Legislature(2017 - 2018)HOUSE FINANCE 519
01/30/2018 09:00 AM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB287 | |
| HB213 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 287 | TELECONFERENCED | |
| += | HB 213 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
January 30, 2018
9:08 a.m.
9:08:45 AM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 9:08 a.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Mark Neuman (alternate)
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
MEMBERS ABSENT
Representative Tammie Wilson
ALSO PRESENT
Arnold Liebelt, Staff, Representative Paul Seaton; Alexei
Painter, Analyst, Legislative Finance Division; Tim Parker,
President, NEA Alaska; Chris Benshoof, Teacher, Fairbanks;
James Harris, Teacher, Soldotna; Amy Jo Meiners, Teacher,
Juneau; Patrick Mayer, Superintendent, Wrangell;
Representative Justin Parish, Sponsor; Lisa Worl, Staff,
Representative Justin Parish; Alexei Painter, Analyst,
Legislative Finance Division; Mike Barnhill, Deputy
Commissioner, Department of Revenue.
PRESENT VIA TELECONFERENCE
Paul Kendall, Self, Anchorage; Brian Bjorkquist, Senior
Assistant Attorney General, Department of Law.
SUMMARY
HB 213 PUBLIC SCHOOL TRUST FUND
HB 213 was HEARD and HELD in committee for
further consideration.
HB 287 APPROP: EDUCATION/STUDENT TRANSPORTATION
HB 287 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster reviewed the meeting agenda.
HOUSE BILL NO. 287
"An Act making appropriations for public education and
transportation of students; making appropriations
under art. IX, sec. 17(c), Constitution of the State
of Alaska, from the constitutional budget reserve
fund; and providing for an effective date."
9:10:05 AM
Co-Chair Foster relayed that his office had not received
any amendments from committee members.
ARNOLD LIEBELT, STAFF, REPRESENTATIVE PAUL SEATON,
introduced himself.
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
introduced himself.
Co-Chair Foster noted the testifiers were available for
questions.
9:11:23 AM
Representative Thompson stated the bill concept was a good
idea, but he believed it had not been sufficiently vetted.
He thought it was premature to force the legislature into a
three-quarter vote to use Constitutional Budget Reserve
(CBR) funds before the legislature had determined what it
wanted to do with the entire budget. He stated there had
not been many meetings on the bill where the committee had
been able to hear from the entire public. He noted the only
testimony had been invited, such as school superintendents.
He thought the bill usurped the budget process. He asked if
the committee was doing the finance subcommittee's work. He
reiterated that it was a good idea, but it was too early.
He asked for the current CBR balance.
Mr. Painter replied that that the CBR balance was projected
to be $2.146 billion at the end of FY 18.
Representative Thompson reiterated that he was not
comfortable with considering the legislation so early in
the legislative session, which would force a three-quarter
vote [by the legislature].
Representative Pruitt believed the funding amount in the
bill was the same amount proposed by the governor. He asked
for the accuracy of his statement.
Mr. Liebelt replied in the affirmative.
Representative Pruitt asked if anyone had spoken with the
Senate to determine if the amount was a bone of contention.
Co-Chair Seaton replied that he had spoken with members of
the other body, including finance members, who had
indicated they did not plan further cuts to K-12 education.
He stated that the amount in the legislation was the same
funding level as the prior year. He remarked that the other
body had not taken any action on the issue because it had
not received the budget. The charts in member's packets
showed a slight drop in the budget from the preceding year
due to lower than projected pupil enrollment. The FY 18
management plan was estimated to be the governor's number
and the number in HB 287 based on the actual amount funded
in FY 17. The charts showed a slight dip, but it did not
represent a real dip because it was the actual number paid
out based on the precise student count.
Representative Pruitt did not propose cuts to education
either. He believed the only argument for the passage of
the bill was related to expectation there would be a
failure in understanding the amount that would be
available. He stated the committee had heard in a
presentation the prior week that there were several dates
associated with education budgets, including May 15 (pink
slip deadline for nontenured teachers) and May 31 (pink
slip deadline for tenured teachers). He thought the bill
represented an expectation of failure by the legislature to
get a budget passed in 90 days. Yet, the legislature had an
understanding on education. He agreed that the budget could
be planned on the data in the bill. He also believed the
legislature would finish its work in 90 days. He believed
the bill was unnecessary. He thought the bill merely
bifurcated the budget and he wondered was next.
Representative Pruitt questioned whether other items such
as health and public safety would be pulled from the
overall budget for separate consideration. He noted that
the budget would be piecemeal. He added that the
[Department of Revenue] spring forecast, which would
provide a better representation of the state's full revenue
source would not come out until April. He noted the release
date also depended on whether the administration chose to
hold onto the forecast longer as it had the previous year.
He asked what the need for the bill was at present. He
stated that if there was alignment he did not understand
the need for the bill.
Co-Chair Seaton discussed early funding of education in
order for municipalities and school districts to construct
their budgets. He did not believe there was complete
agreement on all budgetary items, knowledge of what the
spring forecast would be, or agreement on the amount to be
taken from the [Permanent Fund] Earnings Reserve Account
(ERA). He did not believe school districts and
municipalities could plan their budgets around the belief
that the House and Senate and the governor all agreed on
what the number would be. He compared the unknown situation
to a scenario where the legislature passed a bill that was
signed by the governor. He noted that signed legislation
was security that had not been provided by the legislature
in the past, which had been a problem.
9:19:15 AM
Co-Chair Seaton continued to address Representative
Pruitt's question. There had always been the insecurity of
leaving the education budget to the last item [to be
negotiated]. He stated that unless a separate bill was
passed with money attached that the governor could sign,
the legislature would not be early funding education.
Assuming there would be agreement on the amount that would
be passed was not the same thing as a passed budget. He
stated that until legislators voted on something it was not
possible to know what would happen. The purpose of the bill
was to take the issue off the table and prevent layoffs or
districts from having to construct two budgets because
things changed in midstream. He stated that if the
legislature wanted to early fund education, they should
early fund it; if not, education should be left in the
regular budget. He believed education should be early
funded. He stated that education funding was vital, and the
bill would fund it at the last year's level.
9:21:12 AM
Representative Pruitt surmised that it sounded like there
was a failure to communicate. He clarified he had not
stated there was alignment on everything, but from what he
understood, there was alignment on education funding. He
did not understand the need to push the bill from committee
at present when it sounded like there had been multiple
conversations with members from the Senate about their
alignment on the topic. He did not understand why they
could not wait a few days to determine whether there was
alignment in the Senate as a whole. He cited May 15 and May
31 as failure dates, which were 30 days after the
legislature was supposed to be finished with its work.
Representative Pruitt remarked the bill would pull $800
million more from the CBR than the estimate provided in the
initial presentations. He stated that it would mean pulling
more money out of an account than was potentially needed.
He stated that on July 1 it would mean pulling $1.2 billion
out of an account that earned 1.86 percent in 2017 instead
of using money from the General Fund, which could be pulled
out over the course of the year. He detailed the General
Fund had made 1.56 percent in 2017. He remarked that the
difference may not seem substantial, but 1 percent of
billions was significant. He thought they were pushing
forward on something without communicating with the other
body. He reasoned that if there was alignment the bill
reflected an expectation of failure. He requested to hold
off on taking action for several days in order for a
discussion to take place with the Senate.
9:23:30 AM
AT EASE
9:26:51 AM
RECONVENED
Co-Chair Foster noted there were several questions and that
a slide had been put up on the screen. He relayed his
intent was to hold the bill a couple of days to hear public
testimony on Thursday. He wanted to allow extra time to
communicate any concerns.
Vice-Chair Gara stated that the most important
professionals in the state were becoming demoralized. They
were leaving positions with the University and the
education system because they did not know whether they
would have jobs the following year. He remarked that the
past few years there had been legislators asking for $67
million in education cuts at the last minute. He believed
if legislators were all agreeable that no one would do that
during the current session, they should deal with the
education budget at present. He spoke to the concept of
passing a budget on time. He supported that goal but
pointed out that there had not been a great history of
passing a budget on time in recent years. He did not want
to send pink slips to teachers. He stressed that some of
the best teachers were leaving the state. He reasoned that
when those individuals were lost it meant the state's
education system suffered.
Vice-Chair Gara lauded Co-Chair Seaton for filing the bill
because it reflected a discussion the legislature had been
having for a long time. He spoke about threats that
individuals would lose their jobs. He supported the bill.
He stated that unfortunately with the differing opinions
about a fiscal plan something had not passed. He supported
a fiscal plan. He pointed to decisions made by the
legislature the previous year when the savings account had
been drawn down substantially. He stated that the remaining
sources of revenue were very controversial. He believed the
bill had to pass. He was glad to hear that others did not
want to further cut education. He supported an inflation
adjustment for the losses in education funding. He believed
the bill was something all legislators could agree on.
9:31:28 AM
Co-Chair Foster repeated that he planned to hold the bill
until Thursday for more public testimony. The committee
would hear public testimony during the current meeting as
well.
Representative Neuman thanked Co-Chair Foster for the
opportunity to ask questions. He asked how to prioritize
funding of teachers over state troopers and everyone else.
He spoke about decisions that needed to be made included
what funds to use to fund a budget. He detailed that the
previous year there had been a decision made by the House
Majority not to fund any budgets until taxes and use of the
Permanent Fund Dividend bills were passed. He stated the
legislature could pass a bill like HB 287 and it would
still not matter. He asked about how to utilize the current
fund. He agreed that giving industry and schools an idea of
what the funding would be would be helpful as soon as it
was possible to do so; however, the state was experiencing
difficult financial times and the decisions were difficult.
He thought tying up the available funds in the different
pots of money could be very difficult for the legislature.
He wanted to get more information on the topic.
Representative Neuman spoke about personnel costs - it had
been mentioned that the bill was highly supported by many
members. He was not able to support the bill due to
questions he had. He stated there was no reason why the
Senate and House could not get together early on to give
the education industry an idea of what the funding would
be. He reiterated his thanks for the time to consider the
bill.
Co-Chair Foster reiterated that public testimony would be
reopened later in the meeting and on Thursday.
9:35:01 AM
Representative Tilton echoed comments made by her
colleagues. She wondered about the funding priorities for
the different departments and agencies. She mentioned the
education subcommittee process and questioned whether the
bill put the cart before the horse. She spoke to the
remaining CBR balance and available funding and asked if
figures accounted for increased oil prices.
Mr. Painter replied in the negative. The projections of the
CBR balance at the end of FY 18 assumed the [Department of
Revenue] fall forecast, which he believed used a $56 per
barrel price in FY 18.
Representative Tilton remarked that the projection was at
$56 per barrel, but the other day the price was $70. She
asked if her statement was accurate.
Mr. Painter replied in the affirmative.
Representative Tilton surmised there was an opportunity for
some increased balances in state savings accounts.
Mr. Painter answered that if prices held at $70 for the
remainder of the fiscal year there would be an additional
$200 million in the CBR; the balance would be $2.3 billion
instead of $2.1 billion.
Co-Chair Seaton spoke to an earlier question about whether
the legislation was taking over the responsibility of the
finance subcommittee. The portions included in the bill
were in statute including the Base Student Allocation (BSA)
and pupil transportation, which were not considered by the
finance subcommittee. He clarified that the bill did not
fund the entire education budget including pre-K, teacher
mentor programs, and the Department of Education and Early
Development (DEED) - those items were still under the
purview of the education subcommittee.
Co-Chair Seaton furthered that the bill also considered
other portions where people were required to receive layoff
notices by state law including boarding schools and Mount
Edgecumbe. The bill funded basic K-12 education, which was
where the agreement resided. He stated there was no
agreement on things like bond debt reimbursement for
schools. The bill addressed the portion of education and
employees that were different than state troopers. He
detailed that state troopers were not required to receive
layoff notices May 15 through June. Troopers may go on
furlough on July 1 if a budget was not finished, but the
bill pertained to the only segment of government where
there was a law requiring advanced layoff notices. The
bill's purpose was to ensure the school districts and
municipalities working to fulfill state law were not
negatively impacted.
Co-Chair Seaton clarified there were four groups within the
legislature (two in the Senate and two in the House). He
elaborated that no caucus had a three-quarter vote within
its membership. He explained that if the items were left in
the operating budget they would need agreement between the
four groups without a vote. He did not know that the option
was a secure way to ensure the funding for education. The
purpose was to identify a funding source and agree or not
agree to fund education early. He explained it would mean
the education funding would be a known amount, which would
be attached to the funds identified in the budget bill. The
way to gain full knowledge and security was to have a vote.
He appreciated Co-Chair Foster reopening public testimony.
9:41:18 AM
Representative Ortiz responded to an earlier question about
whether the bill bypassed the subcommittee. He relayed that
the subcommittee had discussed the issue and had already
heard all portions of the sections included in the bill
with the exception of Mount Edgecumbe. The subcommittee was
scheduled to hear about Mount Edgecumbe the following day.
He relayed the subcommittee had not been bypassed.
Representative Neuman stated that generally the
supplemental budget could get rolled into the capital or
operating budget. He asked if the bill was a standalone
appropriations bill.
Co-Chair Seaton replied in the affirmative. The bill was a
complete budget bill that identified the funding sources.
He explained that if it passed it would go to the governor
for his signature. The bill's passage would result in the
removal of the sections in the general operating budget. He
detailed that HB 287 was an operating budget bill for basic
K-12 education. The bill was a way to fund education early.
Representative Neuman stated that the legislature was
statutorily required to pass an operating budget. He noted
there were ways to interrupt the bill if desired. He
elaborated that the legislature had statutorily required
budgets it had to pass every year. He asked if the bill
would fall under the same statutory requirement.
Co-Chair Seaton answered in the affirmative. The bill was a
portion of the operating budget and would have the same
qualifications as any other.
9:44:10 AM
Vice-Chair Gara remarked that the committee was not really
supposed to talk about what the Senate would do per the
Mason's Manual. He emphasized that individuals impacted by
the legislature's failure to pass a budget on time were
angry. He stated that for three years in a row the
legislature had told teachers they would possibly face $67
million in education cuts. The legislature had an
opportunity to tell teachers they would not face cuts in
the current year. He shared that a teacher friend was
leaving the state because he was fed up with the threats of
cuts and receiving pink slip notices. He underscored that
the state was losing its best teachers. He detailed that
state employees receiving pink slips took the issue
seriously. The bill provided an opportunity to communicate
to the education system that they would not face cuts in
the current year. He underscored that the state was losing
its teachers. The bill was an attempt to ensure that the
best teachers remained in Alaska. He hoped the legislature
could come together in agreement that further cuts to
education were not appropriate.
9:46:25 AM
Representative Guttenberg remarked that the committee had
ample opportunity to have discussions. He requested to hear
public testimony if people were waiting.
Representative Grenn asked about the timing and need to get
the bill passed and to the governor as soon as possible. He
stated that May 15 was the statutory deadline regarding
nontenured teachers. He relayed that the Anchorage School
District had to report its budget to the municipality by
March 1. He believed securing funding by that point would
provide morale for the district to know the legislature was
focused on education as a priority for Alaska. He detailed
that due to years of pink slips the morale was low. He
believed the bill would go a long way in showing the
legislature's support. He supported moving the legislation
quickly.
Representative Pruitt spoke to a comment about an earlier
statement about trying to get the four caucuses together on
a CBR vote. He thought the bill appeared to be trying to
take the CBR discussion off the table at present, which he
viewed as a usurpation of the power of the Minority in some
cases. He recalled a letter written on May 20, 2015 signed
by several members including the co-chairs, which indicated
that five days after the pink slip date for nontenured
teachers they wanted to continue the negotiations with the
Minority caucus to obtain the number of votes needed to
access the CBR instead of using the ERA. He noted that the
ERA would be utilized without the vote of the people for
which they requested.
Representative Pruitt continued that even then there had
been an argument from members of the House that usurping
the power of the Minority was not something they wanted to
go forward with. He believed what he had heard about HB 287
was the desire to get the issue off the table so there was
an ability in the long run to (after $800 million was
pulled from the CBR - more than was necessary based on
prior testimony) go forward without the need or necessity
of having the voices of the people that may find themselves
not in the Majority. He believed the issue should be laid
on the table if it was a concern from the past. He stated
that the House Majority [in 2015] had taken the other
members' concerns into account and had allowed the Minority
to continue to play the role everyone would expect. He
believed it was important to take into consideration. He
reiterated the current discussion seemed like an attempt to
eliminate the House Minority's ability to participate in
the full budget process.
9:50:31 AM
Co-Chair Seaton spoke to the $800 million and reminded the
committee that they were talking about a potential ERA draw
that was unsustainable, which was based on a 6.95 percent
annual return. He elaborated that the Alaska Permanent Fund
Corporation (APFC) Board of Trustees had adopted the
actuarial amount of 6.5 percent, which was essentially 0.5
percent down in the board's long-term projection in return
on investment. He wanted to make sure the issue was
considered.
Representative Pruitt stated that Co-Chair Seaton had just
highlighted why the issue was challenging. He continued
that the bill tried to put together pieces of a puzzle
without knowing what the puzzle looked like. He explained
that going forward with the bill would make certain
assumptions and force certain things to be the reality when
it came time to put the budget together. It was part of the
reason he believed the budget needed to move forward
together instead of in pieces. He reasoned they did not
know exactly what the revenue or spending pictures would be
all at the same time, which made it very difficult to put
the whole thing together.
9:52:23 AM
Representative Thompson remarked on a statement made by Co-
Chair Seaton that if the bill passed, the sections would be
removed from the full budget. He wondered what would happen
if the legislature decided it needed to add more money to
the education budget for something like pupil
transportation. He reasoned it would mean the need for
another standalone bill. He stated the subcommittee process
had not been completed to determine whether changes would
be needed. He was concerned about pulling the items from
the budget.
Co-Chair Seaton clarified that nothing precluded the budget
from having additional money on the topics. For example,
the legislature could choose to add additional pupil
transportation funding if it chose to do so. The bill would
fund the BSA and pupil transportation at the prior year
levels. He explained that the legislature could put
something else in the budget if decided to do so. The bill
would be signed by the governor as the specific amounts,
but nothing prevented additional funds in the operating
budget.
Representative Neuman had heard from the sponsor that the
bill would be a standalone operating appropriations bill
that would be required statutorily just as the operating
budget was. He asked for verification of his understanding.
Co-Chair Seaton answered that the bill had the same
parameters as a supplemental bill. He explained that a
supplemental could change or add additional money. There
was no constitutional or statutory requirement for the
operating budget to be passed as one piece.
Representative Neuman believed a statutory change would
require a three-quarter vote on the floor and a public
vote. Alternatively, he wondered if the bill was an
operating budget bill that was statutorily required. He
believed Co-Chair Seaton had answered in the affirmative.
He stated that if the bill was like a supplemental that
rolled into another budget or was included in an operating
budget, the legislature could decide to fund it or not (as
had occurred the previous year with other appropriations
bills in the operating budget). He stated that the governor
could decide to fund the bill at a lesser value as had
happened with the Permanent Fund Dividend in the past. He
did not know if it was possible and requested to find out.
Co-Chair Seaton clarified that it would be a budget bill
just like the fast track supplemental the legislature could
pass. He did not mean that the legislature could not pass
an appropriation without a statutory requirement. However,
the bill under consideration in the Senate looked at a
statutory requirement that future legislatures to pass
budgets by certain times. He explained that HB 287 was the
mechanism to accomplish the goal in the current year.
Co-Chair Foster recognized that Representative Kawasaki had
joined the meeting.
Mr. Liebelt clarified there was an error on the last slide
of a presentation [slide 8] he had provided ["HB 287
Education and Pupil Transportation: An Early and Stand-
alone Appropriation Bill" dated January 25, 2018 (copy on
file)]. He corrected that the slide should read that
nontenured teachers had to receive notices by May 15 and
tenured teachers had to be notified the end of the school
year.
9:58:10 AM
Co-Chair Foster OPENED public testimony [public testimony
had also been heard the preceding week].
TIM PARKER, PRESIDENT, NEA ALASKA, spoke in favor of the
legislation. He thanked the co-chairs and bill sponsors for
the opportunity to express support. He stated that
educators in Alaska cared a lot about student learning, it
was the driving force that pushed educators. He spoke to
the positive motivation in the classroom. He argued that HB
287 was poised to fix some problems with the particular
situation. He recalled the delay in funding the previous
year and how it had impacted school districts and specific
schools. Districts had handed out pink slips in record
numbers, with the thought that unfortunately the pink slips
would be rescinded, which they had been.
Mr. Parker detailed that between the time they issued pink
slips and rescinded them many of the best and brightest
teachers had left the state. He noted the ramifications of
passing out those slips. He wanted to see the focus on the
necessary things that were important to education. He
mentioned the Alaska Education Challenge and noted there
would be a press conference later in the day with the
commissioner; NEA was trying to lean into things that would
help districts make better decisions about how to increase
and maximize student learning. Delayed funding meant
districts were not focused on what they should be. He spoke
to the importance of providing funding stability. He
reiterated NEA's support for HB 287.
10:01:57 AM
Representative Grenn stated that the Anchorage School
District submitted its budget to the municipality by March
1. He asked if it was a common deadline throughout the
state.
Mr. Parker responded that that deadlines were not all the
same, but it was common for budgets to be submitted by the
districts early and then funding mechanisms were addressed
with their boroughs. There had been discussion about
whether April 1st was the right date. Experts had
communicated that going anywhere after April 1 risked
putting schools in positions of providing pink slips. Due
to the various steps required in the school budget process,
NEA had been told that April 1 was an important date to
make sure the legislature had acted by that time. In past
years education funding had been passed a bit later than
April 1 and districts had managed to avoid pink slips.
Co-Chair Seaton remarked that there had been some confusion
on when tenured and nontenured teachers needed to be
notified about layoff. He believed tenured [nontenured]
teachers had to be notified by May 15. He asked if many of
the contracts required that nontenured teachers be laid off
prior to tenured teachers. He surmised that new teachers
were laid off prior to laying off tenured teachers.
Mr. Parker replied in the affirmative. He detailed that
different districts had different contracts, but the net
result was the same in most districts. The other factor was
the number of nontenured teachers versus tenured teachers
in a particular district - it varied by district.
10:05:14 AM
PAUL KENDALL, SELF, ANCHORAGE (via teleconference), did not
believe the past speaker should qualify as public
testimony. He addressed the concept of pink slips. He
thought it was malfeasance or corruption. He stated there
were secret negotiations of public employees. He did not
support unions. He stated that the legislature had stolen
the dividend from residents. He believed the education
industry was corrupt. He thought wages should be cut. He
thought the entire system was mismanaged.
Co-Chair Foster asked testifiers to not disparage other
testifiers and to stick to the legislation.
10:09:51 AM
CHRIS BENSHOOF, TEACHER, FAIRBANKS, spoke in support of the
legislation. He shared that a fellow teacher had routinely
been given pink slips - she had been teaching for 11 or
more years and the routine pink slips were demoralizing.
The uncertainty meant teachers and students were uncertain
about the following year. The uncertainty led to
significant testimony to the local school board - teachers
were concerned about their positions and programs and then
students and families heard about the issues as well, which
caused uncertainty for students. He referenced the Alaska
Education Challenge - one of the commitments was that
schools were safe places for students where safety and
well-being was cultivated.
Mr. Benshoof believed the instability students had to deal
almost annually with was difficult. He shared that the
previous year the district had been asked to create a plan
for how to deal with flat funding. He detailed the plan had
been two to four staff fewer, an increase in parent/teacher
ratio, and a decrease in enrollment. About one week into
that process they had been asked to make a plan b that
would include an additional teacher cut. Ultimately, the
district had been asked to come up with a plan c, d, and e
over the remainder of the year. He was in favor of the bill
and appreciated the committee's time and attention.
10:13:02 AM
JAMES HARRIS, TEACHER, SOLDOTNA, testified in favor of the
bill. He shared that he was the 2017 Alaska teacher of the
year and he had spent most of the year focused on the
issue. He explained that it was an issue for teachers,
students, and communities. The Soldotna School Board had
been faced with developing multiple budgets and
administrators had made multiple plans. He discussed that
the Soldotna High School had numerous initiatives it would
like to offer, but it did not ever know if the ability was
there. The high school did not ever know how many teachers
may need to be cut and whether electives could be offered.
He recalled that two years back the school had not known
whether it could offer AP [advanced placement] classes,
which created instability for students. He believed one
thing that all Alaskans wanted was to provide stability for
kids. He stated that kids felt undervalued - he believed
the current generation of students needed to feel valued.
He relayed that the borough assembly also had to hold off
on its budget because it did not know how much it would be
able to give to help the school district. He thanked the
committee for its work. He supported stability for students
in the long-term.
Representative Guttenberg thanked Mr. Harris for being
teacher of the year and for the efforts he had put into
education.
10:15:29 AM
AMY JO MEINERS, TEACHER, JUNEAU, testified in support of
the bill. She shared that she was the 2016 Alaska teacher
of the year and a mother of three daughters who had gone
through the Juneau school system. She recognized that the
school calendar did not fit neatly into a fiscal calendar
or a January/December timeline. She stated that pink slips
went out in May, but job fairs were held in March. She
explained that teachers booked travel in February for the
March job fairs. The instability played out for students in
many ways. She shared that her youngest daughter was a
senior and had given tours to incoming freshman who were
deciding between the two Juneau high schools. Many of the
questions had been about what courses were offered and what
teachers would be there. All the instability played out in
the spring. She thanked the sponsor for putting the bill
forward and thanked the legislature for the discussion it
was having about education. She hoped the headlines would
read about the positive movement for education going
forward. She thanked the committee for its consideration of
passing an education bill that would stabilize the options
for children.
10:17:33 AM
PATRICK MAYER, SUPERINTENDENT, WRANGELL, spoke in support
of the legislation. He thanked everyone who had a hand in
sponsoring the bill. He stressed the importance of the bill
for the stability of education in Alaska. Early funding
allowed districts to get teacher contracts signed early
enough so they were not lost to other states. He spoke to
statistics suggesting that if teachers were given pink
slips they would leave for jobs in other states.
Additionally, there were fewer job candidates. He shared
that he had been in Alaska since 1982 and believed the
discussion was long overdue. He applauded the committee for
taking the issue on. He urged the committee to support the
bill.
Representative Guttenberg spoke to the process of going
through a school district budget. He asked if the delays,
teacher pink slips, and other had a measurable cost to the
school district.
Mr. Mayer answered that the district currently had two
vacant positions in math and art. The lack of budgetary
certainty was causing the district to delay filling the
positions. Other districts throughout the state experienced
the same problem. The issue was especially important in
small districts because they may have access to a smaller
pool of candidates. The issue was a continual concern
throughout its budget drafting process.
10:20:50 AM
Co-Chair Foster CLOSED public testimony with intent to
reopen it on Thursday afternoon.
HB 287 was HEARD and HELD in committee for further
consideration.
10:21:33 AM
AT EASE
10:25:29 AM
RECONVENED
HOUSE BILL NO. 213
"An Act relating to the investment, appropriation, and
administration of the public school trust fund."
10:25:37 AM
Co-Chair Foster noted the committee had heard a brief
introduction on the bill on January 25.
Co-Chair Seaton MOVED to ADOPT the proposed committee
substitute for HB 213, Work Draft 30-LS0765\R (Glover,
1/26/18).
Co-Chair Foster OBJECTED for discussion. He asked the
sponsor to address the changes in the work draft.
REPRESENTATIVE JUSTIN PARISH, SPONSOR, provided a brief
introduction of the bill. The bill changed the way the
state managed the Public School Trust Fund and would allow
it to realize capital gains as income where appropriate,
always preserving the principal of the fund and allowing
for growth into the future. Moving to a more modern
management system would mean continued growth in the fund,
realize higher dividends, and a higher rate of earning. The
CS had several changes - one practical and a couple of
substantive changes. He deferred to his staff to address
the details.
LISA WORL, STAFF, REPRESENTATIVE JUSTIN PARISH, addressed
the summary of changes:
Page 2, line 10:
Delete "previous 10 fiscal years" and add "five fiscal
years preceding he previous fiscal year."
Page 2, line 31:
Add "Section 6. This Act Takes effect immediately
under AS 01.10.070(c).
Ms. Worl addressed the bill in its entirety by providing a
sectional analysis:
Section 1 (page 1, line 4): Amends AS 37.14.110 (c)
to state the commissioner of revenue shall determine
the net income of the fund in accordance with
accounting principles and that the principal shall be
perpetually retained in the fund for investment
purposes. The distinction between principal and
income and defining and maintaining the difference
between the funds is deleted.
Section 2. (page 2, line 9): AS 37.14.160 adds
section (5) to the duties to direct the commissioner
to determine the average monthly balance for the
public school trust fund based on the monthly average
market value of the fund for the previous 10 fiscal
years.
Ms. Worl elaborated that Section 2 added a lag-year with
the word preceding. She continued to review the sectional
analysis:
Section 3. (page 2, line 11 16): Adds new section,
AS 37.14.165 relates to the use of the public trust
fund allowing the legislature to appropriate 4.75
percent of the amount determined by the commissioner.
Section 4. (page 2, line 19 and line 23): AS
37.14.170 further defines investment of the trust fund
management.
Section 5. (page 2, line 30): AS 37.14.140 is
repealed. This section had stated that the net income
of the fund could not be appropriated or expended.
This section was repealed as it did not allow for fund
to be managed with the POMV method.
Section 6. (page 2, line 31): Adds section 6 for Act
to take effect immediately.
Ms. Worl communicated she was available for questions and
listed others available in the room and online.
10:31:01 AM
Representative Guttenberg relayed that he had previously
asked for the history of the fund. He requested to hear
from the Legislative Finance Division (LFD).
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
asked if Representative Guttenberg would like information
on the history of the fund.
Representative Guttenberg answered in the affirmative.
Mr. Painter obliged. He relayed that the fund had been
established in 1913 as a land trust from a congressional
grant to the territory of Alaska for public schools. In the
1970s the land trust had been converted into a cash trust,
creating the fund as it is at present. At that point, all
the public school trust lands were merged into general
state lands. A cash trust had been created that was
invested and 0.5 percent of royalties from minerals were to
be deposited into the trust in an attempt to make the trust
whole. Since then, the fund had initially been used for
capital projects, but was now mainly used in the formula.
Given investment strategies in the 1970s at the time the
statute was written, there was deleted language in Section
1, such that the only spendable amount coming from the fund
was dividends and other income. He stated that capital
gains could not be spent.
Mr. Painter explained that dividends and capital gains
(gains from selling stocks) went into the Permanent Fund
Earnings Reserve Account (ERA). The Public School Trust
Fund did not allow capital gains to be spent. As a result,
less was spendable every year and the Department of Revenue
(DOR) managed the fund in a way that perhaps did not
maximize the total return of the fund since stocks tended
to be where much of the value resided at present. Changing
the management of the fund to a percent of market value
(POMV) would likely increase the expected returns of the
fund because the management could be shifted away from some
of the dividend earning investments that may not be as
strong. Additionally, the change would allow more to be
spent every year because the state could not spend the
dividends but could spend a more stable market value of the
fund. He noted there were also several lawsuits.
10:34:13 AM
Representative Neuman referenced Mr. Painter's testimony
that the fund had changed from a land trust to a cash fund.
He asked about the process.
Mr. Painter answered that at the time in the 1970s the
lands were managed as school trust lands and when the sales
happened the revenue was spent by schools. At that point
the new sales from land were deposited into a new fund. The
land trust had been liquidated and the lands had been added
to general state land. There was no distinction between
school and other state lands, except for some post-1980
that were transferred. The royalty deposit was intended to
take the place of trust lands that no longer belong to the
trust. He explained it had been the subject of part of the
Kasayulie law suit. At the time as part of the court's
ruling (which had been preempted by a consent decree later
on), the judge had determined that it was not possible to
determine whether the trust had been made whole by putting
the royalties instead of the lands unless the value of the
lands was known. The value of the lands was not known - it
was impractical to survey hundreds of thousands of acres in
small parcels across the state. The trust would remain in
perpetuity as long as the value of the lands was not known,
but if the state could spend in a sustainable way on the
correct things, it seemed to be fulfilling the trust's
purpose. He remarked that the Department of Law (DOL) could
provide further detail on the legal aspects.
Representative Neuman referenced the first paragraph in
section changes that read: "language that was removed in a
manner that preserves the distinction between principal and
income and excludes capital gains." He believed it was a
major change in the way management had been done. He
requested to hear from DOL. He stated the change allowed
the principal to be used for management purposes. He asked
for more detail.
10:37:02 AM
Representative Parish deferred to DOL.
BRIAN BJORKQUIST, SENIOR ASSISTANT ATTORNEY GENERAL,
DEPARTMENT OF LAW (via teleconference), responded there
were several mischaracterizations of the Public School
Trust, which he intended to clarify. He addressed Co-Chair
Neuman's question about what happened with eliminating the
capital gains in Section 1 of the bill. He explained that
the section still had the DOR commissioner determine the
net income and still preserved the principal of the fund,
which was perpetually retained for investment purposes. The
section changed that the capital gains or losses were
retained as part of the principal of the fund - the capital
gains would add to what could be spend or losses could
detract from what could be spent.
Representative Neuman stated that the change would allow
access to the principal for management of the fund. He
reasoned if there was a downturn for several consecutive
years of -4.75, it could be taken out of the fund
principal. He believed it went against the original intent
of the language.
Mr. Bjorkquist disagreed. He explained that the bill
specified that the principal of the fund shall be retained
for investment purposes. The principal of the fund could
not be spent for any purpose including administrative costs
of the fund.
Representative Neuman suggested that the state would have
to use part of the fund principal to fund the change in the
bill if the fund had negative investment years. He
questioned whether it was a change the legislature wanted
to make.
10:39:47 AM
Representative Pruitt was trying to understand how the fund
was currently managed and how the change would be made. He
referenced a handout in members' packets provided by DOR
dated January 23, 2018 (copy on file). The handout showed a
table of projected payouts from FY 19 to FY 25. He looked
at a column labeled "status quo" and observed that the
amount in [FY 25] would be $825 million. Alternatively, the
5-year endowment proposed in the CS, the fund amount would
be $776 million [in FY 25]. He noted there was a change of
about $10 million per year in the amount available for
spending. He asked how the money was currently managed. He
wanted to understand how DOR was currently limited in its
ability to manage the fund and how the bill would allow the
fund to make more money.
Representative Parish deferred to DOR.
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
provided a background on the evolving law and theory on the
management of trust funds and endowments. He believed it
was fair to say that the approach to managing trust funds
and endowments had changed substantially over the past 50
years. The state's statutes governing the Permanent Fund
and the Public School Trust Fund reflected a theory and
common law of managing trust funds that had been in place
quite some time ago. Since that time numerous things had
taken place. First, was the recognition that the overall
objective of managing a trust fund or endowment was to
preserve the inflation adjusted value of the fund
indefinitely. Previously, the idea had been to preserve the
notional value of principal indefinitely. The approach had
been modernized to make sure the principal adjusts with the
value of inflation. Preserving the value of principal alone
did not accomplish the objective.
Mr. Barnhill elaborated that over time the investment
theory regarding investment of trusts and endowments had
evolved from the notion that there should be relatively
risk-free securities, meaning the investment portfolio
would be heavily dominated with fixed income instruments,
had given way to a more aggressively invested portfolio
more weighted towards equities and growth in value. The
idea of what could be appropriated or spent from a trust
had evolved from the concept of income (cash in the case at
hand) delivered through dividends from equity instruments
and coupons from fixed income instruments, had given way to
the idea of delivering some distribution percentage from
the fund (in some cases 5 percent, or 4.75 percent in HB
213). The idea was to produce an inflation adjusted income
stream for the trust's beneficiaries. Over time there was a
stream of income that was relatively consistent and did not
erode the inflation adjusted value of the trust.
Mr. Barnhill expounded that much of the conversation about
the Permanent Fund had been focused on how to evolve the
management and the law governing the fund to a more modern
theory of endowments, which was equally applicable in the
case of HB 213. The statute regarding the exclusion of
capital gains in the public trust fund was also similar to
the Permanent Fund context. In 1981 or 1982, instead of
retaining net capital gains in the principal, the gains
were allowed to flow to the income fund. At that time, the
Permanent Fund had adopted inflation proofing. He spoke to
Representative Neuman's point about eroding the inflation
adjusted value of the trust. The way endowments avoid
eroding the inflation adjusted value of the trusts was to
set a distribution percentage in a way that ensured the
payment to beneficiaries was sufficient without eroding the
inflation adjusted value of the trust.
Mr. Barnhill addressed how the fund was managed currently.
In general, the asset allocation was heavily weighted to
fixed income compared to other trust funds administered by
DOR (55 percent equity/45 percent fixed income). Over the
past couple of years the allocation had been adjusted to
add in a real estate investment trust (REIT). He explained
that a REIT is a cash generating instrument that looked
like equities but delivered cash like fixed income. The
department had also added in a bit of high yield. He
detailed that if the bill passed, the department would
shift the asset allocation to be more heavily equity
weighted in order to generate a higher return profile over
time. The numbers on the DOR table mentioned by
Representative Pruitt reflected the idea that DOR would
shift closer to a 70/30 asset allocation (70 percent
equity/30 percent fixed income) with some adjustments to
have continued exposure to REITs and high yield.
10:47:30 AM
Representative Pruitt spoke to the bill's intent to
maintain the trust principal at an inflationary amount and
to allow for the amount to be spent to also increase at the
inflationary amount. The CS made a change from a 10-year
POMV to a 5-year POMV. He asked Mr. Barnhill for his
opinion on the change.
Mr. Barnhill answered that one of the challenges in the
midterm investment environment (the next ten years) was the
current long running bull market in equities. The
department's advisors, Callan Associates, and many other
advisors were concerned the market may be entering some
period of correction. He noted it was not possible to know
the timing - it could be any day or in three years. It
seemed plausible that at some point over the next 10 years,
the frothy returns the equity market had enjoyed over the
past several years would come to an end at least
temporarily. The department was being cautioned against
being optimistic about continuing to see the double-digit
equity return over the next 10 years.
Mr. Barnhill explained that the 10-year averaging made it
easier for the department to hit the objective of
preserving the inflation adjusted value of the trust over
that period. The 5-year averaging made it more challenging
if there was a period of market correction in the next 10
years. He added that Callan Associates and others present
their capital market assumptions on a 10-year basis (they
were more optimistic on a 30-year basis). While there was
some pessimism over the next 10 years about whether they
could hit their numbers with a 5-year averaging, over a
longer period it should be doable assuming basic elements
and performance of the equity markets persist over time.
Mr. Barnhill clarified that as drafted, the bill did not go
all the way to the legal structure of what was considered
to be the modern way to manage endowments and trusts. The
reason was because it continued to preserve the distinction
between principal and income. The objective of an endowment
is to preserve the inflation adjusted value of the trust
over time. The technical application of principal and
income may not succeed in that objective, which was the
reason laws had been updated to eliminate the distinction
between principal and income so the manager understood it
was not their job to preserve principal, but to preserve
the inflation adjusted value of the trust. He cited a 2010
law passed by the legislature as an example. The law was
called the Uniform Prudent Management of Institutional
Funds Act under AS 13.65. He detailed it was a model law
drafted by a professor with expertise in the legal rules
governing the administration of endowments and trusts. He
stated that AS 13.65 made the transition completely. He
read from statute:
If a trust is created with the distinction of
principal and income for purposes of this law, its
interpreted to mean a trust fund of indefinite
duration.
Mr. Barnhill explained that the distinction was eliminated
in the modern law of trusts.
10:52:20 AM
Representative Pruitt stated asked where to put weight in
terms of a long-term goal if the objective was to receive
more money at present or preserve the value of the fund.
Mr. Barnhill answered that the policy embedded in laws like
the Uniform Prudent Management of Institutional Funds Act
was the concept of balancing the interests of beneficiaries
today with the interest of beneficiaries in the future
(preserving intergenerational equities). He explained that
it preserved the inflation adjusted value of the trust
while maximizing a stream of income to current
beneficiaries. He explained that the numbers [on the DOR
table] reflected the view that by investing more
aggressively the fund would grow faster, the inflation
adjusted value of the trust would be preserved, and the
stream of revenue to beneficiaries would be maximized.
Vice-Chair Gara referenced the DOR handout. He observed
that it did not look like an either/or scenario where
either principal or rate of return were protected. He
referred to the 10-year endowment model and noted the value
of the fund went from $697 million in FY 19 to $808 million
[in FY 25]. He asked if his understanding was accurate.
Mr. Barnhill answered in the affirmative.
Vice-Chair Gara stated that the other goal of the sponsor
was to increase the amount of funding that went to public
education. While the fund value increased, by FY 24 the
annual payout under the 10-year endowment portion of the
bill would mean $31.5 million compared to the status quo
payout of $23.9 million per year. He asked for verification
that it would mean approximately $7.5 million per year in
additional funds for education.
Mr. Barnhill answered in the affirmative.
Vice-Chair Gara stated that a $100 increase in the Base
Student Allocation (BSA) was about $30 million and an extra
$7.5 million was an increase to the BSA of about $25. He
stated that in endowments if a certain amount was taken out
annually, there may be some years where money had to be
taken from the principal, but over the long-term the
principal and payout grew. He asked why there would be a
limitation that prevented dipping into the principal in a
bad year.
10:56:54 AM
Mr. Barnhill referenced the table provided by DOR and
replied that 10-year endowment was the department's way of
reflecting the averaging or lookback. The bill had
initially included a 10-year lookback, which had been
changed to a 5-year lookback in the CS. He explained that
the 3-year was the lookback for multiple trust funds
administered by the department. Modern endowment theory did
not ask whether the value of the principal was being
invaded, but whether the inflation adjusted value of the
trust was being preserved. He pointed to the 10-year
endowment column with a starting balance of $697 million.
He spoke to the inflation adjusted value preserved
indefinitely through time. He detailed that Callan
Associates had a 10-year inflation projection of 2.25
percent, which had recently been increased to 2.26 percent.
He explained that the 10-year endowment approach preserved
the $697 million on an inflation adjusted basis for the 5-
year timeline and indefinitely.
Mr. Barnhill reported that it was plausible there would be
a down market in the future. He noted there would be points
in time when the inflation adjusted value was not
preserved. The overall objective of endowment law was to
preserve the inflation adjusted value indefinitely. He
stated there were multiple ways to correct for a period of
time where there was a drawdown or a correction in the
markets and the inflation adjusted value of the trust
decreases. Options included staying the course with the
understanding that the market may come back, which it often
did, or the distribution percentage could be adjusted
temporarily from 4.75 percent downward for a couple of
years to see if the inflation adjusted value corrected. It
was not fatal. There were other ways of correcting for the
issue. The fact there was a period where the current value
was less than the inflation adjusted value. He explained
the situation was not fatal.
11:00:16 AM
Vice-Chair Gara shared that he was in favor of the bill. He
asked Mr. Barnhill to provide a written document specifying
the impact of doing a traditional endowment model seeking
long-term gains and where there was not significant concern
over one or two years of a decline in principal.
Mr. Barnhill answered that if it was a legal question he
preferred to defer to DOL. He stated if it was a trust
question...
Vice-Chair Gara interjected that it was a trust
administration question.
Mr. Barnhill responded the easiest thing was to refer
members to AS 13.65, which set out the factors to consider
in distributing from an endowment. The model statute said
that evaluating the prudency of how the factors were
evaluated and applied in a given year depended on what was
known to the manager at the time.
Vice-Chair Gara asked whether it would cause DOR concern if
he were to propose an amendment that removed the provision
specifying that the principal could never be dipped into,
meaning the fund would just be run as an endowment.
Mr. Barnhill answered that the committee could delete
Section 1, which would mean converting from a principal and
income fund to an endowment fund, which he believed would
be appropriate.
Representative Parish pointed to the language on page 2,
lines 12 and 13: "Each year, the legislature may
appropriate 4.75 percent..." He stated that if there were
ever a concern that the growth of the fund was hindered, it
would be the legislature's prerogative to allocate funds
from other sources. Given the high rate of returns enabled
by the legislation and the conservative 4.75 percent
proposed POMV draw over a 5-year lookback, he did not
anticipate any erosion of value except in exceptional
market circumstances. He reiterated that in those
circumstances the legislature had the option of drawing
less.
11:03:23 AM
Representative Neuman stated he was having difficulty
because land was a real property asset with a value that
increased and decreased. He recalled losing money on a
property in the 1980s because the value had gone down
considerably. He had no idea when looking at the forecasts
what the prior performance had been. He asked how the fund
had performed in the past 10 years - he did not know how to
make the comparison without the numbers. He wondered
whether the change would put more money in the fund or not.
He spoke to the value of the land and understood the
concept of going to cash, but the committee had heard from
LFD that the state did not know the value of the property
when it had been changed from a land trust to a cash fund.
He wondered if it could be a potential lawsuit. He asked
how the funds currently went into the system. He questioned
whether the funds came in as unrestricted general funds
(UGF). He reasoned that it would be difficult to see what
the funds were if they came in as UGF and were converted to
designated general funds (DGF).
Representative Parish relayed that the Public School Trust
Fund was a dedicated fund; it was a pre-statehood fund that
was a federal program. He deferred to Mr. Painter to answer
any concerns about the transition from a land trust to a
cash trust. He asked Mr. Barnhill to respond to the
question about long-term earnings.
11:06:13 AM
Mr. Barnhill answered that as indicated by Mr. Painter, the
fund had started out in 1913 as a land trust. In 1978 the
land trust element was extinguished by the legislature and
it was converted entirely to a cash asset portfolio.
Currently there was no land in the trust fund - the fund
was roughly allocated between 55 percent equity and 45
percent fixed income. The fund was also invested in REIT
securities (which was not land) and high yield. He
discussed unaudited returns as of December 31, 2017. The 1-
year return was 13.79 percent, the 3-year return was 6.74
percent, the 5-year return was 7.36 percent, and the 10-
year return was 6.23 percent. He offered to compare the
returns to the Power Cost Equalization (PCE) Fund, which
DOR administered more on an endowment approach. As of
December 31, 2017, the 1-year PCE return was 16.02 percent,
the 3-year return was 7.7 percent, the 5-year return was
10.3 percent, and the 10-year return was 7.04 percent. He
offered to provide a copy to the Co-Chair Foster for
distribution.
Representative Neuman requested the past performance in
writing. He remarked on the difference between investing
the $1 billion PCE Fund compared to the $22 million Public
School Trust Fund.
Mr. Barnhill clarified that the Public School Trust Fund
was a $670 million fund. He recognized the fund was smaller
than the PCE Fund, but not that much smaller.
11:08:46 AM
Mr. Painter responded to Representative Neuman's question
about how funding appeared in the budget. He explained that
the 0.5 percent of royalties dedicated to the fund were
appropriated but did not appear in the budget just as the
royalties going to the Permanent Fund did not show up. The
spending from the fund as a dedicated fund showed up as
"other," which would not change in the bill. Both the Mount
Edgecumbe and K-12 formula components showed up as other
funds. There was no UGF because of the pre-statehood
dedication.
Co-Chair Neuman asked if the [indecipherable] used UGF of
DGF.
Mr. Painter answered "other."
Co-Chair Seaton referenced Mr. Barnhill's testimony that
the 10-year endowment model preserved the inflation
adjusted value over a 10-year period. He asked if the 5-
year lookback that was used by the Permanent Fund also
preserve the inflation adjusted value over the same amount
of time.
Mr. Barnhill answered that for the 10-year lookback the
inflation adjusted value at current Callan Associates
capital market assumptions was preserved for all periods of
time. For the 5-year approach and 10-year window using
current Callan capital market assumptions, the inflation
adjusted value of the trust fund narrowly missed. Inflation
adjusted value was restored in Callan's 30-year projection
for capital markets was closer to 8 percent as opposed to
6.5 percent. The pessimism embedded into Callan's 10-year
projections created the issue for the 5-year approach. He
added that the issue was also true for the 3-year approach.
11:11:19 AM
Representative Guttenberg considered the interest earned in
a year over the payout plus inflation proofing. He noted
that Mr. Barnhill had discussed that in some of the years
it was considerably higher. He asked if the interest that
went back into the fund was considered principal.
Mr. Barnhill replied there were two paradigms he was trying
to distinguish. He referred to the principal income
paradigm as the legacy paradigm. In the Permanent Fund
context there was familiarity and comfort with the concept
of inflation proofing because the legislature had decided
to explicitly inflation proof through an appropriation back
from the ERA to principal. In the Public School Trust Fund
the legacy approach did not do that explicitly because the
statutory definition of principal included capital gains.
He speculated that the drafters of the approach believed
the retention of capital gains was some form of inflation
proofing. In other words, in the legacy approach for the
Public School Trust Fund, there was not any explicit
inflation proofing because capital gains and principal were
retained, which was different than the Permanent Fund.
Mr. Barnhill addressed the modern paradigm the bill tried
to move towards and explained that the inflation adjustment
was implied through the distribution percentage of 4.75
percent. The notion was to balance the payouts in a way
that preserved the inflation adjusted value of the trust
over periods of time.
Representative Guttenberg asked what Callan Associates and
two of their competitors would recommend on the 5-year or
10-year endowment concepts.
Mr. Barnhill did not want to put words in Callan's mouth.
He speculated that Callan would observe that that the
principal and income structure to trust funds was long
outdated and the majority (if not all) endowment funds
operate on an endowment methodology or POMV approach. He
referenced the 10-year, 5-year, and 3-year lookback periods
and ventured that Callan would observe that with their
current capital market assumptions for the next 10 years
that the 10-year averaging approach worked, and the 5-year
approach narrowly missed, but over longer periods of time
would restore inflation adjusted value and the same was
true for the 3-year approach.
Representative Guttenberg surmised that Callan would say it
was up to the client.
11:15:07 AM
Co-Chair Foster WITHDREW his OBJECTION to the adoption of
the work draft.
Representative Neuman asked why the approach had been
changed from 10 to 5 years.
Representative Parish answered that he had originally
proposed the 10-year lookback. On advice by Mr. Painter he
had included a lag-year to provide greater predictability
to know what level of funding was coming. He recognized
going to a 5-year lookback was a more aggressive option,
but it was familiar to the bulk of the Alaskan population
through the Permanent Fund program and it was more in line
with what the other body [Senate] may be supportive of. He
stated that for the past 20 years the Public School Trust
Fund had tripled in nominal value. He believed it was
fantastic and that robust growth in the state's funds was
valuable; however, he thought that it fundamentally
departed from the purpose of a trust, which was to preserve
the inflation adjusted value, while maximizing dividends to
beneficiaries. He believed either the 5-year or the 10-year
lookback achieved the objective. There was a strong
argument to be made that the 5-year lookback did a superior
job, if at the expense at limiting the rate that inflation
adjusted value was beat.
11:18:00 AM
Representative Neuman requested to see the numbers behind
the reasoning the change had been made to 5 years. He
mentioned perhaps a 7-year or 8-year approach should be
considered. He noted there was a reason the sponsor had
changed to the 5-year approach and he assumed it was
because the numbers looked better.
Representative Parish was sensitive to the concern, which
was the reason he had originally proposed a 10-year
lookback. He would provide the requested information in
writing.
Co-Chair Foster wanted to make sure there was time for
public testimony. He noted that no one was signed up
online.
Vice-Chair Gara referenced discussion about going back to
the Callan model with POMV and no ban on going into the
principal in one year or another. He asked if it would mean
deleting Section 1 of the bill.
Mr. Barnhill replied that if the legislature wanted to
convert the trust from a principal and income fund to a
modern endowment fund, it would mean deleting Section 1 of
the bill.
Vice-Chair Gara requested the information asked for by
Representative Neuman. He was interested in the numbers for
a 7-year and 8-year approach.
Representative Parish replied that he would provide the
information.
11:20:21 AM
Representative Pruitt remarked that the CS also made the
changes effective immediately. He asked if it would enable
DOR to shift the asset allocation immediately.
Mr. Barnhill believed the intention was two-fold. First,
DOR would shift the asset allocation as soon as prudently
possible from a 55 percent [equities]/45 percent [fixed
income] to a 70 percent [equities]/30 percent [fixed
income] allocation. There could be difficulties in making
the shift immediately depending on the market conditions;
the shift should not be done at the wrong time. He believed
the other intention was to appropriate for purposes of FY
19 pursuant to the distribution percentage as opposed to
the current method.
Representative Parish added that the primary objective was
realizing a high rate of return from its assets. The
state's asset managers had communicated that higher returns
could be achieved on the $670 million fund if they were
provided more management discretion. He believed it was
better done sooner rather than later. The difference in
earnings would be in the thousands of dollars per day if
the market behaved as was expected. The difference between
an immediate effective date versus 90 days after passage
would be measured in the hundreds of thousands of dollars,
which he believed merited consideration by the legislature.
He thanked the committee.
11:22:53 AM
Co-Chair Foster WITHDREW his OBJECTION to the adoption of
the work draft.
There being NO further OBJECTION, Work Draft 30-LS0765\R
(Glover, 1/26/18) was ADOPTED.
Co-Chair Foster OPENED and CLOSED public testimony. He
relayed that amendments were due on Friday.
HB 213 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster addressed the schedule for the following
meeting.
ADJOURNMENT
11:24:55 AM
The meeting was adjourned at 11:24 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 213HFIN CS WORKDRAFT V.R.pdf |
HFIN 1/30/2018 9:00:00 AM |
HB 213 |
| HB 287 Anchorage School District - Bishop. Deena - Public Testimony 012518.pdf |
HFIN 1/30/2018 9:00:00 AM |
HB 287 |
| HB 213 Summary of Changes Ver. U to Ver. R.pdf |
HFIN 1/30/2018 9:00:00 AM |
HB 213 |
| Sectional Analysis HB 213 - version 30-LS0765-R.pdf |
HFIN 1/30/2018 9:00:00 AM |
HB 213 |
| HB 287 PublicTestimonyPiazza20180125.pdf |
HFIN 1/30/2018 9:00:00 AM |
HB 287 |
| HB 287 NEA-Alaska letter of support HB287.pdf |
HFIN 1/30/2018 9:00:00 AM |
HB 287 |
| HB 213 Response Qs HFIN-DOR re HB 213 2-3-2018.pdf |
HFIN 1/30/2018 9:00:00 AM |
HB 213 |