                                                                                                                                
Representative Grenn asked when  the weekly benefit had been                                                                    
increased last.  Ms. Wescott responded effective  January 1,                                                                    
2009.  Representative   Grenn  asked   if  there   had  been                                                                    
automatic  adjustments  every  year. Ms.  Wescott  responded                                                                    
that  the  second  portion  of  the  bill  would  allow  for                                                                    
automatic  increases  moving forward.  Representative  Grenn                                                                    
referred to  a note he  had from  the previous year  that 36                                                                    
states  had  automatic  adjustments.  He  wondered  if  that                                                                    
number had  changed. Ms. Wescott  responded that  the number                                                                    
was still 36.                                                                                                                   
                                                                                                                                
Vice-Chair  Gara   understood  why   the  fiscal   note  was                                                                    
indeterminate  and  was  okay  with  leaving  it  that  way.                                                                    
However, he thought  there might be a problem at  the end of                                                                    
the  year because  of no  budget money  being allocated  for                                                                    
what the state knew would  be approximately $228,000 of UGF.                                                                    
He suggested  there would be a  $230,000 cost at the  end of                                                                    
the year.                                                                                                                       
                                                                                                                                
Co-Chair  Foster  indicated  that the  one  amendment  being                                                                    
offered was brought to the committee by the bill sponsor.                                                                       
                                                                                                                                
1:42:17 PM                                                                                                                    
                                                                                                                                
Co-Chair Foster MOVED to ADOPT Amendment 1 (copy on file):                                                                      
                                                                                                                                
     Page 9, line 13:                                                                                                           
                                                                                                                                
          Delete "2019"                                                                                                         
                                                                                                                                
          Insert "2020"                                                                                                         
                                                                                                                                
     Page 9, line 28:                                                                                                           
                                                                                                                                
          Delete "2018"                                                                                                         
                                                                                                                                
          Insert "2019"                                                                                                         
                                                                                                                                
Co-Chair Foster reviewed the amendment.                                                                                         
                                                                                                                                
There being NO OBJECTION, Amendment 1 was ADOPTED.                                                                              
                                                                                                                                
Co-Chair Seaton  was not comfortable with  the indeterminate                                                                    
fiscal note. Fiscal  notes were combined into  the budget as                                                                    
appropriations.  Without  an  amount,   no  money  would  be                                                                    
appropriated for the bill if it  were to pass. He was unsure                                                                    
how to handle the matter.                                                                                                       
                                                                                                                                
Co-Chair Foster would take an  at ease after Vice-Chair Gara                                                                    
reviewed the fiscal note.                                                                                                       
                                                                                                                                
Vice-Chair  Gara reported  that  HB 142,  version  U, had  2                                                                    
fiscal  notes. The  first  was  a zero  fiscal  note by  the                                                                    
Department of  Labor and  Workforce Development  (DLWD). The                                                                    
appropriation  was unemployment  and  training services  and                                                                    
the   allocation  was   unemployment   insurance.  The   OMB                                                                    
component number  was 2276. The  second fiscal note  was the                                                                    
indeterminate  fiscal  note  by   OMB  that  had  just  been                                                                    
discussed. It reached  across all of the  departments in the                                                                    
state and had an OMB component number of 0.                                                                                     
                                                                                                                                
Co-Chair   Foster   invited   Kelly  Cunningham   from   the                                                                    
Legislative Finance Division (LFD) to the table.                                                                                
                                                                                                                                
1:46:05 PM                                                                                                                    
                                                                                                                                
KELLY  CUNNINGHAM,  ANALYST, LEGISLATIVE  FINANCE  DIVISION,                                                                    
responded  that because  increasing  the  UI benefits  would                                                                    
touch all allocations,  she did not believe there  was a way                                                                    
to  generate  a  fiscal  note  that  would  represent  every                                                                    
allocation in  the state.  The Legislative  Finance Division                                                                    
worked with  OMB and DLWD  on the fiscal note  and concluded                                                                    
that it made  sense to use "various" and for  the note to be                                                                    
indeterminate  as long  as  an amount  was  included in  the                                                                    
analysis.                                                                                                                       
                                                                                                                                
Vice-Chair Gara asked  if the normal course would  be to add                                                                    
the funds as  a statewide appropriation when  the budget was                                                                    
reconciled at  the end of  the year. Ms.  Cunningham replied                                                                    
that there  would not be  an appropriation in  the operating                                                                    
bill. The costs  would not be seen, as they  would be spread                                                                    
throughout the agencies and rolled  in with all of the other                                                                    
benefits that  went into salary adjustment  increases in the                                                                    
following year.                                                                                                                 
                                                                                                                                
Vice-Chair  Gara was  comfortable  with the  bill and  would                                                                    
support it.  However, he did  not want  the state to  lose 2                                                                    
employees  because  of  the  lack  of  a  fiscal  note.  Ms.                                                                    
Cunningham  noted  that there  would  not  be  a loss  of  2                                                                    
employees  within  DLWD because  the  cost  would be  spread                                                                    
throughout the state agencies.                                                                                                  
                                                                                                                                
Co-Chair  Foster   asked  Ms.   Cunningham  to   repeat  her                                                                    
response, as  Co-Chair Seaton did  not hear her  answer. Ms.                                                                    
Cunningham  explained that  because the  increase in  the UI                                                                    
benefits would  touch all allocations throughout  the state,                                                                    
there would not  be an efficient way of  generating a fiscal                                                                    
note. The  "various" indeterminate  note made sense  as long                                                                    
as the estimated amount was in the analysis.                                                                                    
                                                                                                                                
Representative  Wilson  asked  when   the  bill  would  take                                                                    
effect.  Ms.  Cunningham replied  it  would  take effect  in                                                                    
January 2019. It would impact half  of the FY 19 budget. The                                                                    
estimated amount for  FY 19 would be $115,000,  and it would                                                                    
be $230,000  in the out years  starting in FY 20.  She noted                                                                    
it would be automatic.                                                                                                          
                                                                                                                                
Representative  Guttenberg   wanted  reassurance   that  the                                                                    
indeterminate fiscal note would not  end up as a negative in                                                                    
the budget.  Ms. Cunningham understood that  the costs would                                                                    
get  rolled in  after  the  fact. Representative  Guttenberg                                                                    
clarified  that   the  cost  would  be   added  rather  than                                                                    
subtracted after  the fact. Ms. Cunningham  responded, "That                                                                    
is correct."                                                                                                                    
                                                                                                                                
Co-Chair  Seaton  confirmed  that the  legislature  had  the                                                                    
ability  to do  a  fiscal note  in  conference committee  if                                                                    
necessary. He was comfortable moving the bill.                                                                                  
                                                                                                                                
Co-Chair  Seaton  MOVED to  report  CSHB  142 (FIN)  out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal notes.                                                                                                      
                                                                                                                                
There being NO OBJECTION, it was so ordered.                                                                                    
                                                                                                                                
CSHB  142 (FIN)  was REPORTED  out of  committee with  a "do                                                                    
pass"  recommendation and  with a  new zero  fiscal note  by                                                                    
DLWD and with a new  indeterminate fiscal note by the Office                                                                    
of the Governor.                                                                                                                
                                                                                                                                
1:52:25 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
1:56:25 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
HOUSE BILL NO. 213                                                                                                            
                                                                                                                                
     "An Act relating to the investment, appropriation, and                                                                     
     administration of the public school trust fund."                                                                           
                                                                                                                                
1:56:33 PM                                                                                                                    
                                                                                                                                
Co-Chair  Foster indicated  that  the  committee last  heard                                                                    
HB 213  on  January  30,  2018 at  which  time  a  committee                                                                    
substitute,  version R,  was adopted,  and public  testimony                                                                    
was taken.  His office  had received  one amendment  for the                                                                    
bill. He  asked the bill  sponsor and  his staff to  come to                                                                    
the table.                                                                                                                      
                                                                                                                                
1:57:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JUSTIN PARISH, SPONSOR,  spoke to the benefit                                                                    
of  the bill.  The bill  was  a way  of bringing  additional                                                                    
revenue to the State of  Alaska through better management of                                                                    
one of the  state's large investment funds.  The state would                                                                    
be able  to continue to achieve  the mission of the  trust -                                                                    
to maintain  its inflation-adjusted  value and do  better at                                                                    
spinning off  money to support  public education. He  had no                                                                    
fundamental objections to the amendment being offered.                                                                          
                                                                                                                                
Representative Wilson  wanted to better understand  how much                                                                    
money the state  was making on the account based  on the way                                                                    
it was currently being managed,  versus the amount the state                                                                    
would make if  it was managed in the way  it was proposed in                                                                    
the bill.                                                                                                                       
                                                                                                                                
Representative Parish  referred to  a Department  of Revenue                                                                    
(DOR) spreadsheet  "DOR 10-Year  'What if' Payout"  (copy on                                                                    
file). He pointed  to the 3rd and 4th lines  below the table                                                                    
under "Notes."  The status quo  endowment returned  a little                                                                    
under  6  percent  (the  projection).  He  deferred  to  Mr.                                                                    
Barnhill to explain further.                                                                                                    
                                                                                                                                
1:59:51 PM                                                                                                                    
                                                                                                                                
MIKE BARNHILL,  DEPUTY COMMISSIONER, DEPARTMENT  OF REVENUE,                                                                    
sent  a letter  to  the committee,  dated  February 3,  2018                                                                    
(copy on  file). Attached  to the letter  were the  rates of                                                                    
return for the Public School  Trust 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  would be  happy  to                                                                    
review  them to  give members  the historical  sense of  the                                                                    
performance of the fund.                                                                                                        
                                                                                                                                
Mr. Barnhill continued that the  primary intent of the bill,                                                                    
from the department's perspective,  was not to generate more                                                                    
income for public schools. It  was to convert the trust fund                                                                    
from  an  old-style  principle-and-income trust  fund  to  a                                                                    
modern  style  endowment fund.  In  making  the change,  the                                                                    
purpose  would  evolve  from  protecting  the  principle  to                                                                    
protecting  the inflation-adjusted  value of  the fund  over                                                                    
time. The  old principle and income  fund did a fine  job of                                                                    
protecting   the  inflation-adjusted   value.  However,   he                                                                    
thought the  endowment approach did it  more precisely. Once                                                                    
the fund  was converted  to an  endowment style  trust fund,                                                                    
DOR would feel comfortable changing the asset allocation.                                                                       
                                                                                                                                
Mr.  Barnhill reported  that currently  DOR  had roughly  55                                                                    
percent  invested in  equities  and 45  percent invested  in                                                                    
fixed income.  He explained  that because  it was  under the                                                                    
principle  and income  style of  accounting, the  department                                                                    
weighted  it  more  heavily  to fixed  income  in  order  to                                                                    
generate more  cash. Under the  statute for the  trust fund,                                                                    
only cash could be expended.  Once the fund was converted to                                                                    
an  endowment  fund, the  department  would  weight it  more                                                                    
heavily to equities - approximately  70 percent equities, 30                                                                    
percent  fixed  income.  The fund  could  be  invested  more                                                                    
aggressively,  and  over  time,  the fund  was  expected  to                                                                    
generate  more  income.  The  reason   for  changing  to  an                                                                    
endowment fund  was two-fold.  First, the  department wanted                                                                    
to  protect the  inflation-adjusted value  of the  fund over                                                                    
time so  that the real value  of the fund would  not change.                                                                    
Secondly,  the  department   wanted  to  prudently  maximize                                                                    
income  to  current  beneficiaries. It  would  maintain  the                                                                    
fairness of  the trust  by providing  the same  benefit over                                                                    
various  periods of  time.  He referred  to  the concept  as                                                                    
"intergenerational equity."                                                                                                     
                                                                                                                                
2:02:59 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  was   concerned  with  spending  the                                                                    
principle.  She understood  that  rules disallowing  dipping                                                                    
into  the fund  were no  longer in  place. She  wondered why                                                                    
4.75 for a Percent of  Market Value (POMV) was chosen rather                                                                    
than  4 percent  or 4.25  which would  lessen the  chance of                                                                    
eating into the principle. Mr.  Barnhill thought a review of                                                                    
Amendment   1  might   help   answer  the   representative's                                                                    
question. He referred to page 2 of the amendment.                                                                               
                                                                                                                                
Representative  Guttenberg suggested  that the  amendment be                                                                    
moved.   Representative  Wilson   preferred   to  hear   Mr.                                                                    
Barnhill's explanation first.                                                                                                   
                                                                                                                                
Mr. Barnhill continued with his  explanation. He referred to                                                                    
page 2 of Amendment 1,  lines 7-8. He highlighted that words                                                                    
"not more  than" were inserted  before 4.75.  Currently, the                                                                    
bill read: "4.75  can be appropriated of  the 5-year average                                                                    
market value  of the fund."  He explained that  by inserting                                                                    
the words "not  more than" it would give  the department the                                                                    
ability to correct  its course. He suggested  there might be                                                                    
investment environments  in which, in an  effort to maintain                                                                    
the  inflation-adjusted  value  and to  maximize  income  to                                                                    
current   beneficiaries,  the   department  would   want  to                                                                    
appropriate  less  that  4.75   percent.  For  example,  the                                                                    
department might recommend 4.5 percent  for one year and the                                                                    
wording would  allow for the adjustment.  From an investment                                                                    
management  perspective,   the  department  was   trying  to                                                                    
maintain  the   inflation-adjusted  value   over  successive                                                                    
periods of time.                                                                                                                
                                                                                                                                
Mr. Barnhill  pointed to  Amendment 1,  page 2,  lines 10-12                                                                    
which  eliminated  the  distinction  between  principle  and                                                                    
income. He acknowledged  Representative Wilson's concern was                                                                    
fair. In every transition from  a principle and income trust                                                                    
to an endowment trust, the  question was always raised about                                                                    
being able to  protect the principle of a  fund. The concern                                                                    
was the principle  being invaded and spent in  a down market                                                                    
when  the trust  was  under water.  He  explained that  what                                                                    
modern trust law permitted trustees  of endowments to do was                                                                    
spend the endowment when it  was under water. The notion was                                                                    
about trying to balance  competing concerns - protecting the                                                                    
inflation-adjusted value  and meeting  the needs  of current                                                                    
beneficiaries.  He  reiterated   that  in  substantial  down                                                                    
markets  modern trust  law  permitted  expenditures from  an                                                                    
underwater   trust.  However,   the  expectation   was  that                                                                    
management would do everything  possible to return the value                                                                    
to  the  inflation-adjusted  value. He  clarified  that  the                                                                    
department included  the course correction language  of "not                                                                    
more  than 4.75  percent" so  that the  trust administrators                                                                    
could make the recommendation  to appropriate something less                                                                    
than 4.75  percent when the  trust was underwater.  He added                                                                    
that the benefit  to having the "not more"  language was the                                                                    
analysis would be  made annually and would  allow for course                                                                    
correction.                                                                                                                     
                                                                                                                                
2:07:08 PM                                                                                                                    
                                                                                                                                
Representative Wilson  appreciated Mr.  Barnhill's comments.                                                                    
She  asked  for  further clarification  regarding  the  4.75                                                                    
number,  which she  thought  was a  number  used in  general                                                                    
practice. She  queried the use  of language  that stipulated                                                                    
not using  any of  the principle. She  wanted to  ensure the                                                                    
health of the fund.                                                                                                             
                                                                                                                                
Mr. Barnhill  thought her concern  was fair.  The department                                                                    
called  her   concern,  "The  blow  through   concern."  The                                                                    
question   was  whether   the   department   would  make   a                                                                    
recommendation  or   whether  the  legislature   would  blow                                                                    
through the principle.  He could not offer  a guarantee that                                                                    
the  principle  would  not  be spent.  He  spoke  about  the                                                                    
"Prudent Expenditure  Rule." He  explained that  the experts                                                                    
in trust  law married  a prudent  expenditure rule  with the                                                                    
prudent investment  rule. The idea  was that  the department                                                                    
would be subjecting an expenditure  to a prudency evaluation                                                                    
and  the fiduciary  standard of  care, the  highest standard                                                                    
under   law.  The   department's  hope   was  that   if  the                                                                    
legislature  embraced  the   endowment  approach,  when  the                                                                    
department  made a  recommendation to  spend less  than 4.75                                                                    
percent  and provided  justifying analysis,  the legislature                                                                    
would  respect  its  recommendations. He  relayed  that  the                                                                    
department would provide the factors  used in its evaluation                                                                    
to support spending  less. He noted that if  an analysis was                                                                    
done  pursuant   to  a  fiduciary  standard   of  care,  the                                                                    
department would  be rigorous in  its analysis and  give the                                                                    
legislature its  best guess as  to the prudent way  to spend                                                                    
from the trust.                                                                                                                 
                                                                                                                                
2:10:15 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara MOVED to ADOPT Amendment 1 (copy on file):                                                                      
                                                                                                                                
     Page 1, lines 4 - 10:                                                                                                      
                                                                                                                                
          Delete all material and insert:                                                                                       
          "*  Section 1.  AS 3  7.10.07 1(d)  is amended  to                                                                    
          read:                                                                                                                 
                                                                                                                                
          (d)  In   exercising  investment,   custodial,  or                                                                    
          depository  powers or  duties under  this section,                                                                    
          the  fiduciary  or  the  fiduciary's  designee  is                                                                    
          liable for a breach of  a duty that is assigned or                                                                    
          delegated   under  this   section,  or   under  AS                                                                    
          14.40.255,    14.40.280{c),    14.40.400(b),    AS                                                                    
          37.10.070,   AS37.14.160    [AS   37.14.l   lO(c),                                                                    
          37.14.160], or  37.14.170. However,  the fiduciary                                                                    
          or the  designee is not  liable for a breach  of a                                                                    
          duty that has been  delegated to another person if                                                                    
          the  delegation is  prudent  under the  applicable                                                                    
          standard of prudence set out  in statute or if the                                                                    
          duty is assigned by law  to another person, except                                                                    
          to the extent that the fiduciary or designee                                                                          
               (1) knowingly  participates in,  or knowingly                                                                    
          undertakes  to  conceal,  an act  or  omission  of                                                                    
          another person  knowing that  the act  or omission                                                                    
          is  a breach  of that  person's duties  under this                                                                    
          chapter;                                                                                                              
               (2) by  failure to  comply with  this section                                                                    
          in the administration of                                                                                              
          specific responsibilities,  enables another person                                                                    
          to commit a breach of duty; or                                                                                        
               (3)  has knowledge  of a  breach  of duty  by                                                                    
          another person,  unless the fiduciary  or designee                                                                    
          makes reasonable  efforts under  the circumstances                                                                    
          to remedy the breach."                                                                                                
                                                                                                                                
     Page 2, lines 3 - 4:                                                                                                       
                                                                                                                                
          Delete "in separate  principal and income accounts                                                                    
          for"                                                                                                                  
                                                                                                                                
          Insert  "into [IN  SEPARATE  PRINCIPAL AND  INCOME                                                                    
          ACCOUNTS FOR]"                                                                                                        
                                                                                                                                
     Page 2, lines 5 - 6:                                                                                                       
                                                                                                                                
          Delete  "that  distinguish between  the  principal                                                                    
          and income of the fund"                                                                                               
                                                                                                                                
          Insert  "[THAT DISTINGUISH  BETWEEN THE  PRINCIPAL                                                                    
          AND INCOME OF THE FUND]1"                                                                                             
                                                                                                                                
     Page 2, line 13, following "appropriate":                                                                                  
                                                                                                                                
          Delete "AS 37.14.140 is"                                                                                              
                                                                                                                                
          Insert 11AS 37.14.110(c) and 37.14.140 are"                                                                           
                                                                                                                                
Representative Wilson OBJECTED for discussion.                                                                                  
                                                                                                                                
Vice-Chair Gara  spoke to the  amendment. He  mentioned that                                                                    
he  and Representative  Pruitt  had  expressed concerns  and                                                                    
thought an amendment  was needed for the  bill. He explained                                                                    
that without  the amendment, if  the stock  market performed                                                                    
poorly  the fund  would not  generate  revenue. The  current                                                                    
trust  would spin  off $25  million.  The legislature  would                                                                    
have to  come up  with $25 million  from another  source. He                                                                    
furthered that if the next  year was another bad year, there                                                                    
would  be  no  money  again. The  prudent  expenditure  rule                                                                    
stated that trusts were managed  for the long-term. In other                                                                    
words,  the principle  would be  fully  maintained over  the                                                                    
long-term. The point of the  Public School Trust was to spin                                                                    
off a consistent amount of money in a careful way.                                                                              
                                                                                                                                
Vice-Chair  Gara  spoke  to  the  flexibility  of  a  modern                                                                    
endowment model. He also noted  that the bill in its current                                                                    
form  tried to  balance generating  income while  protecting                                                                    
the principle. Based  on a 5-year look-back  and after about                                                                    
10 years 2.5  percent of the principle  would disappear. The                                                                    
sponsor  of  the bill  originally  had  a 10-year  look-back                                                                    
which  limited   revenue  too  much.  The   changes  in  the                                                                    
amendment would  facilitate spinning off roughly  $8 million                                                                    
in  revenue  and  allowed  the  department  to  invest  more                                                                    
prudently to generate better returns  over the long-term. He                                                                    
thought it  was a  safe way of  producing more  revenue from                                                                    
the trust  fund which  was the  sponsor's intent  along with                                                                    
protecting the principle over the  long-term. He invited Mr.                                                                    
Barnhill to comment.                                                                                                            
                                                                                                                                
Mr.  Barnhill  responded that  the  amendment  was fine.  He                                                                    
noted that  in looking at  the chart containing  the various                                                                    
adding  methodologies ["What  if Payouts]  that with  the 5-                                                                    
year average  POMV, the inflation-adjusted value  at the end                                                                    
of the 10-year period was less  than 100 percent. At the end                                                                    
of a  20-year period it  remained less than 100  percent but                                                                    
was  incrementally better.  He explained  that by  inserting                                                                    
the  "not  more  than"  language, the  department  would  be                                                                    
required to  do better by course  correcting periodically in                                                                    
order  to stay  closer to  100 percent.  He added  that over                                                                    
long  periods of  time  hitting 97  percent  to 100  percent                                                                    
would mean managers were doing a good job.                                                                                      
                                                                                                                                
2:14:48 PM                                                                                                                    
                                                                                                                                
Representative Wilson asked someone  to explain Section 1 of                                                                    
the  amendment. Mr.  Barnhill  asked whether  Representative                                                                    
Wilson was  referring to  the first  part of  the Amendment.                                                                    
Representative Wilson responded affirmatively.                                                                                  
                                                                                                                                
Mr. Barnhill replied  that the first part  of the amendment,                                                                    
lines  1-19,  simply  had conforming  changes.  The  deleted                                                                    
language   included  reference   to   AS  37.14.110(c)   and                                                                    
AS 37.14.160.  All that  was being  done was  conforming the                                                                    
language  to   the  amendment.  The  last   section  of  the                                                                    
amendment  deleted AS  37.14.110(c) which  was what  created                                                                    
the distinction  between principle and income  in the trust.                                                                    
The bill was deleting  the distinction between principle and                                                                    
income or the  requirement to account for  it. The amendment                                                                    
simply removed AS 37.14 110(c) from statue.                                                                                     
                                                                                                                                
Representative Wilson  asked for further  clarification. She                                                                    
thought  the   person  that  made  the   determination,  the                                                                    
commissioner, was  being removed.  She asked who  would make                                                                    
the determination. Representative  Parish directed attention                                                                    
to  page  2, lines  9-10.  The  duties of  the  commissioner                                                                    
included  determining the  monthly average  market value  of                                                                    
the fund for the 5  fiscal years preceding the previous year                                                                    
on July 1st of each year. There was a calculation in place.                                                                     
                                                                                                                                
Mr. Barnhill explained  that the repeal of  Section 1, lines                                                                    
1-10 took  place in 2  parts of the amendment:  the deletion                                                                    
of  all material  (lines  4-10)  and the  last  part of  the                                                                    
amendment, the repealer.  In lieu of Section 1,  there was a                                                                    
new  conforming  Section  1.  Representative  Wilson  asked,                                                                    
"Conforming  to  what?"  Mr.   Barnhill  responded  that  it                                                                    
deleted  reference  to  AS   37.14.110(c)  which  was  being                                                                    
repealed.  Representative  Wilson  did  not  understand  the                                                                    
amendment. She relayed her understanding of the amendment.                                                                      
                                                                                                                                
Vice-Chair  Gara  explained  the  lines  in  section  1.  He                                                                    
thought  the amendment  could have  been  written with  more                                                                    
clarity. Representative Wilson read  from the amendment. She                                                                    
wondered  if  the  amendment  was  referring  to  a  person.                                                                    
Vice-Chair  Gara responded  from  line 4-19  was already  in                                                                    
statute.   The  only   change  was   the   deletion  of   AS                                                                    
37.14.110(c)  which  addressed  the  issue  of  whether  the                                                                    
principle could  be tapped. The  only change had to  do with                                                                    
the  one statutory  reference. Representative  Wilson asked,                                                                    
if the statute  was kept in the bill,  whether the principle                                                                    
would remain  untouched. Vice-Chair Gara replied  that if AS                                                                    
37.14.110(c)the  system  would   remain  a  principle  trust                                                                    
instead of a prudent expenditure rule trust.                                                                                    
                                                                                                                                
2:20:32 PM                                                                                                                    
                                                                                                                                
Representative Wilson relayed  she did not want  to keep the                                                                    
trust  as  a principle  trust.  She  wanted to  protect  the                                                                    
principle. She  was fine with  the changes and was  glad the                                                                    
"up  to"  language  was  included. She  did  not  trust  the                                                                    
legislature not  to use  the entire  4.75 percent,  as times                                                                    
were  unpredictable.  She  indicated she  had  seen  similar                                                                    
decisions made by the legislature  about other funds such as                                                                    
the Power Cost  Equalization (PCE) fund. She  wanted to make                                                                    
sure that the money was  protected for students. She did not                                                                    
like  that there  was  the possibility  that,  even after  a                                                                    
recommendation from  the department for a  smaller draw, the                                                                    
legislature would take a higher amount.                                                                                         
                                                                                                                                
Representative Wilson WITHDREW her OBJECTION.                                                                                   
                                                                                                                                
There being NO OBJECTION, Amendment 1 was ADOPTED.                                                                              
                                                                                                                                
Co-Chair Foster  asked Vice-Chair Gara to  review the fiscal                                                                    
notes.                                                                                                                          
                                                                                                                                
Vice-Chair Gara indicated there were  3 fiscal notes for the                                                                    
bill. The first fiscal note  with an OMB component number of                                                                    
2804 by DEED listed the  department and the appropriation as                                                                    
fund   capitalization.  The   allocation   was  the   public                                                                    
education  fund.  The  second   fiscal  note  by  DEED,  OMB                                                                    
component   number   1060,   listed   the   allocation   and                                                                    
appropriation as Mt. Edgecumbe  Boarding School. There was a                                                                    
fiscal  impact of  $4.6 million  for operating  expenditures                                                                    
which  was included  in the  governor's  budget request.  He                                                                    
continued  that the  third DEED  fiscal note,  OMB component                                                                    
number  141, had  an  appropriation of  K-12  aid to  school                                                                    
districts and an allocation of  foundation program. The bill                                                                    
had a  fiscal impact  listing the  governor's FY  19 request                                                                    
for operating expenditures.                                                                                                     
                                                                                                                                
2:23:49 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:24:19 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Representative   Wilson  was   truly   concerned  with   the                                                                    
possibility of going into the  principle. Although she liked                                                                    
the  possibility of  the fund  earning more  money, she  was                                                                    
very  concerned about  touching the  principle. She  thought                                                                    
that someone  from the  Legislative Finance  Division should                                                                    
respond.                                                                                                                        
                                                                                                                                
2:25:37 PM                                                                                                                    
                                                                                                                                
ALEXEI  PAINTER,  ANALYST,   LEGISLATIVE  FINANCE  DIVISION,                                                                    
explained   that  by   removing   the  distinction   between                                                                    
principle and income,  it was possible to dip  into what was                                                                    
considered the principle. It was  his understanding that the                                                                    
addition of the  words "up to" in the  amendment would allow                                                                    
the legislature to choose not  to do so. He reconfirmed that                                                                    
the  legislature could  dip into  the current  value of  the                                                                    
principle.                                                                                                                      
                                                                                                                                
Representative  Parish thought  that,  while the  management                                                                    
structure  was designed  to maintain  the inflation-adjusted                                                                    
value of  the fund,  having separate accounts  for principle                                                                    
and income did  not achieve the objective.  He thought, over                                                                    
the long-term, the most real  representation of the value of                                                                    
the  fund was  not  principle income  but rather  inflation-                                                                    
adjusted  value  and  being  able  to  maximize  the  amount                                                                    
available to public education in  the current year and years                                                                    
to come.                                                                                                                        
                                                                                                                                
Vice-Chair  Gara  asked Mr.  Barnhill  about  moving to  the                                                                    
Prudent  Expenditure   Rule.  He  asked,  by   allowing  the                                                                    
department  to  manage  the   fund  for  long-term  returns,                                                                    
whether  the  bill  would  have  any  impact  on  investment                                                                    
returns possibly leading to better returns.                                                                                     
                                                                                                                                
Mr. Barnhill replied that if  the legislature switched to an                                                                    
endowment  methodology (the  prudent  expenditure rule)  the                                                                    
department would  change the asset  allocation from  a 55/45                                                                    
equity  fixed income  allocation to  a 70/30  allocation. He                                                                    
commented  that  over  periods of  time  the  change  should                                                                    
generate  enhanced growth  over  a  portfolio weighted  more                                                                    
heavily towards fixed income. Over  specific periods of time                                                                    
the  equity  markets  were  more   volatile.  He  could  not                                                                    
guarantee  that   it  would  produce  more   income  in  any                                                                    
particular  year but  thought  that over  longer periods  it                                                                    
should.                                                                                                                         
                                                                                                                                
Co-Chair  Seaton  MOVED to  report  CSHB  213 (FIN)  out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal notes.                                                                                                      
                                                                                                                                
There being NO OBJECTION, it was so ordered                                                                                     
                                                                                                                                
HB 213  was REPORTED out  of committee with three  "do pass"                                                                    
recommendations, three  "no recommendation" recommendations,                                                                    
and three  "amend" recommendations and with  one zero fiscal                                                                    
note and with  two fiscal impact notes by  the Department of                                                                    
Education and Early Development.                                                                                                
                                                                                                                                
Co-Chair Foster reviewed the agenda for the following day.                                                                      
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
2:29:30 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 2:29 p.m.                                                                                          

Document Name Date/Time Subjects
HB 142 Testimony.pdf HFIN 2/8/2018 1:30:00 PM
HB 142
HB 213 Letter to House Finance Co-Chairs.pdf HFIN 2/8/2018 1:30:00 PM
HB 213
HB 142 Amendment #1 Foster.pdf HFIN 2/8/2018 1:30:00 PM
HB 142
HB 213 Letter to House Finance Co-Chairs.pdf HFIN 2/8/2018 1:30:00 PM
HB 213
HB 213 Amendment 1 Gara.pdf HFIN 2/8/2018 1:30:00 PM
HB 213
HB142 Support Document - Support Letters 2.7.18.pdf HFIN 2/8/2018 1:30:00 PM
HB 142
HB 213 - DOR 10yr what if payout.pdf HFIN 2/8/2018 1:30:00 PM
HB 213
DOR Response to Amendments to HB 213 2-14-2018.pdf HFIN 2/8/2018 1:30:00 PM
HB 213
HFSC Follow Up Public Libraries Receiving OWL Support in FY2018.pdf HFIN 2/8/2018 1:30:00 PM
DEED Response Qs HFIN
HFSC Follow Up FY2018 School BAG Awards by School.pdf HFIN 2/8/2018 1:30:00 PM
DEED Response Qs HFIN
HFSC Follow Up FY2017 E-Rate Overview.pdf HFIN 2/8/2018 1:30:00 PM
DEED Response Qs HFIN
HFSC Follow Up FY15-FY18 Funding by District.pdf HFIN 2/8/2018 1:30:00 PM
DEED Response Qs HFIN