Legislature(2021 - 2022)ANCH LIO DENALI Rm
09/10/2021 03:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HJR1 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HJR 1 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
THIRD SPECIAL SESSION
[Meeting held at the Anchorage L.I.O.]
September 10, 2021
3:35 p.m.
3:35:22 PM
CALL TO ORDER
Co-Chair Merrick called the House Finance Committee meeting
to order at 3:35 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair (via teleconference)
Representative Ben Carpenter
Representative Bryce Edgmon (via teleconference)
Representative DeLena Johnson (via teleconference)
Representative Andy Josephson
Representative Bart LeBon (via teleconference)
Representative Sara Rasmussen
Representative Steve Thompson (via teleconference)
Representative Adam Wool (via teleconference)
MEMBERS ABSENT
None
PRESENT VIA TELECONFERENCE
Representative Jonathan Kreiss-Tompkins; Angela Rodell,
Executive Director, Alaska Permanent Fund Corporation;
Alexei Painter, Director, Legislative Finance Division;
Representative Dan Ortiz; Representative Bryce Edgmon;
Representative DeLena Johnson; Representative Bart LeBon;
Representative Steve Thompson; Representative Adam Wool.
SUMMARY
HJR 1 CONST AM: PERMANENT FUND; POMV; EARNINGS
HJR 1 was HEARD and HELD in committee for further
consideration.
HOUSE JOINT RESOLUTION NO. 1
Proposing amendments to the Constitution of the State
of Alaska relating to the Alaska permanent fund and to
appropriations from the Alaska permanent fund.
3:35:47 PM
Co-Chair Merrick asked Representative Kreiss-Tompkins to
reintroduce the resolution.
REPRESENTATIVE JONATHAN KREISS-TOMPKINS (via
teleconference) explained that the resolution did two
things. First, the resolution would combine the Permanent
Fund Earnings Reserve Account (ERA) and the fund principal
into one singular Permanent Fund. Second, the fund would be
managed by an unbreakable 5 percent of market value (POMV)
draw with the existing statutory smoothing function using
the first five of the six preceding fiscal years. The
purpose of the legislation was to protect the entirety of
the fund in perpetuity for future generations.
Co-Chair Merrick highlighted individuals available for
questions.
3:37:43 PM
Co-Chair Foster remarked that passage of a constitutional
amendment required a vote of the legislature and the
public. He asked Representative Kreiss-Tompkins for detail.
Representative Kreiss-Tompkins explained that the passage
of a constitutional amendment would require a two-thirds
supermajority vote in the House and Senate. Additionally,
an amendment would require a simple majority vote from the
public in the next general election. He elaborated that if
the legislation passed the legislature, the question would
go to the public in the next election in November 2022. He
noted it was a high bar.
Representative LeBon asked to hear Angela Rodell's view of
the proposed resolution.
3:39:09 PM
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION (via teleconference), indicated that the Alaska
Permanent Fund Corporation (APFC) was supportive of the
legislation in its entirety. She stated the resolution
reflected what had been an APFC board priority for the past
20 years. She highlighted the resolution's simplicity and
creation of an endowment with a percent of market value.
She noted there were a couple of clarifying amendments to
the resolution language that APFC would suggest in terms of
the timing of some of the dates and things. She categorized
the items as cleanup or clarification. She was happy to
elaborate if the committee desired.
Co-Chair Merrick indicated the committee would finish with
questions and then hear from Ms. Rodell on the suggested
amendments.
3:40:35 PM
Representative Rasmussen asked if there were any charts
showing how the current statutory draw from the ERA
compared with the 5 percent draw from a combined fund.
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION (via
teleconference), replied that there would be no difference
in the POMV calculation as a result of the change because
currently the POMV calculation incorporated the entire
fund.
3:41:29 PM
Representative Wool reported that the bill had been heard
in the House Ways and Means Committee. He believed the
legislation was appealing to many people in its current
form. He stated that the House Ways and Means Committee had
heard a desire to put the 5 percent draw in the state
constitution in addition to a PFD formula. He remarked that
one popular idea was a 50/50 split in which half of the
draw went to state services and the other half went to PFD
checks. He wondered if APFC did not care what happened to
the POMV draw as long as it was limited to 5 percent.
Ms. Rodell reported that the corporation was indifferent
once the 5 percent was drawn out of the fund. The
corporation's focus was limited to the amount being drawn
from the Permanent Fund, which APFC would like to see
included in a constitutional amendment.
Representative Wool highlighted the concern that if 50
percent of the draw was paid out in PFD checks, the
remaining 50 percent would not be sufficient for the
government services many people were accustomed to. He
surmised that locking the draw in the constitution would
remove the fear of overdrawing the fund. He surmised that
added revenue in the form of taxes would have to fill the
void to pay for services. He asked the bill sponsor to
share his feeling on the idea of attaching a formula to the
constitutional amendment.
Representative Kreiss-Tompkins was open to the bill being a
vehicle for a broader compromise to the fiscal problem,
including any substantive amendments beyond the present
language. He thought there were a couple of options such as
placing an actual formula into the state constitution. He
was personally fairly cautious about that option. He
highlighted another option that had been discussed, which
would put language in the constitution that guaranteed the
formula as provided by law and the formula would remain in
statute. He had more comfort with the second approach. He
remarked that if there was a will to answer some of the
problems that had been bedeviling the legislature and state
over the last decade and there was a way to put some of
them to bed, he would be open to the legislation acting as
a vehicle including addressing the PFD in some way.
3:46:37 PM
Representative Wool asked if there were any other items in
the constitution like education funding, where a dollar
amount or a formula were specified. He wondered if there
were any other occurrences in the constitution that spelled
out how much money should go to a specific program. He
asked for verification that putting a PFD formula in the
constitution would prioritize the appropriation over
anything else in the budget.
Representative Kreiss-Tompkins replied that the question
presupposed there was a proposal to put a specific formula
in the constitution. He clarified there was not currently a
proposal in front of the legislature, and it was not a
concept he was enthusiastic about. He was not aware of any
specific financial formulas in the state constitution. He
stated that the somewhat less proscriptive "as provided by
law" approach was more consistent with other provisions in
the constitution that provided more flexibility as the
legislature and government reacted to changing
circumstances.
Representative Wool thought that if there was a provision
including the language "as provided by law," the item would
still be prioritized over other budget items.
3:48:19 PM
Vice-Chair Ortiz referenced that Representative Kreiss-
Tomkins and Representative Carpenter had both been members
of the Fiscal Policy Working Group. He asked if there was
any consensus position regarding HJR 1.
Representative Kreiss-Tompkins responded that one of the
working group recommendations was to have the Permanent
Fund in an endowment structure with a constitutional POMV.
He explained that the recommendation was reflected in the
current HJR 1 language. He elaborated that there was a
recommendation that none of the single policy
recommendations stood on their own due to a lack of
political support for passage. He did not believe there was
political support for HJR 1 to pass the legislature. He
characterized it as a "rearranging the deck chairs"
situation. He believed there likely needed to be a broader
comprehensive approach to gain support for the bill's
passage. He detailed that a broader approach would include
revenues, certainty on the dividend question, and other
issues. He believed the issues were just as relevant as the
working group recommendation on a constitutional POMV and a
single fund structure for the Permanent Fund.
3:51:05 PM
Representative Carpenter stated that Representative Kreiss-
Tomkins had done a good job summing the information up. He
had nothing additional to add.
Representative LeBon asked Ms. Rodell to comment on how
unusual it was for the Alaska Permanent Fund to contain an
Earnings Reserve Account and how it was more traditional in
the public endowment arena to have just one common fund. He
asked Ms. Rodell to speak to why there was a greater
advantage to rolling the funds together.
Ms. Rodell replied that the Permanent Fund constitutional
amendment had been adopted by the voters 45 years back as
of the coming November. She detailed that its adoption had
occurred at a much simpler time from an investment and
accounting perspective. She stated that the language was
beautifully written as it provided a way to think about
constitutional language and the flexibility it had provided
every subsequent generation in terms of the fund. The
language required the state to collect a percentage of the
royalty revenue and that the royalty revenue would be
deposited into the fund. She explained that the money could
be used only for income producing investments and the
resulting income went to the General Fund unless otherwise
provided by law. She furthered that in 1980, the
legislature created APFC and moved the management of the
fund outside of the Department of Revenue over to the
independently operated APFC. She explained there had been a
thought at the time that income needed to be collected and
held separately from the General Fund. She detailed that
the dividend statutes had been put in place in their final
form around 1982 or 1983; the fund had operated under those
statutes ever since.
Ms. Rodell elaborated that APFC had gone beyond investing
in bonds and collecting cash interest and principal
payments off the bonds to investing in stocks, real estate,
private equity, infrastructure, and hedge funds. Current
accounting rules required APFC to define all increases in
valuation that may occur from market movement as income.
She clarified it was impossible to spend the income without
selling the investment and collecting the associated cash,
which was the reason the legislature created its definition
of statutory net income and required that income to flow to
the ERA. She explained that conforming the definition of
income to create the current definition had been the
compromise to the constitutional language.
Ms. Rodell elucidated that the reason the trustees had been
behind a POMV classic endowment structure for 20 years was
that it removed the artificial device in defining income,
it allowed the fund to fully recognize the increased value
over time, and APFC would no longer be required to annually
ask for an inflation proofing appropriation. She explained
that currently, the only way the principal could continue
to purchase investments at the same level was through the
inflation proofing appropriation mechanism. The state would
no longer need to inflation proof the fund through an
appropriation. The change would also confirm the
intergenerational desire put forth by the legislature on
the fund. Legislative findings for the corporation were to
maximize principal, minimize risk, and to ensure there was
revenue for all generations of Alaskans. She shared that
the POMV would fulfill the goals because it would create an
equitable distribution annually, based on the calculation.
3:56:42 PM
Representative Rasmussen if APFC would be supportive of a
one-time overdraw as part of a larger package to put the
POMV in the constitution for its protection going into the
future. She remarked on the lack of a comprehensive plan
that would get the state through the next several years
given how tight funds were in the General Fund.
Ms. Rodell replied that being disciplined around the draws
from the fund was important for the fund's sustainability.
She believed it was important to understand the full
package and whether the one-time draw was really a one-time
draw. She shared that based on her experience a one-time
draw had not always been just a one-time draw.
Representative Rasmussen asked Mr. Painter to provide some
history concerning the various funds. She believed that as
finances became tighter around the state, it appeared
people were looking to the various "slush funds" as they
had been traditionally called. She thought it would make
the most sense to put all incoming state revenue into the
CBR in order to maximize the investments. She had heard the
CBR did not make any money [earn any interest]. She thought
it seemed like poor use of the state's resources if they
were not trying to maximize every dollar.
Mr. Painter listed funds in addition to the Permanent Fund,
ERA, and CBR. He detailed that the Statutory Budget Reserve
(SBR) was created as a simple majority vote savings account
to have in addition to the CBR, which required a three-
quarter vote. He explained that most of the SBR balance had
been added when there had been no debt to the CBR, and
additional savings had been put in the SBR. He stated it
had been refilled in the last year and it would be more of
a policy choice by the legislature to put money in. Other
funds were mostly designated for particular purposes such
as the Power Cost equalization (PCE) Fund and the Higher
Education Investment Fund, which were set up as a source of
ongoing support for programs. He explained that the
legislature had made a policy choice that the programs
needed a designated source of revenue and had set aside the
money for the future.
Mr. Painter relayed that the remainder of the state funds
were ongoing expenses or fund balance built up in a fund
for a designated tax. He highlighted the alcohol and
tobacco fund as an example. He detailed that in some years
revenue exceeded projections, resulting in an additional
fund balance remaining in the fund. He elaborated that the
fund balance was used to smooth the cashflow throughout the
year. He relayed that in general, the designated funds were
created by the legislature as a mechanism to support
certain programs on an ongoing basis.
4:01:30 PM
Representative Rasmussen highlighted a hypothetical
scenario where all of the money from the various
funds/accounts was moved into the Permanent Fund to create
one account. Under the scenario, she asked if there was
anything that would prohibit the legislature from
appropriating the money from the General Fund via the
annual 5 percent POMV draw.
Mr. Painter replied, "No." He noted that because of the lag
in the averaging in the POMV draw, if $1 billion was
deposited into the Permanent Fund on the present day, it
would not impact the POMV in the next year and it would
only have a partial impact in the following year. He
explained that in the short-term, the move would increase
budget deficits, but it would balance out in the long-term.
Co-Chair Merrick asked Mr. Painter to explain the
difference between a dedicated fund and a designated fund.
Mr. Painter replied that a dedicated fund could not be
spent outside the purposes set out in the constitution or
in the statehood compact. He elaborated that when Alaska
had become a state, the Public School Trust Fund had been
part of the statehood act. He explained that dedications
were provisions that could not be broken through the
appropriations process. Whereas designations were statutory
provisions that indicate a past legislature's intent for a
fund to be spent a certain way; however, designations were
subject to appropriation. For example, a past legislature
may have intended for one-half of alcohol revenue to go
towards treatment recovery programs, but it was subject to
appropriation by future legislatures, unlike the dedicated
funds.
4:03:56 PM
Representative Carpenter returned to the notion of formulas
in the constitution. He referenced language in the proposed
resolution and within the constitution specifying that at
least 25 percent of all royalties went into the Permanent
Fund. He stated there was precedent for how the
constitution worked with regard to setting percentages and
making something happen with the dollars the state dealt
with. He elaborated that the statutory additional 25
percent that was supposed to go into the Permanent Fund had
been followed most years with the exception noted by the
state's chief auditor where statute had not been followed
for a couple of years. To the best of his knowledge, the
statutory formula had always been followed by the state in
putting royalties from the oil industry into the Permanent
Fund.
Representative Carpenter asked for clarification from Ms.
Rodell on the balance of the ERA. He stated there had been
dialogue in the current meeting painting a picture that the
Permanent Fund had grown because the state had put oil
royalties and other sums into the fund and allowed it to
grow, which he agreed with. He stated that the resolution
would move the balance of the ERA into the corpus of the
fund that could not currently be touched. He asked how the
current balance of the ERA came to exist. He asked if the
ERA balance was a result of depositing oil royalties or
other investment earnings into the account.
4:06:34 PM
Ms. Rodell responded that the ERA could only grow through
the investment decisions made by the corporation. The fund
had reached its current size due to a combination of
things. She detailed that the amount available for
appropriation had not been used each year and had remained
fully invested with the principal of the Permanent Fund.
She explained that the ERA could only grow by realizing
gains; rebalancing; and by collecting cash, rental income
off real estate, interest off of bonds, and stock
dividends. She expounded that the statutory net income
continued to build and stayed fully invested and grew
through the market valuation and via usage over the years
by various legislatures. As of July 31, the balance of the
ERA was $13.1 billion. Of the total, $3.4 billion had been
earmarked for the FY 23 POMV and $3 billion reflected
unrealized gains, which left a remaining balance of $6.7
billion uncommitted and available for future appropriation.
She reported that APFC would have August 31 numbers
available later in the current month. She shared that it
typically took APFC three weeks to conduct reconciliations
and determine the fund balance.
Representative Carpenter asked about the $3.4 billion in
ERA funds earmarked for the FY 23 POMV. He asked for
verification that the amount reflected 5 percent of the
total Permanent Fund [ERA and principal].
Ms. Rodell explained that the APFC books had been closed
for FY 21. The amount reflected the average of the full
value of fund assets (principal plus ERA balance)
multiplied by 5 percent.
Representative Carpenter asked if the ERA grew with the
income deposited annually by the Permanent Fund because of
the 5-year lookback 5 percent draw, if not appropriated or
partially appropriated by the legislature.
Ms. Rodell thought she understood Representative
Carpenter's question. She provided a hypothetical scenario
where the legislature only appropriated $1.5 billion
instead of the $3.4 billion under the calculation. She
explained that the difference between the two would remain
in the ERA and continue to stay fully invested in the full
asset allocation of the fund and would hopefully continue
to grow (assuming the market had no substantial losses) and
would be available to be included in future calculations
that could result in a higher POMV calculation in a future
year.
Representative Carpenter asked how the balance of the ERA
came to exist. He asked if portions of the income deposited
into the account over the past several years would have
grown the size of the ERA if it had not been appropriated
by the legislature.
Ms. Rodell answered that the POMV had been implemented in
2018. She asked if Representative Carpenter was talking
about prior to the implementation of the POMV. She
explained that prior to the POMV the only money drawn from
the ERA had been the amount for the PFD under a completely
different basis. She explained that previous calculation
was based on income, not market value. Additionally, an
amount had been transferred each year from the ERA to the
fund principal associated with inflation proofing. She
confirmed there had been statutory net income left behind,
which had been allowed to grow; however, there were years
like 2009 where there were losses that counted against the
Permanent Fund.
Representative Carpenter clarified that his question only
pertained to the balance of the ERA and how it came to
exist. He remarked that statutory net income was what the
state and the people would recognize as the traditional
formula used to determine the amount of earnings for the
PFD. He stated there were a number of years where the
statutory net income was deposited into the ERA and only a
portion of the statutory number had been paid out in the
PFD, leaving a portion of the money in the ERA, which had
caused the ERA to grow. He continued that the statutory net
income had not been paid out as directed by statute because
the legislature had chosen not to [pay the full statutory
amount]. He asked if he was correct.
Ms. Rodell indicated that the statement was correct but
added that there had been investment decisions made over
the years that substantially increased statutory net income
in certain years. For example, one year, APFC had sold a
multifamily holding that resulted in a substantial realized
gain, causing a large amount of statutory net income to
flow in. She agreed that the legislature did not use the
entire ERA year-over-year.
Representative Carpenter thought it was important to
acknowledge that while it was true the only way the fund
grew was by putting money into it (from oil royalties or
appropriation by the legislature), the spendable money in
the ERA was a balance that existed because the legislature
had chosen not to follow the statute and had left the money
in the ERA. He elaborated that the legislature had elected
not to spend all of the money on a PFD. He emphasized that
spending the money down at present was no different than
paying a statutory PFD in the past with the exception of
the interest earned in recent years. He remarked that the
interest would not exist either if statute had been
followed.
4:17:16 PM
Ms. Rodell did not have anything to add. She stated that
how money was spent out of the ERA was a policy call for
the legislature.
Representative Thompson asked how much was appropriated for
inflation proofing in the current year.
Ms. Rodell replied that the amount came to between $500
million and $600 million. She detailed that the funding had
not been appropriated and the language in the $4 billion
transfer from FY 20 specified the intent to forward fund
inflation proofing. She was drawing a blank on the precise
figure and would circle back with the information.
Representative Thompson assumed the $4 billion transfer
more than covered several years of inflation proofing. He
asked if his understanding was accurate.
Ms. Rodell responded that the inflation proofing was only
calculated on the principal balance, not the entire fund.
Additionally, the inflation calculation was based on an
entire year. The amount for FY 21 would have been $577
million with an inflation rate of 1.3 percent. She
elaborated that if there was an expectation inflation would
increase substantially in the next couple of years, the
number would grow. She expounded that because money had
moved into the principal of the account, there was also a
bigger base on the calculation.
Representative Thompson asked if inflation proofing would
come out of the original 5 percent draw before being split
up between operating and the PFD. Alternatively, he asked
if the 5 percent would come out of the operating side only.
Ms. Rodell answered that under the POMV constitutional
amendment there would no longer be a need for inflation
proofing because it would eliminate the two account
structure. She detailed that inflation would be
automatically accounted for in the overall market value of
the fund. The current challenge was that the principal did
not get to hold onto any of the market value gain;
therefore, it lost all of its inflation adjusted gain as
well because it could only capture its cost basis. Once the
two account structure was eliminated, the need for
inflation proofing was eliminated as well.
4:21:35 PM
Vice-Chair Ortiz stated his understanding that the [fiscal
policy] working group and the governor had spoken about the
need to put a revised spending cap into the [state]
constitution. He asked if passage of the current version of
HJR 1 constituted an effective spending cap and would
reduce the need for anything further to be done to the
constitution in that regard.
Mr. Painter replied that he did not want to speak for the
administration, but the OMB director had testified to the
Senate Finance Committee the previous day that the
administration still believed a spending cap would be
necessary to address times when oil revenue spiked again;
having a constitutionalized POMV would not be an effective
spending cap because there would be additional revenue.
4:23:18 PM
Representative Kreiss-Tompkins stated that he could not add
anything in terms of the administration's perspective. He
replied that he was not personally kept awake at night by
the lack of revisions to Alaska's current spending limits.
In many ways, HJR 1 (in its current form) represented a
revenue limit. He stated given it was the preponderance of
revenue the State of Alaska currently received, a revenue
limit largely equated and effected to an expenditure limit
as well. He believed that for many, but not all intents and
purposes, a revenue limit and a constitutional POMV would
substantially restrain spending. He addressed a
hypothetical scenario where other non-Permanent Fund
related revenue sources spiked unexpectedly due to
volatility or other. Under the scenario, some may say an
expenditure limit was important. He personally did not have
a concern with the issue. He shared that the working group
had recommended revisiting and revising spending limits. He
stated that if it was a piece that would help find a
broader solution, he could find a way to get behind it.
Representative Carpenter agreed with Vice-Chair Ortiz on
the concept of the POMV draw being a spending limit on a
source of income from the Permanent Fund. However, he
emphasized that it did not do anything in regard to
royalties coming into the state. He noted that per the
constitution only 25 percent of the entire oil royalties
came to the state to be put into the Permanent Fund. He
considered the remaining 75 percent of the oil royalties.
He assumed the legislature would ignore the statute
specifying that an additional 25 percent needed to go into
the Permanent Fund. He remarked that both things would be
spending caps of a sort because only 50 percent of the oil
royalties could go into the General Fund for spending. He
stated the only way there would be an effective spending
cap on the amount of money available to the state was if
100 percent of the oil royalties, corporate income taxes,
and all other taxes collected annually went into the
Permanent Fund and only 5 percent was drawn from the fund.
He remarked that he did not see the scenario happening. He
thought the aforementioned scenario would be what was
necessary if the HJR 1 structure were to be used as a
spending cap.
4:27:03 PM
Representative Josephson referred to a Senate Finance
Committee meeting Mr. Painter had participated in a couple
of days back. He asked what portion of the current $82
billion Permanent Fund balance resulted from the 25 percent
royalty deposits made since 1977.
Mr. Painter deferred to Ms. Rodell.
Ms. Rodell did not have a breakdown in royalty between the
25 percent and the 50 percent. She could only speak to the
amount of royalty deposited into the fund since inception,
which was slightly more than $18 billion.
Representative Josephson surmised that $18 billion of $82
billion would be the constitutionally required royalty
portion of the current fund balance.
Ms. Rodell responded, "Yes."
Representative Josephson returned to a question by
Representative Rasmussen about letting some of the sub-
funds move into the CBR. He stated that Representative
Harriet Drummond had made a convincing case that the Higher
Education Investment Fund had earned over 20 percent in the
current year. He believed the CBR earned around 2 percent.
He asked for the accuracy of his statement.
Mr. Painter replied that currently the CBR was invested to
earn about 2 percent per year.
Representative Josephson reasoned that the Higher Education
Investment Fund would be poorer if the monies were held by
the CBR. He asked if that was what Mr. Painter was saying.
Mr. Painter agreed. He explained that it was due to the
different cash needs of the CBR. For example, if the state
had a balanced budget and the CBR did not need to be used
for cash flow, the CBR could be invested more aggressively.
Representative Josephson addressed Ms. Rodell's statement
that it would no longer be necessary to inflation-proof the
fund if HJR 1 became part of the constitution. He thought
it would then be necessary to repeal the statutes
pertaining to inflation proofing. He provided a
hypothetical scenario where the Permanent Fund earned 2
percent in a year and inflation was 5 percent. He asked for
verification that under the scenario, it would be desirable
to cover the other 3 percent. He believed inflation would
still be "the thief in the dark."
Ms. Rodell replied with a hypothetical example where APFC
bought a multi-family rental complex. She noted that real
estate was a long-term investment and tended to hold its
value through inflationary times. Under the scenario, APFC
purchased the property for $1.00 with $0.75 from the fund
principal and $0.25 from the ERA. She explained that if
APFC sold the complex for $10 after 20 years, the principal
would only receive the $0.75 made in the original
investment, whereas the ERA would receive $9.25. Under the
scenario, the new cost to purchase an equivalent property
was $10. She questioned how to purchase an equivalent
property with the $0.75 in the principal. She explained
that if the state went to a POMV endowment as envisioned by
HJR 1, APFC could buy a $1 investment with the Permanent
Fund and after 20 years, the fund would receive the full
$10 upon sale of the asset. She elaborated that over the
course of time, as the asset's market value continued to
increase, the state would receive 5 percent off of the
investment (on an average value) to spend in terms of
annual revenue available for appropriation. She expounded
that the fund would capture the full inflationary benefit
by the increased market value.
Representative Carpenter thought Ms. Rodell had made an
incorrect statement earlier. He referenced her statement
that $18 billion in total royalty payments had been made to
the Permanent Fund since royalty payments began. He stated
it had to include the 25 percent statutory requirement and
the 25 percent constitutional requirement. He highlighted
that it could not represent just the constitutional
requirement.
Ms. Rodell clarified that she had indicated she did not
know the individual components. She had stated she only
knew that the total royalty deposits equaled slightly more
than $18 billion.
4:35:06 PM
Representative Josephson thought the information supported
his position. He remarked that the 25 percent
[constitutional requirement] had to be paid, while he
believed payment of the other 25 percent [statutory
requirement] was less clear. He reasoned if the amount was
$18 billion for both items, it had to be less than that for
the constitutionally required portion. He asked if he was
accurate.
Ms. Rodell replied, "Yes, you are correct."
Co-Chair Merrick asked Ms. Rodell to talk about the
amendment proposals.
Ms. Rodell indicated the corporation had two suggestions
for the committee's consideration. The first applied to
Section 2(c). She read the current language: "The permanent
fund may be used to pay costs associated with investments
made under (a) of this section." She respectfully requested
adding language to clarify that the fund could be used for
management and investments. For example, currently the
corporation's budget was funded out of the ERA and any
money not used to manage the fund lapsed back into the ERA.
She explained it was possible to make the argument that the
current HJR 1 language meant APFC would require general
funds to manage the fund. She expounded that APFC wanted to
ensure it could continue to use the Permanent Fund as a
source for managing and investing the fund as it had for
the past 40 years.
Ms. Rodell relayed that the second suggestion pertained to
Section 3. She read from the section:
On June 30, 2023, an amount equal to the unencumbered
balance on November 8, 2022, of the earnings reserve
account established by law shall be deposited...
Ms. Rodell clarified that APFC was only able to reconcile
its balances on a monthly basis. She explained it was
impossible to compute an accurate balance other than on a
month end. The corporation suggested changing the November
8th date to a month end date. She recommended that the
committee may want to give some consideration about the
reference of two different timeframes and what happened to
the unencumbered balance and the value of the ERA in the
time period between the marks. For example, if the mark was
November 30 and the deposit was June 30, there could be
substantial market volatility between the two dates that
had not been taken into consideration, which could create a
conflict in the amount. She suggested the amount on the
transfer date should be any unencumbered balance remaining
in the ERA, which would avoid any fluctuations in the
value.
Co-Chair Merrick asked Representative Kreiss-Tompkins if he
agreed with the suggested amendments.
Representative Kreiss-Tompkins replied that he was
supportive of the second suggested revision that corrected
a technical mishap. Additionally, he was supportive of the
first recommendation given the available information.
Representative Josephson looked at [Section 2] subsection
(c) and understood it would become dedicated if it passed
because it was part of a [constitutional] amendment. He
stated it spoke to him in terms of the importance of
designated general funds. He stated that "we want certain
funds designated for the operation and maintenance of an
institution." He elaborated that they did not want the
funds to go into the CBR or to talk about them at great
length every year or for the funds to compete with every
other program every year. He continued it was understood
that certain funds were needed for the Permanent Fund. He
stated there was a strong presumption that the state could
sell off the Permanent Fund building, which he did not want
to do. There was also a strong presumption that APFC needed
the building and belonged there in order to enable the
corporation to operate and to prevent having to discuss the
topic annually. He thought subsection (c) was illustrative
of the reason for designated general funds and why some
were swept and needed to be unswept.
4:41:10 PM
Co-Chair Merrick asked if Mr. Painter had a comment.
Mr. Painter responded in the negative.
Representative Carpenter thought Representative Josephson's
comments made sense. He asked what the term "management"
encompassed in regard to Ms. Rodell's recommendation. He
asked if management meant fees and monies required to make
investments or to recoup the funds (e.g., attorney fees).
Alternatively, he wondered if it included management of the
corporation. He saw the two things as separate.
Ms. Rodell replied that the language as currently written
could be interpreted to mean the fund could only be used to
pay the cost basis of an investment. The term management
would mean everything from paying external managers to
manage an investment or paying for corporate expenses to
manage an investment. She explained that currently, APFC
directly managed and invested almost 45 percent of the
fund.
Representative Carpenter agreed with Representative
Josephson. He thought APFC's operating cost needed to be an
annual discussion.
Representative Rasmussen asked Mr. Painter for the current
total of all the state's funds combined (i.e., CBR, SBR,
PCE, Higher Education Investment Fund) outside of the
Permanent Fund.
Mr. Painter responded that he would have to get back to the
committee with a precise number. He excluded retirement
accounts and included the value of the General Fund and
Other Non-Segregated Investments (GeFONSI). He noted that
GeFONSI funds were often not necessarily spendable because
they were ongoing.
Representative Rasmussen referenced Mr. Painter's mention
of GeFONSI non-spendable ongoing expenses. She asked if
there was anything prohibiting the accounts from being
transferred and coming out of the General Fund.
Mr. Painter replied that many of the GeFONSI funds were
already obligated. He elaborated that the funds represented
items such as capital projects that had been appropriated
for ongoing projects. He explained that the state still had
the cash, but it would be necessary to repeal the
underlying appropriation to get at the funds [for another
use]. He did not believe the funds were necessarily
available without going back and repealing half finished
capital projects. He used another example and stated that
by federal law, the state could not spend the International
Airport Fund on general government; the money had to remain
with the airports. Likewise, the Exxon Valdez Oil Spill
Investment Fund with a balance of $200 million had to be
used for purposes specified in the settlement. He cited the
Alaska Mental Health Trust as another example where funds
were under legal obligation to a particular purpose.
Mr. Painter stated that the designated funds only, were the
sweepable funds. He estimated that between the current
balance of the PCE fund at approximately $1 billion, the
CBR at about $1 billion, the SBR (if sweepable), the Higher
Education Investment Fund, and others, the total balance
was around $3 billion. He remarked that the designated
funds supported ongoing appropriations; therefore, sweeping
them to the CBR would significantly increase the deficit.
HJR 1 was HEARD and HELD in committee for further
consideration.
Co-Chair Merrick reviewed the schedule for the following
meeting.
ADJOURNMENT
4:47:35 PM
The meeting was adjourned at 4:47 p.m.
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