Legislature(2019 - 2020)ADAMS 519
03/09/2020 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB259 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 259 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 9, 2020
1:35 p.m.
1:35:33 PM
CALL TO ORDER
Co-Chair Johnston called the House Finance Committee
meeting to order at 1:35 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Jennifer Johnston, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Andy Josephson
Representative Gary Knopp
Representative Bart LeBon
Representative Kelly Merrick
Representative Colleen Sullivan-Leonard
Representative Cathy Tilton
Representative Adam Wool
MEMBERS ABSENT
None
ALSO PRESENT
Mike Barnhill, Deputy Commissioner, Department of Revenue;
Angela Rodell, Chief Executive Officer, Alaska Permanent
Fund Corporation; Representative Mike Prax.
SUMMARY
HB 259 SUPPLEMENTAL PFD FOR 2019 RECIPIENTS
HB 259 was HEARD and HELD in committee for
further consideration.
Co-Chair Johnston reviewed the meeting agenda.
HOUSE BILL NO. 259
"An Act directing the commissioner of revenue to pay
dividends to certain eligible individuals; and
providing for an effective date."
1:36:27 PM
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "HB 259
Supplemental Permanent Fund Dividend," dated March 9, 2020
(copy on file). The legislation had been introduced at the
governor's request to complete the payment of the 2019
Permanent Fund Dividend (PFD) according to the statutory
formula. He intended to outline the math included in the
bill and discuss how the concept would be managed within
the context of the Permanent Fund as an endowment.
Mr. Barnhill began on slide 2 and relayed that HB 259 would
amend the uncodified law to provide for the remainder of
the statutory PFD for 2019. He detailed that the Department
of Revenue (DOR) had estimated in 2019 that the PFD would
be $2,910 per person. The actual PFD paid had been $1,606
per person, which left a balance of $1,304 per person.
1:37:47 PM
Mr. Barnhill moved to slide 3 and informed committee
members that the estimate for the total aggregate cost of
the supplemental PFD was $1.88 billion. The amount was
funded from $896.5 million unrestricted general fund (UGF)
and $172.2 million from the Statutory Budget Reserve (SBR),
which left a balance of $815.9 million to pay on the
statutory formula. The department estimated that just under
626,000 people would be eligible, which resulted in a
supplemental PFD payment of $1,304 per person.
Mr. Barnhill discussed eligibility on slide 4. He detailed
that a person was eligible for the supplemental PFD if they
had received a 2019 dividend and were eligible to receive a
2020 dividend. Under the legislation, the supplemental PFD
would be paid with the 2020 dividend, subject to
legislative appropriation.
1:39:14 PM
Mr. Barnhill moved to slide 5 and spoke to the rationale
behind the bill. The administration had primarily proposed
the legislation because of statute enacted into law in the
1980s. He detailed that the state had followed the statute
calculation in payment of the PFD until several years back.
In the past four years there had been a "non-structured"
approach to the PFD and the governor believed in the
importance of paying according to the statute. He added
that there had been four years of uncertainty around how
much the PFD would be, which had resulted in discussion
consuming a considerable amount of time and energy in
legislative budget discussions. He asserted that at some
point it was necessary to get back to a structured solution
to the PFD. He communicated that the governor urged the
legislature to consider his proposal that adhered to the
existing statutory formula.
1:40:28 PM
Mr. Barnhill advanced to slide 6 and discussed the notion
that the Permanent Fund was a form of an endowment. He
relayed that the state had been working over a number of
years to get to a complete endowment. He highlighted the
characteristics of endowments including permanent duration,
protect the inflation adjusted value of the funds, preserve
intergenerational equity, and limit spending to the average
real return of the fund. He elaborated on the
characteristics listed. One of the ways endowments achieved
their purpose was to protect the inflation adjusted value
of the funds deposited into the Permanent Fund/endowment,
which was something the state had done since the beginning.
He detailed that when there were realized gains that moved
into the [Permanent Fund] Earnings Reserve Account (ERA),
the legislature appropriated back an amount to compensate
the principal for inflation. The primary purpose of an
endowment was to preserve intergenerational equity so that
each generation of beneficiaries had equal access to the
benefit of the endowment, which was something that had been
part of the management and experience of the Permanent Fund
in Alaska.
Mr. Barnhill continued that the way endowments preserved
intergenerational equity was to limit the spending from an
endowment to the average real return of the fund. He noted
that in SB 26 [Permanent Fund legislation passed in 2018]
the legislature had adopted a spending formula, which
limited spending for the first three years to 5.25 percent
and 5 percent thereafter. The notion was there was an
assumption the Permanent Fund would earn approximately 5
percent real return over time and as long as spending was
limited to that amount or less, it would protect the
inflation adjusted value of the fund so it could be
available to all generations.
Mr. Barnhill continued to address slide 6. He reported that
over the decades the Permanent Fund had been in existence,
Alaska tended to spend less than the real return of the
fund. There were some years the state had spent more, but
because those years were fewer than the years where Alaska
spent less than the real return, the fund had grown in real
terms over time.
1:43:12 PM
Mr. Barnhill moved to a table on slide 7 that showed
historical Permanent Fund spending compared to the real
return of the fund. He noted that the information was
relevant for two purposes: 1) the governor was proposing to
spend additional amounts in FY 21 from the Permanent Fund
and 2) the Alaska Permanent Fund Corporation (APFC) board
had issued a resolution the previous week suggesting that
the real return portion of the distribution percentage be
revisited periodically in order to determine whether
spending was less than, equal to, or in excess.
Mr. Barnhill highlighted that the table included return,
inflation, and spending data from APFC. He pointed to the
top row representing 1998 that showed a gross return for
the Permanent Fund of 16.35 percent, inflation according to
the CPI-U [Consumer Price Index for all Urban Consumers]
deflator of 1.7 percent, and a real return of 14.67 percent
(gross return minus inflation). He noted that investment
management fees could also be subtracted from the gross
return, but for the simplicity's sake it had been excluded
in the table. He relayed that if the SB 26 paradigm were
applied going back in time, the lagging five-year return
for the purposes of FY 2000 (the five years ending FY 98)
would have been 9.95 percent. Under endowment principles,
as long as spending was under 9.95 percent, the inflation
adjusted value of the fund would not be eroded; likewise,
if spending exceeded 9.95 percent, the fund would begin to
erode. In 2000, the amount distributed from the Permanent
Fund was $1.175 billion or 6.3 percent of the lagging five-
year market value. He explained that because spending had
been below the real return, the real return had been
retained and the Permanent Fund had grown in real terms
because there had been no erosion of market value.
Mr. Barnhill moved down the table and highlighted that
there were years where the lagging five-year real return
had declined due to the market. He highlighted column 7
showing the lagging five-year real return. He referenced
FY 05 and pointed out that the lagging return had gone down
to under 1 percent. In FY 05, $559 million had been
appropriated, which was close to 3 percent of the lagging
five-year market value. There had been an erosion of real
return that year, which was to be expected with a static
distribution formula. He explained that for all of the
years with the static dividend formula, funding had been
appropriated pursuant to the formula, which was
irrespective of the real returns.
1:47:17 PM
Mr. Barnhill continued that going forward there was a
static distribution formula of 5 percent. There would be
years where the lagging five-year real return was higher
and years where it was lower. He explained that
fundamentally, the trustees were asking the legislature to
pay attention to what happens in the lagging five-year real
return and the distribution categories. He explained that
if there were more years where the number was positive
(where the distribution was less than the real return), the
real value of the Permanent Fund would grow. The goal was
to maintain or grow in order to protect an endowment.
1:48:11 PM
Mr. Barnhill looked at the fourth row from the bottom of
slide 7 showing FY 19 - the Permanent Fund had earned 6.32
percent with inflation of 1.65 percent, resulting in a real
return of 4.67 percent. The lagging five-year real return
average in FY 19 was 5.59 percent. Under SB 26 they were
appropriating 5.25 percent of the lagging market value or
$3.1 billion. He highlighted that the number was less,
meaning that value was not being eroded. He moved to the
second row from the bottom showing totals with the $815
million for the supplemental PFD. He pointed out that the
Permanent Fund distribution went from $3.1 billion to a
proposed distribution of $3.9 billion, which increased the
percentage of the five-year market value to 6.64 percent,
leading to a negative real return. He noted that the
occurrence was not unprecedented and had happened many
times in the past. He explained it was a product of having
a static distribution formula and varying real returns. The
point was, it was necessary to monitor when the real return
was less than the amount distributed. He stated that in the
case of the supplemental for 2019 it would be slightly
less.
Co-Chair Johnston recognized Representative Mike Prax in
the audience.
1:50:21 PM
Representative Wool looked at the 2019 distribution of
$3.09 billion in the column titled "Amt PF Distribution."
He asked if the number reflected the 5.25 percent of market
value (POMV) draw.
Mr. Barnhill replied affirmatively.
Representative Wool looked at the same column pre-SB 26 and
surmised the number would be the amount calculated by the
statutory dividend formula.
Mr. Barnhill directed attention to the 2016 row to see pre-
SB 26 numbers. The distribution of $803.4 million was the
statutory dividend plus other amounts distributed for the
Department of Law and Department of Corrections. He
elaborated that the five years ending in 2017 created the
calculation for FY 19. In 2017, the calculation for FY 19
had appropriated $2.7 billion or approximately 5.25 percent
of the lagging five-year market value of the Permanent
Fund. The three years reflecting SB 26 were FY 19, 20, and
21 with a distribution amount of approximately 5.25
percent.
Co-Chair Johnston asked if it was 1998 when the five-year
lookback averaging started for the dividend calculation.
Mr. Barnhill replied it had been 2017.
Co-Chair Johnston clarified that she was not asking about
the POMV.
Mr. Barnhill asked if Co-Chair Johnston was speaking about
the one-year lag in paying the PFD.
Co-Chair Johnston replied in the affirmative. She asked if
it had started in 1998.
Mr. Barnhill believed it had started in 2017 when the one-
year lag had been shortened.
Co-Chair Johnston clarified she was speaking about the
dividend formula. She did not believe the five-year lagging
average had started at the beginning of the PFD program.
Mr. Barnhill responded that it was 21 percent of the five-
year sum of statutory net income. He did not recall when
the 21 percent had been instituted. He noted that 21
percent was functionally a five-year average. He thought it
was in the 1980s, but he would follow up.
1:54:17 PM
Co-Chair Johnston summarized her understanding of the
information provided by Mr. Barnhill. She asked for
verification that instead of the 4.69 percent distribution
listed for 2019, the supplemental PFD would result in a
distribution of 5.93 percent.
Mr. Barnhill answered that he was saying two things. He
began with what he identified to be the first and most
important. He explained that when there was a static
distribution formula (Alaska had a static distribution
formula since the beginning as set in statute and the
limitation of 5 percent of the lagging five-year market
value had been added on) it was important to compare the
results over time to the real return earned by the
Permanent Fund. He noted that real return equaled gross
return minus inflation. He elaborated that it was necessary
to compare the data to confirm that over periods of time,
the amount being distributed (in terms of the POMV) was
equal to or less than the real return, otherwise the
inflation adjusted value would begin to erode. The
information was functionally what the APFC board resolution
had specified in the previous week.
Mr. Barnhill relayed that the second part was how HB 259
impacted spending from the Permanent Fund in terms of
impact to real return (as shown in the last row on slide
7). He noted that the lagging five-year market value of the
fund went from 5.25 percent to 6.64 percent. Compared to
the lagging five-year real return, it was 1 percent over
the lagging five-year return. He stated it was not without
precedent in the history of the Permanent Fund - there had
been multiple years where spending had exceeded the lagging
five-year real return. He concluded that the issue was
something to watch.
1:57:06 PM
Co-Chair Johnston added that when looking at the fund over
years, the distribution formula was static, but the reason
it was leveled out over five years was to determine whether
the fund had the capacity to grow.
Mr. Barnhill agreed. He continued that as long as the state
wanted to avoid the erosion of the fund value, it should
always spend equal to or less than the real return over
time.
Representative Wool referenced that Mr. Barnhill had stated
it was without precedent...
Mr. Barnhill stressed that [he had stated] it was not
without precedent.
Representative Wool corrected his statement. He clarified
that Mr. Barnhill had stated it was not without precedent
to have the percent real return retained in the negative.
He pointed out that the difference [from the negative
number shown for 2019 with a supplemental PFD] was that
other times the number had been negative, the draw on the
Permanent Fund had not also been used to fund state
services. In other words, state services had been paid for
by oil, whereas, starting in 2019, the Permanent Fund draw
was being used for other things. He reasoned there were
other pressures on the draw besides just paying Permanent
Fund checks.
Mr. Barnhill replied that the point was valid with respect
to going forward under an SB 26 paradigm. The department
anticipated that the level of spending from the Permanent
Fund would increase in percentage terms. He referenced the
column labeled "% Lagging 5 yr MV Distributed" and
highlighted that in the early 2000s the number ranged from
2 to 4 percent and in the past three years the number was
5.25 percent. The department anticipated that going forward
the number would be 5 percent under SB 26. The important
takeaway was that there would be years under the SB 26
paradigm where the lagging five-year real return was less
than 5 percent. He explained it was what the board was
asking the legislature to pay attention to.
1:59:40 PM
Representative LeBon asked if HB 259 proposed to fund the
$816 million from the CBR or ERA.
Mr. Barnhill answered, "ERA."
Vice-Chair Ortiz stated that a supplemental PFD would cost
$816 million. He calculated that with a real rate of return
at 5.59 percent, the opportunity cost of lost earnings for
the future of the fund would be $45 million (if a draw was
taken in the current year and the funds were taken out of
return possibilities). He asked if his calculation was
accurate.
Mr. Barnhill had not calculated the opportunity costs. He
stated that the point was interesting. He returned to the
overarching purpose of an endowment to preserve the
inflation adjusted value of the fund over time in order to
protect intergenerational equity. He pointed to the table
on slide 7 and highlighted that there were years where the
state spent more on a five-year lagging average than the
real return, yet the real value of the fund had grown over
time because there was a built-in discipline in the
formula. As long as it could be demonstrated that the real
value of the fund was growing over time, the overarching
objective of the endowment was achieved. He noted that it
was always possible to make the point that spending $1 out
of an endowment would mean there would be $1 plus interest
less to spend in the future, but that was not the question
asked in the context of an endowment. He stated the prudent
question was whether the future had the same access to the
principal inflation adjusted value over time. He stated
that it would be the case as long as the real value was
maintained or grew.
2:02:18 PM
Vice-Chair Ortiz referenced the third goal of the plan to
ensure intergenerational equity into the future. He
highlighted that continuing to pay the statutory PFD amount
would mean consistently overdrawing the SB 26 statute that
specified 5 percent. He thought they would be sacrificing
the equity into the future because they would be
consistently drawing more from the account than what SB 26
called for.
Mr. Barnhill replied that they did not know whether the
statutory formula would consistently overdraw. He explained
that what the formula would show was not available until
the year in which the statutory PFD pursuant to the formula
was appropriated. Primarily because the formula was driven
by APFC investment managers. He elaborated that money moved
to the ERA when managers decide to liquidate a portfolio
and realize a gain. He noted it changed and could be a
fairly volatile decision making process. He detailed that
the process was based on the performance of certain
portfolios and cash flows. He stressed that under the SB 26
paradigm with a 5 percent distribution there may be years
in which the lagging five-year real return was less than 5
percent, irrespective of how the dividend was calculated.
He stated that APFC was trying to impress upon all of the
stakeholders that the static formula could deliver
distributions in a single year that exceeded the five-year
real return. He stated that the situation would not be the
end of the world, it had occurred previously within the
past 20 years, nevertheless the real value of the fund had
grown because of spending discipline; however, it was
something to be aware of going forward.
2:05:20 PM
Representative Sullivan-Leonard shared that she did not
have a background in accounting, but she did like to look
at how legislation was formed and how the legislature
followed the law. She asked if the administration had
followed statute in 2018 to make reductions to the PFD.
Mr. Barnhill asked for clarification.
Representative Sullivan-Leonard elaborated on her question.
She stated that the previous Walker administration had made
reductions to the PFD distribution. For example, the
administration had chosen to have $792 million in 2017 and
$683 million in 2018 remain in the ERA. She asked if the
previous administration had followed statute in making the
decision to keep the funds in the ERA.
Mr. Barnhill answered that under the previous
administration when there had been reductions to the PFD
that did not comply with the statutory formula, it had been
within the legislature's purview to not appropriate. He
explained that the funds that had not been appropriated
stayed in the ERA. He noted that slide 9 showed the amount
retained by virtue of not being paid in the form of the PFD
and the amounts that had been earned since that time. There
had been a $792 million reduction to the PFD in 2017 and a
$683 million reduction in 2018. The amounts had earned $363
million since that time, leaving $1.8 billion still in the
Permanent Fund earning money.
Representative Sullivan-Leonard reasoned that if the
legislature followed state statute, HB 259 was appropriate
for a PFD distribution.
Mr. Barnhill responded that it was a policy matter and the
Dunleavy administration believed that as long as there was
a statutory formula, it should be followed by the
legislature.
2:08:11 PM
Co-Chair Johnston discussed that the original ballot
measure pertaining to the Permanent Fund was for earnings
to go to the General Fund. She noted that 50 percent of the
money went to a dividend and 50 percent remained in the
fund, meaning no money had gone into the General Fund. In
some respects, it was similar to what Representative
Sullivan-Leonard had discussed, where the state actually
left its earnings in the fund to grow.
Mr. Barnhill explained the legacy statutory calculation.
There was 25 percent of the five-year realized or statutory
net income that went into the ERA. He detailed that
inflation proofing came out of the ERA and was deposited
into the principal of the fund in order to insulate the
principal from inflation. He continued that 50 percent of
the five-year statutory net income average went into the
dividend fund. The residual remained in the ERA and had
grown to be quite large.
2:10:06 PM
Co-Chair Johnston believed the ERA contained approximately
$17 billion, which had come from oil income. She added
there had been some appropriations into the corpus from the
ERA from some of the savings (of the 50 percent that the
state did not take). She asked for verification that there
had been a large amount of growth in the fund because the
state had not taken the income.
Mr. Barnhill answered that the real value of the Permanent
Fund had grown in real terms over time because the state
had not consistently appropriated up to the real return of
the fund. He highlighted the column titled "% Real Return
Retained" on slide 7 and pointed out that there were years
where a considerable amount had been retained and the fund
had grown as a result.
Representative Josephson was confused by the
administration's position. He looked at the column showing
the percent of lagging five-year market value distributed
[slide 7] and noted that Mr. Barnhill had highlighted that
the numbers reflecting SB 26 were some of the larger in the
column. He observed that to find comparable numbers it
required going back to the 1999 timeframe. He referenced an
article in the Anchorage Daily News (ADN) just before
Christmas titled "Alaska Permanent Fund spending may be
unsustainable, corporation warns." He remarked that part of
what he heard Mr. Barnhill saying was that the 5.25 percent
may be too large according to APFC, but the administration
wanted to spend more. He was having difficulty reconciling
the two things.
Mr. Barnhill replied that he was primarily saying it was
important to monitor the average lagging real return and
the amount spent (the percentage of the average five-year
market value). In the past, spending compared to real
return had been very positive (and in some years the number
had been negative). He explained that the issue would
persist irrespective of HB 259. He stated that in future
years the real return may drop below 5 percent, while the
hope was the real return would increase over the 5 percent
mark in future years. With respect to the proposal in
HB 259, he was trying to place it in the context of how to
manage an endowment. Managing an endowment required paying
constant attention to the real return and the spending with
respect to the real return - whether the real value was
being added to or subtracted from.
2:13:24 PM
Representative Josephson highlighted that when the
legislature had selected the 5.25 percent that went down to
5 percent after several years [under SB 26], it had been
done with the knowledge there would be good and bad years,
which was the reason a balance had been struck. He thought
he heard Mr. Barnhill saying the balance was too
conservative.
Mr. Barnhill clarified that it was not what he was saying.
His point was the need to keep an eye on the issue.
Co-Chair Johnston stated that DOR was responsible for going
to bonding agencies and arguing the state's case. She
wondered how DOR would argue the state's rating to
agencies. She asked how the administration would address
the additional draw and how it would impact the state's
bond ratings.
Mr. Barnhill replied that he would show the agencies the
table [on slide 7] to provide context. The administration
would also like to make the case there had been a
structural fiscal deficit for several years that the
administration was attempting to work through step by step.
The effort involved replacing the state's legacy fiscal
structure that called the state to pay for certain things
per statute; however, there were limited revenues. He
elaborated that SB 26 had been the first step in terms of
imposing a discipline on draws from the Permanent Fund.
Another important structural change under discussion was
whether there should be a change to the PFD formula.
Additionally, there was a need to look at structural
revenues and spending. The department would communicate the
challenge and explain the state's progress on the path
towards rebuilding Alaska's fiscal structure when it met
with ratings agencies in New York.
2:16:05 PM
Co-Chair Johnston referenced a conversation she and Mr.
Barnhill had regarding the CBR and the fact that a minimum
required cushion for cash management had yet to be
determined. She recalled that Mr. Barnhill had basically
inferred that they could not currently look at the CBR for
that purpose because it had been used as revenue [to help
fund the budget]. She was concerned that the governor's
proposal appeared to draw the CBR down to $400 million or
$500 million in combination with an increased draw from the
ERA. She was pleased to know that DOR believed a [fiscal]
structure was needed and that it was the goal. However, she
noted that the department would go to New York and tell
ratings agencies the state did not quite have structure in
place, a given number of money had been used, and the state
may need to use the ERA as its backup fund for cash
management. She thought the scenario may mean that the DOR
representative would have to be an exceptional salesperson.
Mr. Barnhill replied that he would try. He continued that
unfortunately the state had faced some severe challenges to
its legacy fiscal structure. He believed the more
conversations they had with the legislature about how to
replace the legacy structure with a new fiscal structure
that worked in the modern revenue climate, the better. He
noted that the issues took time - democracy was not neat
and pretty, but messy. He reasoned that as long as some
forward progress was made annually towards solving the
issues, there would be better stories to tell ratings
agencies in New York. He believed progress was being made.
He recognized that in the midst of economic issues in the
state and worldwide it was difficult to see the progress.
He highlighted that having the discussions showed progress.
He continued that it was progress if the parties could
agree on the importance of having the discussion about new
revenue structures, fiscal structures, new structures with
respect to appropriation limits, and possibly tax
structures.
2:19:17 PM
Co-Chair Johnston was pleased that Mr. Barnhill was
suggesting the topic the committee would spend the week
discussing was time worthwhile spent.
Mr. Barnhill replied, "It is."
Co-Chair Johnston stated her only concern was that progress
had been made, but the appropriation under HB 259 may
result in two steps back. She noted they had not yet
discussed the fiscal note.
Mr. Barnhill stated there was one fiscal note [OMB
Component Number 981] from the Permanent Fund Dividend
Division. He believed the cost of reprogramming was about
$12,000, which he characterized as a "steal."
Co-Chair Johnston remarked that the fiscal note was
basically to ensure that everyone who received the
supplemental PFD was eligible.
Mr. Barnhill affirmed.
Representative Wool referenced Mr. Barnhill's statements
that it was necessary to keep an eye on the amount
distributed versus the amount of five-year lagging earnings
and if the number was negative - which it would be - it was
important to continue to keep watch. He had been present
for discussions leading up to the passage of SB 26. He
recalled discussions with APFC where the legislature had
been told the draw could be 5.25 percent for several years
and 5 percent thereafter (knowing there would be some plus
and some minus years). He noted that financial advisors
would say that a draw of around 4 percent was sustainable
for the long-term for sovereign wealth funds and
endowments. He noted that Alaska's fund had only been a
sovereign wealth fund for several years. He referred to the
ADN article mentioned previously [by Representative
Josephson] suggesting the APFC board may have some
concerns. He asked if the APFC board believed 5 percent may
be too high and should be reconsidered. He highlighted that
the administration was simultaneously proposing to increase
the draw above 5.25 percent. He was trying to reconcile the
two things.
Mr. Barnhill responded that he was presenting a new lens
for watching spending from the Permanent Fund. The method
measured the amount spent and compared it to the real
return earned. He believed it was a discipline they needed
to engage in annually. He would not characterize whether 5
percent was too high or too low; it had been a balance the
legislature achieved by statute - a balance that could be
considered fair at the time it had been made. He explained
it was necessary to pay attention over time to determine
whether 5 percent was the right number. He noted there may
be long periods of time where 5 percent was the perfect
number and there may be economic periods where 5 percent
needed adjustment because it was too high or low. Looking
at the spending and return helped quickly identify whether
real value was eroding or being added to. He believed that
under the SB 26 paradigm there would be years where the
numbers were in the negative. He remarked that hopefully
there would be years where the numbers were in the positive
- it was necessary to keep an eye on the data.
2:23:39 PM
Representative LeBon considered the five-year lookback on
determining what percent to draw. He detailed that if the
fund was growing, the five-year lookback effectively
reduced the draw to about 4.5 percent.
Mr. Barnhill pointed the column showing percent of current
year market value distributed on slide 7, which showed a
comparison of spending to the previous year's balance
(instead of a five-year average balance). He looked at the
fourth row from the bottom under the "For FY" column for FY
21 as an example and explained that the $3.1 billion
distribution ended up being 4.7 percent of $66.3 billion
(the FY 19 closing balance). He explained that in an
endowment there were multiple ways of measuring and
comparing. He detailed that most endowments tended to use
some sort of averaging to smooth out spending, the natural
volatility, and investment gains/losses over time. One
check was to look at spending compared to the closing
balance of the previous year to determine whether it was
significantly higher or lower. He highlighted that the
column labeled "% Current Yr MV Distributed" showed the
percentage right at or below 5 percent (in some years the
percentage was closer to 1 percent). He relayed it was
another metric to gauge whether there was overspending or
underspending taking place.
Mr. Barnhill moved to the impact to the FY 21 Permanent
Fund draw on slide 8. The slide showed a computation of the
lagging five-year average market value for the Permanent
Fund of $58.9 billion. Multiplying the figure by the [SB 26
distribution percentage] of 5.25 percent equaled a POMV
draw of $3.1 billion. The supplemental PFD of $816 million
was an additional 1.39 percent of the lagging five-year
market average, which resulted in a distribution percentage
of slightly over 6 percent.
2:26:21 PM
Mr. Barnhill noted they had already discussed the amounts
not distributed for 2017 and 2018 PFDs (slide 9). He
explained that the amounts could be considered for use on a
supplemental PFD.
Co-Chair Johnston noted that the Angela Rodell, Executive
Director, Alaska Permanent Fund Corporation was in the room
for questions.
ANGELA RODELL, CHIEF EXECUTIVE OFFICER, ALASKA PERMANENT
FUND CORPORATION, introduced herself.
Representative Wool asked if the APFC board had changed its
position on whether the planned [annual] 5 percent POMV
draw was sustainable. He asked if recent market activity
had shaded opinion on the 5 percent draw.
2:28:00 PM
Ms. Rodell replied that the board had not changed its
stance on the 5 percent draw at present. The board wanted
to make it clear that there could be times in a down market
where the draw could effectively be more than 5 percent,
which could draw down the ERA in an unanticipated way. She
continued that when APFC had talked about and testified on
SB 26 and the 5.25 percent for three years stepping down to
5 percent, it was to give everyone a sense of how the POMV
would work and to provide a glidepath on the dependency for
the fund.
Representative Wool asked how many years were needed to
have a higher view of the 5 percent POMV draw where APFC
may decide the amount was too generous. He wondered if it
was a 10-year perspective or less.
Ms. Rodell referenced events in the market in the past
three weeks. She intuited that if the fiscal year were to
end at the end of the current day, numbers would be flat
for the fiscal year (she noted that private market
valuations would not come in for three months). She
detailed that if the trend continued into the next couple
of years and made up the majority of a five-year
calculation, she believed it would be necessary to stop and
consider whether the draw was too high because at that
point the draw would exceed earnings. She expounded that
the draw would begin to eat into the fund, and it would be
necessary to decide whether or not it was something that
should be continued. She noted that it was possible in
three years the market could be robust and bullish. She
explained that "these things" would be volatile. She
reported that the APFC trustees had met the previous week
to reaffirm their commitment to SB 26 and to reaffirm it
had always been intentional to appropriate "up to" [a given
amount] and that the legislature would continue to monitor
and ensure that the account was not overdrawn unexpectedly.
2:31:19 PM
Representative Wool recalled that the year 2008 had come up
myriad times during the debate on SB 26. He knew there had
been "a lot of activity in the last few weeks," but he did
not believe it was at the 2008 level. He noted that 2008
had been a one-year event. He was trying to interpret what
Ms. Rodell was saying and surmised that if a multiyear 2008
event did not occur, the system should be able to absorb
volatility when considering the long-term history of the
fund.
Ms. Rodell answered that it was designed to stay as long as
they remained at the amount agreed upon - 5.25 percent in
FY 20 and 5 percent in FY 21. She appreciated the analysis
done in the presentation and she would be curious to see
how it would all shake out by the end of session in terms
of a total amount for FY 21 and what a 5 percent draw would
look like for FY 22 at the end of the year.
Representative Josephson had considered a press account
from five days back on warnings issued by APFC. He noted
that the corporation had described concerns both in
extremely bad markets and extremely good markets. He asked
Ms. Rodell to elaborate on the latter in more detail.
Ms. Rodell replied that in extremely good markets it was
necessary to sell gains to rebalance on a regular basis -
she noted it had occurred a couple of times in the
statutory net income numbers. She elaborated that as the
market went up and up, the corporation sold stocks and
realized gains, which was moved into statutory net income
and became part of the earnings calculation. In a time
period of robust bull markets there could be a situation
where the dividend calculation took all of the POMV because
of the way the calculations worked in terms of realizing
earnings versus merely growth in the market value.
Ms. Rodell reported that one of the things the APFC board
had looked at two weeks earlier at its board meeting was
how the two calculations could be contradictory. The
calculations were contradictory when there was a market
that required rebalancing on a much more frequent basis.
She elaborated that down markets required rebalancing away
from cash (buying low) in order to increase the public
equity asset allocation to its regular level. Whereas, in
high performing markets it was necessary to rebalance
because growth was occurring to fast and it was necessary
to sell out and realize gains. There were a couple of
different scenarios where the events took place and it
highlighted the differentiation between the earnings
calculation and the market value calculation.
2:35:11 PM
Representative Josephson stated his takeaway from the
discussion was that SB 26 had been a compromise and he
inferred there could be a more sophisticated, nuanced bill
that accounted for some of the variables.
Ms. Rodell agreed. She detailed that the paper published by
the trustees in early January recognized that endowments
had looked at prudent spend rules, which took a percentage
of the previous year's spend along with the percent of
market value to recognize what was taking place year over
year and limit the potential growth under a POMV or
earnings calculation. There were hybrid approaches. To the
credit of the legislature and state, the appropriation of
the POMV had occurred two consecutive years and discussion
was occurring for the third year. She explained that
adhering to the statute had been helpful from an investment
planning perspective.
Co-Chair Foster asked for the current value of the ERA.
Ms. Rodell replied that as of December 31, 2019 the ERA
balance was approximately $10.1 billion of unencumbered
amounts (the numbers included the private market valuations
for the first quarter and were the most robust). She
detailed that reserved amounts included $3.1 billion for FY
21, $4 billion that had been appropriated and would move
over at the end of the fiscal year in June, and $600
million in inflation proofing (all of the funds excluding
the $3.1 billion had been included in FY 20 bills) for a
total of approximately $8 billion. Adding the $8 billion to
the unencumbered balance of $10.1 billion resulted in a
total balance of about $18 billion as of December 31.
Co-Chair Foster considered the figures that resulted in [an
unencumbered balance of] a little over $10 billion. He
stated that recently there had been a news report about the
decrease in the Permanent Fund size due to the current
Coronavirus and shrinking global markets. He asked if the
decrease was about $2.8 billion.
Ms. Rodell confirmed there had been a decrease of about
$2.8 billion to the total Permanent Fund over a seven-day
period. On December 31, the fund total had been about
$66.982 billion. As of market close the previous Friday,
the total fund value was about $65.426 billion, a decrease
of about $1.556 billion since December 31, which would be
spread pro rata between the fund principal and ERA.
Co-Chair Foster asked for verification that the loss was
only realized in the ERA when losses were realized (when
investments with losses were sold).
Ms. Rodell agreed.
Co-Chair Foster recognized that the loss could increase if
markets fell further. He surmised that currently there was
a loss of about $1.5 billion that could be realized in the
ERA. He remarked that the loss would bring the
[unencumbered ERA balance] down to $9 billion. He continued
that taking an additional draw of $816 million for the
supplemental PFD would take the balance down to just over
$8 billion. He highlighted that APFC had recently included
two recommendations in a resolution. He elaborated that the
resolution recommended looking at constitutionally
combining the entire fund to include both the corpus and
ERA or setting up an internal statutory rule specifying
that a balance of at least four times the draw would be
maintained in the ERA. The current draw was $3 billion,
which equaled $12 billion when multiplied by four. He
highlighted that the [$8 billion] balance would be far
short of the $12 billion. He asked Ms. Rodell how
concerning the issue was.
2:41:25 PM
Ms. Rodell believed Co-Chair Foster was asking how APFC
would view drawing down the ERA to a point where it may
only have a two or three times balance. She shared that the
challenge with the ERA was that it acted as the buffer in
many ways to the performance of the fund. She elaborated
that it had room to absorb volatility and provide the $3.1
billion for the FY 21 transfer. The concern was about
drawing the ERA down to a point where it could no longer
act as a buffer and a negative balance occurred. She
continued that there were only losses when they were
realized; therefore, arguably there could be a negative
balance in the ERA and because the money was still
invested, the valuation was negative. Under the scenario,
she questioned where they would come up with the $3.1
billion for FY 22 and how the situation would be managed
and reconciled.
Ms. Rodell continued that because there were two accounts
where the principal was protected and could not be touched
at all times and the ERA was relied on for different
things, the trustees' view was to request a formula driven
buffer in order to recognize the cushion and have the
ability to make the required payments. She stated the
question for the committee was what would happen if APFC
could not make a payment due to market volatility, how the
situation would be viewed, and what the legislature's
expectation was to deliver. She relayed it was the question
APFC had struggled with because there was not clarity on
the expectations of the ERA. She noted that the message had
been for APFC to invest the ERA similarly and in the same
assets as the fund. The question for the legislature was
whether it was viewed differently now.
2:44:55 PM
Co-Chair Foster replied that it was a great question. He
stated Ms. Rodell was essentially asking about the
legislature's contingency plan if the existing plan failed.
He believed it was something they all needed to keep in
mind. He pointed out there was an additional problem
related to the CBR. He detailed that with a CBR balance of
$2 billion and the governor's plan to use $1.5 billion from
the account for the PFD, the balance would be taken down to
$500 million. He highlighted that the state needed $1
billion in the account to pay for its bills. He observed
that a balance of $500 million was far short of the
recommendation. He noted that it did not factor in that oil
prices were currently crashing. He stressed that the state
was looking at hundreds of millions of dollars less than it
had planned for. He recapped that the CBR balance could be
far less than needed and an ERA balance that did not meet
the minimum of what APFC believed to be prudent. He had
significant concern about paying a supplemental PFD and a
full PFD at present.
2:46:36 PM
Co-Chair Johnston remarked that there had been much
discussion about structure during the current meeting. She
stated that paying the supplemental PFD would result in
straying from the existing structure. She wondered if it
made APFC's job more difficult to manage with less
structure. She asked how APFC would manage the investments
of the ERA if there was deviation from the structured draw.
Ms. Rodell replied that APFC could only control what it
could control; it could not control the markets or what the
legislature would appropriate from the ERA. The corporation
was encouraging the legislature to stick with the spending
amount that had been agreed upon. The corporation would
manage the funds and liquidity to the best of its ability.
When things started going in many different directions for
valid reasons, it would make APFC's job managing the ERA
challenging. She explained that APFC would likely look at
what it needed to do to respond in order to deliver to the
legislature's expectations.
Co-Chair Johnston asked for verification that APFC would
need to maintain more liquidity than it currently had to
maintain with the legislature's structured draw.
Ms. Rodell agreed. Alternatively, APFC would look at
prepaying on the POMV even though it had not been
appropriated. There were a number of different options to
ensure APFC could focus on the long-term investment
strategies it had been tasked with. Ultimately, APFC was
focused on the $49 billion in the corpus of the Permanent
Fund, which was not to diminish the importance of the $18
billion in the ERA. The corporation was driven more by the
$49 billion and how it thought about investing in
perpetuity than the short-term strategies required by the
ERA.
2:49:40 PM
Co-Chair Johnston remarked that the discussion had touched
upon the CBR and that it operated as the cash management
account for state government. She asked if Ms. Rodell
believed the ERA could act as the state's cash management
account if funding was reduced to an insufficient level in
the CBR. She asked if a legal opinion would be required.
Ms. Rodell answered that there were a couple of ways to
look at the issue. She explained that the Permanent Fund
would need something to catch all of the earnings. She
reported that the fund received about $1.2 billion to $1.5
billion in interest payments, rent payments, and in
dividend payments off of dividend stocks. An account was
needed to catch the funds because it became available for
appropriation and was statutory net income. She considered
that if there was contemplation on having one or two years
of the POMV moved over to manage separately, it would be a
portion or a subaccount of the ERA and not the entire fund.
She believed the cash management question was best posed to
DOR and the Department of Law.
Representative Wool noted that Vice-Chair Ortiz had
mentioned the earning power of the $816 million to pay past
PFDs. He did not recall the number or timeframe.
Vice-Chair Ortiz answered, "$45 million."
Representative Wool was concerned about drawing down the
ERA and producing less earnings. He noted Co-Chair Foster's
point that the portion of revenue from oil was experiencing
serious problems in addition to the revenue from stocks. He
asked if Ms. Rodell could speak to the decrease in earnings
potential by drawing down the ERA in an ad hoc way.
Ms. Rodell believed the importance of the POMV had been to
create a prudent spend rule on the fund. The idea was to
recognize and benefit from increases in the market value
and avoid overspending in years where market value was flat
because there would be an averaging function. She explained
that ad hoc draws from the ERA would move away from the
prudent spend idea. She asked the committee to consider
what the spending rule needed to be for the fund.
2:53:35 PM
HB 259 was HEARD and HELD in committee for further
consideration.
Co-Chair Johnston reviewed the schedule for the following
morning and amendment deadlines for HB 97 and HB 223.
ADJOURNMENT
2:54:38 PM
The meeting was adjourned at 2:54 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 259 Presentation 03.09.2020.pdf |
HFIN 3/9/2020 1:30:00 PM |
HB 259 |
| HB 259 Transmittal Letter 021820.pdf |
HFIN 3/9/2020 1:30:00 PM |
HB 259 |
| HB 259 Public Testimony Rec'd by 032720.pdf |
HFIN 3/9/2020 1:30:00 PM |
HB 259 |