Legislature(2019 - 2020)Anch LIO Lg Conf Rm


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Audio Topic
10:07:35 AM Start
10:09:10 AM Bicameral Permanent Fund Working Group Presentations
10:12:15 AM Permanent Fund Corporation Mission and History
12:59:08 PM Fiscal Models
02:12:32 PM Revenue Models
04:12:12 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ - Angela Rodell, AK Permanent Fund Corp: Mission, TELECONFERENCED
history, roles and responsibilities of trustees
- Presentations by working group teams
- David Teal, Div. of Legislature Finance: Fiscal
- Commissioner Bruce Tangeman, Dept. of Revenue:
Revenue models
**Streamed live on AKL.tv**
                    ALASKA STATE LEGISLATURE                                                                                  
             BICAMERAL PERMANENT FUND WORKING GROUP                                                                           
                         June 28, 2019                                                                                          
                           10:07 a.m.                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Jennifer Johnston, Co-Chair                                                                                      
Senator Shelley Hughes                                                                                                          
Senator Donald Olson                                                                                                            
Representative Adam Wool                                                                                                        
Representative Jonathan Kreiss-Tomkins                                                                                          
Representative Kelly Merrick                                                                                                    
MEMBERS ABSENT                                                                                                                
Senator Click Bishop, Co-Chair                                                                                                  
Senator Bert Stedman                                                                                                            
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Cathy Gissel                                                                                                            
Senator Chris Birch                                                                                                             
Senator Jesse Kiehl                                                                                                             
Representative Matt Claman                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Sara Hannan                                                                                                      
Representative Louise Stutes                                                                                                    
Representative Geran Tarr                                                                                                       
COMMITTEE CALENDAR                                                                                                            
BICAMERAL PERMANENT FUND WORKING GROUP PRESENTATIONS                                                                            
     Permanent Fund Corporation Mission and History                                                                             
     Fiscal Models                                                                                                              
     Revenue Models                                                                                                             
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
ANGELA RODELL, Executive Director                                                                                               
Alaska Permanent Fund Corporation                                                                                               
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT: Discussed  the mission,  history, roles  and                                                             
responsibilities of the trustees of the Permanent Fund.                                                                         
DAVID TEAL, Legislative Fiscal Analyst                                                                                          
Legislative Finance Division                                                                                                    
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT: Presented  fiscal models  for the  permanent                                                             
BRUCE TANGEMAN, Commissioner                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Presented revenue  models for  the permanent                                                             
ACTION NARRATIVE                                                                                                              
10:07:35 AM                                                                                                                   
CO-CHAIR JENNIFER  JOHNSTON called  the Bicameral  Permanent Fund                                                             
Working Group meeting to order at  10:07 a.m. Present at the call                                                               
to  order were  Senators  Olson and  Hughes; and  Representatives                                                               
Merrick,  Wool, Kreiss-Tomkins,  and Co-Chair  Johnston. Co-Chair                                                               
Johnston announced  that Co-Chair  Bishop had a  family emergency                                                               
and  would  not  be  in  attendance  and  Senator  Stedman  would                                                               
participate via teleconference.                                                                                                 
^Bicameral Permanent Fund Working Group Presentations                                                                           
      Bicameral Permanent Fund Working Group Presentations                                                                  
10:09:10 AM                                                                                                                   
CO-CHAIR  JOHNSTON   reviewed  the   agenda  for   the  Bicameral                                                               
Permanent Fund Working Group (PFG).  She said that Angela Rodell,                                                               
Executive Director,  Alaska Permanent Fund Corporation  will give                                                               
a PowerPoint, followed by fiscal  and revenue model presentations                                                               
by David  Teal, Legislative  Fiscal Analyst,  Legislative Finance                                                               
Division,  and   Bruce  Tangeman,  Commissioner,   Department  of                                                               
Revenue. She advised that she  had conferred with Co-Chair Bishop                                                               
and the presentations  by the three working group  teams would be                                                               
removed from  today's agenda. [The  three teams were  assigned to                                                               
evaluate  the  impacts of  a  $3,000,  a  $1,600, and  a  surplus                                                               
permanent fund dividend amount.]                                                                                                
10:09:41 AM                                                                                                                   
SENATOR HUGHES said  that a substantial amount of  work went into                                                               
the working group team reports.  She asked that the working group                                                               
reports  be  published and  available  even  if the  teams  would                                                               
continue to work towards reaching agreement.                                                                                    
CO-CHAIR JOHNSTON  said she  would discuss  her request  with Co-                                                               
Chair Bishop. She envisioned the  three working group teams would                                                               
work  similar to  the way  the  legislative conference  committee                                                               
process works. She related her  understanding that the conference                                                               
committee process takes considerable  time and the committee does                                                               
a  substantial  amount  of  work   before  it  can  come  to  any                                                               
agreement. Although she offered to  speak to Co-Chair Bishop, she                                                               
anticipated  that as  co-chairs,  they would  expect the  working                                                               
group teams to produce reports  similar to ones that a conference                                                               
committee would prepare.                                                                                                        
SENATOR HUGHES  said that  as the Chair  of the  Senate Judiciary                                                               
Standing Committee,  she would make  her report available  to the                                                               
public. The committee  heard [SJR 5, proposing  amendments to the                                                               
Constitution  of  the State  of  Alaska  relating to  the  Alaska                                                               
permanent fund and  the permanent fund dividend],  so she planned                                                               
on  uploading  her  report  and  would  also  make  it  available                                                               
^Permanent Fund Corporation Mission and History                                                                                 
         Permanent Fund Corporation Mission and History                                                                     
10:12:15 AM                                                                                                                   
ANGELA   RODELL,  Executive   Director,  Alaska   Permanent  Fund                                                               
Corporation, Department  of Revenue (DOR), Juneau,  said that she                                                               
is  the Chief  Executive  Officer of  the  Alaska Permanent  Fund                                                               
Corporation  (PFC).  She  turned to  her  PowerPoint,  "Bicameral                                                               
Working Group,  Alaska Permanent Fund,  June 2019." She  said she                                                               
would  begin by  referring to  the Constitution  of the  State of                                                               
Alaska, which is how she begins every presentation. She read:                                                                   
      In 1976, Alaskans voted 75,588 to 38,518 in favor to                                                                      
       amend the Constitution of the State of Alaska and                                                                        
     created the Alaska Permanent Fund.                                                                                         
       Alaska Constitution Article IX Section 15. Alaska                                                                        
     Permanent Fund:                                                                                                            
     At  least  twenty-five  percent of  all  mineral  lease                                                                    
     rentals,  royalties,  royalty  sale  proceeds,  federal                                                                    
     mineral revenue  sharing payments and  bonuses received                                                                    
     by the state  shall be placed in a  permanent fund, the                                                                    
     principal  of  which  shall  be  used  only  for  those                                                                    
     income-producing  investments  specifically  designated                                                                    
     by law as eligible  for permanent fund investments. All                                                                    
     income from  the permanent fund  shall be  deposited in                                                                    
     the general fund unless otherwise provided by law.                                                                         
She  added that  the  Constitution  of the  State  of Alaska  has                                                               
simple straight-forward language.                                                                                               
10:13:45 AM                                                                                                                   
MS. RODELL turned to slide 3, "Legislative Findings 37.13.020."                                                                 
          The  people   of  the  state,   by  constitutional                                                                    
          amendment,  have  required  the  placement  of  at                                                                    
          least  25% of  all mineral  royalties received  by                                                                    
          the state  into a permanent fund.  The legislature                                                                    
          finds with respect to the fund that:                                                                                  
          • The Fund should provide a means of conserving a                                                                     
             portion of the state's revenue from mineral                                                                        
             resources to benefit all generations of                                                                            
          • The Fund's goal should be to maintain safety of                                                                     
            principal while maximizing total return.                                                                            
          • The Fund should be  used as  a savings  device                                                                      
             managed to allow the maximum use of disposable                                                                     
             income from the Fund for the purposes                                                                              
             designated by law.                                                                                                 
She said that  once the decision to establish  the permanent fund                                                               
was passed by  initiative, it took another four  years before the                                                               
[Alaska]  Permanent  Fund  Corporation (PFC)  was  created.  This                                                               
created the  foundation for how  the PFC manages and  invests the                                                               
fund. The  permanent fund was  originally managed in 1977  by the                                                               
Department of  Revenue. In 1980,  when the Alaska  Permanent Fund                                                               
Corporation was established, it took over that role.                                                                            
10:15:21 AM                                                                                                                   
MS.  RODELL  turned   to  slide  4,  "1980   The  Corporation  AS                                                               
     The  Alaska State  Legislature passed  SB  161 in  1980                                                                    
     establishing the Alaska Permanent Fund Corporation.                                                                        
     The purpose of the Corporation  is to manage and invest                                                                    
     the  assets  of  the  permanent fund  and  other  funds                                                                    
     designated  by law  in  accordance  with AS  37.13.010-                                                                    
     APFC  operates as  a separate  state  entity under  the                                                                    
     oversight  of  an  independent Board  of  Trustees  who                                                                    
     serve as fiduciaries of the Alaska Permanent Fund.                                                                         
          A fiduciary  responsibility is a  legal obligation                                                                    
          of  one  party to  act  in  the best  interest  of                                                                    
          When a party knowingly  accepts the fiduciary duty                                                                    
          on behalf  of another party, they  are required to                                                                    
          act  in the  best interest  of the  principal, the                                                                    
          party whose assets they are managing.                                                                                 
MS. RODELL  said that [the  above] statement captures  the Alaska                                                               
Permanent  Fund Corporation's  mission. It  is what  the PFC  has                                                               
been  set up  to  do and  all  that it  does.  She also  included                                                               
several definitions [shown in italics above.]                                                                                   
MS. RODELL said that it is the job of the Board of Trustees to                                                                  
act in this manner in the best interest of the principal of the                                                                 
10:16:32 AM                                                                                                                   
MS. RODELL turned to slide 5, "The Board of Trustees AS                                                                         
     The  Board consists  of six  members  appointed by  the                                                                    
            Two  of the members  must be heads  of principal                                                                    
          departments,  one  seat   is  designated  for  the                                                                    
          Commissioner of Revenue.                                                                                              
            The four  public members of the  board must have                                                                    
          recognized  competence  and   wide  experience  in                                                                    
          finance,    investments,    or   other    business                                                                    
          management-related fields.                                                                                            
     The   Board  sets   investment   policy,  reviews   the                                                                    
     portfolio's  performance,   and  works   together  with                                                                    
     management  to  determine the  Corporation's  strategic                                                                    
     As fiduciaries,  the Trustees have  a duty  to Alaskans                                                                    
     in  assuring that  the Permanent  Fund  is managed  and                                                                    
     invested  in  a   manner  consistent  with  legislative                                                                    
10:17:31 AM                                                                                                                   
MS.  RODELL   turned  to  slide  6,   "History"  and  "Investment                                                               
Responsibilities." One  of the things  members will notice  as we                                                               
review the  statutory changes is that  over the course of  the 39                                                               
years  of the  corporation's existence  is that  the process  has                                                               
been one  of allowing the  corporation the  time to take  on more                                                               
risk, being very prudent in taking  on that risk, and having more                                                               
and more direct management of the fund.                                                                                         
10:18:12 AM                                                                                                                   
MS.  RODELL  turned  to  slide  7,  "1980  Original  Language  AS                                                               
     (a) The prudent-man rule shall  be applied by the board                                                                    
     in the  management and  investment of  Alaska permanent                                                                    
     fund  assets.  The  prudent-man   rule  as  applied  to                                                                    
     investments  of the  corporation means  that in  making                                                                    
     investments the  board shall exercise the  judgment and                                                                    
     care under  the circumstances then prevailing  which an                                                                    
     institutional    investor    of   ordinary    prudence,                                                                    
     discretion,   and   intelligence   exercises   in   the                                                                    
     management of  large investments  entrusted to  it, not                                                                    
     in  regard   to  speculation  but  in   regard  to  the                                                                    
     permanent  disposition of  funds, considering  probable                                                                    
     safety of capital as well as probable income.                                                                              
     (b)  The  corporation assets  shall  only  be used  for                                                                    
     income-producing investments.                                                                                              
     (c)   The    board   shall   maintain    a   reasonable                                                                    
     diversification  among  investments unless,  under  the                                                                    
     circumstances, it is clearly prudent not to do so.                                                                         
     (d)  The board  shall submit  long-range and  quarterly                                                                    
     investment reports to the  Legislative Budget and Audit                                                                    
     (e) The  corporation may not borrow  funds or guarantee                                                                    
     from  principal  of  the   Alaska  permanent  fund  the                                                                    
     obligations of others.                                                                                                     
     (f) The board may enter  into and enforce all contracts                                                                    
     necessary, convenient or desirable  for purposes of the                                                                    
MS. RODELL said  it was interesting to note  that the prudent-man                                                               
rule has  been in existence  since the [fund's] inception  and it                                                               
is  not something  that was  brought in  more recently,  which is                                                               
what  some of  us thought,  that it  was a  newer version  of the                                                               
investment  responsibility. She  added  that  the Permanent  Fund                                                               
Corporation  also   still  complies  with  the   rule  to  submit                                                               
quarterly investment reports to  the Legislative Budget and Audit                                                               
10:19:18 AM                                                                                                                   
REPRESENTATIVE KREISS-TOMKINS  said Ms. Rodell mentioned  the PFC                                                               
has taken on more direct management  of assets in recent time. He                                                               
asked her  to elaborate on  how the percentage of  assets managed                                                               
directly by the PFC has changed in recent years and her goals.                                                                  
MS. RODELL responded that slide 8 will address his question.                                                                    
10:19:51 AM                                                                                                                   
MS.  RODELL   turned  to  slide  8,   "1980  Original  Investment                                                               
Vehicles."  She said  that  considering  the original  investment                                                               
vehicles at  the time, members  might notice  that it was  a very                                                               
conservative list of vehicles. She reviewed the list.                                                                           
     AS 37.13.120 (g)  (i)                                                                                                      
     • Obligations insured or  guaranteed  by  the  United                                                                      
     • Certificates of Deposit (CDs) issued by US Banks                                                                         
     • Shares & CDs issued by chartered savings  and loans                                                                      
        in Alaska                                                                                                               
     • CDs issued by Alaska banks                                                                                               
     • Corporate debt and notes rated AA or higher                                                                              
     • Residential  mortgages   and    commercial   loans,                                                                      
        containing federal guarantees                                                                                           
     • Futures contracts for the purpose of hedging                                                                             
     • Asset allocation limits:                                                                                                 
        25% corporate debt, 15% residential mortgages                                                                           
MS. RODELL  said that a  balance of  60 percent of  the portfolio                                                               
needed to  be in obligations  that were insured or  guaranteed by                                                               
the United States,  Alaska bank CDs and similar  items, which was                                                               
a very conservative allocation. She  noted that this point is the                                                               
first mention of investing in Alaska.                                                                                           
     AS 37.13.120 (l)                                                                                                           
    • The board shall invest the assets of the corporation                                                                      
        in in-state investments to the extent in-state                                                                          
        investments are available if the in- state                                                                              
          1. Have a risk level and expected yield                                                                               
          comparable to alternate investment opportunities;                                                                     
          2. Are included in the list of permissible                                                                            
          investments in (g) of this section.                                                                                   
10:21:43 AM                                                                                                                   
REPRESENTATIVE WOOL asked  whether the interest rates  at the two                                                               
Alaskan banks  were preferential.  He recalled  reading materials                                                               
in members'  binders that Governor  Hammond had mentioned  one of                                                               
the  incentives to  create  the permanent  fund  dividend in  the                                                               
beginning was  because only  a few  people were  benefitting from                                                               
certain loan programs  in the state, so he wanted  to spread that                                                               
benefit to  the average person who  did not receive any  loan. He                                                               
asked  whether  any  of  the  investments  received  preferential                                                               
MS. RODELL answered  no. She said the  Permanent Fund Corporation                                                               
does not believe  that any of the investments  were subsidized or                                                               
given preferential treatment. She  pointed out that what happened                                                               
in  the banking  community  at  the time  with  lots of  building                                                               
occurring, resulted in the need for  a lot of liquidity. This was                                                               
an  effort to  keep a  robust banking  system in  the state,  she                                                               
10:23:03 AM                                                                                                                   
REPRESENTATIVE  WOOL  asked  what   the  balance  of  the  Alaska                                                               
Permanent Fund was at the time and the average earnings.                                                                        
MS.  RODELL  answered that  in  1980  the  balance was  about  $1                                                               
billion and interest rates were in the high teens.                                                                              
10:23:29 AM                                                                                                                   
SENATOR  OLSON,  in  reviewing  the  portfolio,  recognized  that                                                               
investing in CDs  may be safe, but they do  not currently bring a                                                               
significant return. He  assumed it was the same in  the 1980s. He                                                               
asked whether the reason the  Alaska Permanent Fund balance is so                                                               
robust is  that the fund  was free  from the shackles  of placing                                                               
too much emphasis on security.                                                                                                  
MS. RODELL  responded that  he raises a  really good  point, that                                                               
when the  fund was new,  the state  was focused on  ensuring that                                                               
the permanent  fund was  going to  be available  for generations.                                                               
She referred  to the  findings, which  stated that  the permanent                                                               
fund  needed  to  be  present   for  all  future  generations  of                                                               
Alaskans.  It needed  to be  available  in 2019  and beyond,  she                                                               
said. As  with most  new things, [the  corporation] tended  to be                                                               
risk averse  until it  got comfortable  with how  the investments                                                               
would  work.  In  addition,  size matters  and  once  [the  fund]                                                               
reached a certain size [the  managers] realized they could afford                                                               
to take  on more risk. Over  time, the stability of  the fund was                                                               
maintained in  terms of  constitutional protection,  since annual                                                               
royalty deposits  were made, as  required, and the  oil continued                                                               
to  flow through  the Trans-Alaska  Pipeline System  (TAPS). This                                                               
gave comfort  to a lot  of people  that this could  continue over                                                               
time, she said. She said that  as she walks through the timeline,                                                               
members can  notice that changes  were made on a  regular, robust                                                               
basis, because  it was  important to Alaskans  to make  sure that                                                               
the permanent  fund continued to do  all the things it  needed to                                                               
10:25:55 AM                                                                                                                   
CO-CHAIR  JOHNSTON  stated  that  Senator Kiehl  had  joined  the                                                               
REPRESENTATIVE  WOOL  asked  for  further  clarification  on  her                                                               
earlier comment  that the permanent  fund balance was  $1 billion                                                               
and the  interest rate in  1980 was in  the high teens.  He asked                                                               
whether the she  was speaking to the returns and  if the interest                                                               
rates were in the high teens.                                                                                                   
MS. RODELL said that was unsure  whether she had the returns with                                                               
her, but  in 1980 or 1982,  the interest rates were  in excess of                                                               
15 percent due to high inflation.                                                                                               
10:26:41 AM                                                                                                                   
MS. RODELL turned to slide 9,  "Changes Over Time." She said that                                                               
the changes came on a fairly  regular basis. In 1982, the savings                                                               
and loan crisis started to work  its way through the country. She                                                               
added that  in 1982, the types  of stocks that could  be invested                                                               
in  were what  are called  today "value  stocks" and  not "growth                                                               
stocks" that  generate regular payments and  income. She reviewed                                                               
the remaining 1982  statutory changes, adding that  there was not                                                               
a recognition between debt and  equity at the time, just exposure                                                               
to U.S. Corporations, in general.                                                                                               
     1982 Amended Allowable Investments:                                                                                        
       • Added collateral requirements for illiquid CDs                                                                         
        • Added dividend yielding equities (foreign &                                                                           
        • Changed definitions of federal guarantees to                                                                          
          match revised security requirements                                                                                   
        • Changed asset allocation limits to 15% mortgages;                                                                     
          15% real estate; 10% foreign equities; 20%                                                                            
         foreign CDs; 50% US corporate debt & equities                                                                          
     1986 Added rating requirement of "A" to collateral for                                                                     
           illiquid CDs 1989                                                                                                    
     1989 Added language:                                                                                                       
        • Allowing for foreign corporate debt rated "AA" or                                                                     
        • Allowing for foreign government debt and CDs                                                                          
        • Broadening the definition of allowable foreign                                                                        
        • Broadening the definition of allowable future                                                                         
     Repealed and replaced asset allocation limits to:                                                                          
          15% mortgages                                                                                                         
          15% real estate                                                                                                       
          20% CDs and 50% corporate stocks & debt                                                                               
          securities (foreign & domestic)                                                                                       
 MS. RODELL said that in 1986, there was a recognition that the                                                                 
 corporation could take more risk and increase returns as a                                                                     
 result. She turned to 1989.                                                                                                    
MS.  RODELL  said it  became  much  simpler  by removing  the  10                                                               
percent limit  on foreign equity  and the 20 percent  for foreign                                                               
CDs  by  changing it  to  20  percent  CDs  of U.S.  and  foreign                                                               
combined. The Board  of Trustees and the PFC  would determine the                                                               
optional mix  of foreign and  U.S. stocks so  long as it  did not                                                               
exceed 50 percent of the fund, she said.                                                                                        
10:29:38 AM                                                                                                                   
REPRESENTATIVE WOOL  referred to the 1982  allowable investments.                                                               
He said the asset allocations adds up to 110 percent.                                                                           
MS.  RODELL clarified  that  these  refer to  limits  and not  an                                                               
allocation  pie.  The board  was  still  entrusted to  create  an                                                               
actual  allocation,  but  this would  place  limits  on  specific                                                               
exposures, so if  the board went in one direction,  it would need                                                               
to cut it from another.                                                                                                         
10:30:15 AM                                                                                                                   
MS.  RODELL turned  to slide  10, "Changes  Over Time  1992." She                                                               
said  that  the changes  in  statute  in  1992 made  some  bigger                                                               
changes.  She said  that it  redefines CDs  and also  removed the                                                               
secondary market  liquidity requirements,  so the  corporation no                                                               
longer had to hold the collateral for it.                                                                                       
     Changes Over Time 1992 ?                                                                                                   
        • Redefined CDs, removing secondary market                                                                              
          liquidity requirements                                                                                                
      • Reduced rating requirement for corporate debt to                                                                        
          "A" from "AA"                                                                                                         
      • Removed certain mortgage insurance requirements                                                                         
        • Added permission for Board to establish/modify                                                                        
          investment guidelines, subject to review and                                                                          
          comment by Legislative Budget and Audit Committee                                                                     
          prior to adoption                                                                                                     
        • Amended collateral requirements                                                                                       
        • Changed asset allocation limits to 15% mortgages,                                                                     
          15% real estate,  20% CDs, 50% equities, 5%                                                                           
          corporate, domestic, foreign and taxable                                                                              
          municipal debt                                                                                                        
She said  she mentioned earlier  that the corporation  could only                                                               
invest in mortgages  on the portion that  had federal guarantees,                                                               
and this  removed some  of those limits.  She emphasized  that it                                                               
added  permission for  the board  to actually  establish its  own                                                               
investment  guidelines.  This was  the  first  time that  a  real                                                               
relinquishing of  some of the investment  responsibilities to the                                                               
Board of Trustees occurred, she said.                                                                                           
10:32:05 AM                                                                                                                   
MS. RODELL turned to slide 10, "Changes Over Time."                                                                             
     1994      Amended real estate limits, raising                                                                              
     investment amount from $20,000,000 to $150,000,000                                                                         
        • Total value of investment can exceed $150,000,000                                                                     
          if 33% of investment property is owned by other                                                                       
          institutional investors                                                                                               
     1996      Rating requirements changed to "investment                                                                       
        Asset allocation limits changed to:                                                                                     
        55% Stocks, 15% Real Estate, 20% CDs, 15% Mortgages,                                                                    
       5% other types of investments, subject to prudent                                                                        
        investor rule                                                                                                           
        • Recognized 'other' may cause aggregate investment                                                                     
          to exceed applicable limits                                                                                           
MS. RODELL  said that prior to  1994, the PFC was  limited to $20                                                               
million  for  investment  amount  and  the  total  value  of  the                                                               
investments could  not exceed $150  million. This meant  that the                                                               
PFC could  only be a partner  in an investment if  33 percent was                                                               
owned  by other  institutional investors.  This also  limited the                                                               
PFC to a  majority owner, but not a 100  percent owner, she said.                                                               
The rating  requirements changed  to investment grade,  the asset                                                               
allocation limits  changed, and public equities  were raised from                                                               
50 to 55 percent.                                                                                                               
She  said that  another big  change was  to add  a new  category,                                                               
"other  types of  investment," which  allowed the  corporation to                                                               
invest  in  other types  of  investments  so  long as  they  were                                                               
subject to the prudent-investor rule.  This meant that as long as                                                               
other institutional investors of similar  type and quality of the                                                               
permanent fund made investments,  that the corporation could also                                                               
invest. There  was the  recognition that  this other  vehicle may                                                               
look for  another type of  allocation limit. For example,  with a                                                               
Real   Estate  Investment   Trust   (REIT),  some   institutional                                                               
investors group  that with their public  equity portfolio because                                                               
it  would  be  listed  in  a public  equity  exchange.  In  those                                                               
instances,  [the   corporation]  could  exceed  the   55  percent                                                               
limitation on  its stocks. There  was a recognition that  some of                                                               
those limits  might be exceeded, which  was fine, so long  as the                                                               
corporation was in compliance with  the 55 percent stocks or five                                                               
percent of "other" investments, she said.                                                                                       
10:34:18 AM                                                                                                                   
MS. RODELL reviewed slide 12, "Changes Over Time ?"                                                                             
     1999 Amendments:                                                                                                           
        • Allowed to borrow money with respect to real                                                                          
          property investments provided no recourse to APFC                                                                     
          or Fund                                                                                                               
        • Updated collateral and rating thresholds for debt                                                                     
        • Added real estate investment trusts (REITs) to                                                                        
          allowable investments list                                                                                            
        • Allowed the Fund to wholly own institutional                                                                          
          sized real estate (no longer limited to 67%                                                                           
        • Changed asset allocation limits: 55% Stocks l 15%                                                                     
         Real Estate l 20% CDs l 15% Mortgages 5% Other                                                                         
          types of investments, subject to prudent investor                                                                     
          rule 2004 Amended Language:                                                                                           
        • Borrowing for any investment vehicle (not just                                                                        
          real estate) nonrecourse to APFC or the Fund                                                                          
      • Increased asset allocation limit for the "Other"                                                                        
          category from 5% to 10%                                                                                               
10:35:25 AM                                                                                                                   
REPRESENTATIVE  WOOL asked  her to  elaborate on  the reason  the                                                               
Permanent Fund Corporation (PFC) can borrow money.                                                                              
MS. RODELL  responded that  when the  Permanent Fund Corporation                                                                
invests in real estate, it sometimes makes sense to leverage the                                                                
investment to allow for capital improvements rather than to hold                                                                
it with  cash. For example,  the corporation has  held some real                                                                
estate holdings  since 1985 but  these properties have increased                                                                
in  value.  In order  to  capture  some of  that  value  to make                                                                
additional real  estate investments, the  PFC can borrow against                                                                
the value of  that property and take  cash out of the underlying                                                                
value. However, the Alaska  PFC limits the amount of leverage on                                                                
its individual real estate  to 50 percent of the value. Further,                                                                
the corporation cannot do  multiples of the value, especially in                                                                
joint venture properties. Sometimes  it is important for the PFC                                                                
to allow its partner to use the value for cash, as well, thereby                                                                
using  it as  a  partnership  tool. It  is  limited  because the                                                                
vehicle  that  is buying  the  property  is  a  "limited special                                                                
purpose vehicle" that the corporation invests in, which only has                                                                
rights  to  the  property  itself.  Thus,  the  lender can  only                                                                
foreclose on  the underlying property and  cannot come after the                                                                
permanent fund  or the Permanent Fund  Corporation for repayment                                                                
of any kind.                                                                                                                    
10:37:33 AM                                                                                                                   
REPRESENTATIVE KREISS-TOMKINS referred [to  slide 12] to the 1999                                                               
statutory changes.  He asked  how many  wholly owned  real estate                                                               
properties the corporation owned at this point.                                                                                 
MS.  RODELL pointed  out  that  the listings  are  posted to  the                                                               
corporation's website.  Although she did not  recall offhand, she                                                               
offered to report back to the group with the figures.                                                                           
10:38:08 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS  referred  [to slide  12]  to  the                                                               
phrase  "nonrecourse to  APFC." He  asked whether  that term  was                                                               
also  the one  she just  explained to  Representative Wool,  that                                                               
when leveraging a real estate  investment, the lender cannot come                                                               
after the APFC for repayment.                                                                                                   
MS. RODELL answered "exactly."                                                                                                  
10:38:45 AM                                                                                                                   
SENATOR  HUGHES asked  whether the  amendments  to statutes  [on                                                                
slides 9-12] were recommended by the board or if some changes                                                                   
were initiated by the legislature.                                                                                              
MS. RODELL offered to double check, but it was her understanding                                                                
that they came from  the Board of Trustees. She reminded members                                                                
that the board's recommendations also go through the Legislative                                                                
Budget and Audit Committee, so it was possible that some changes                                                                
came from the committee. She was unsure of the specifics.                                                                       
SENATOR  HUGHES  related her  understanding  that  the  Board of                                                                
Trustees  was  intimately involved  in  the  process.  She asked                                                                
whether  there  were  any  cases  in  which  the  board was  not                                                                
comfortable with something that was adopted.                                                                                    
MS. RODELL answered no, not to her knowledge.                                                                                   
10:40:00 AM                                                                                                                   
MS. RODELL reviewed slide  13, "2005 Current Language Adopted AS                                                                
37.13.120."  She said  this is  current  law the  Permanent Fund                                                                
Corporation uses to manage  the permanent fund. She said she has                                                                
included the  language in its  entirety for  the working group's                                                                
benefit. Members  will notice  that many  of the  provisions are                                                                
very  similar to  the  language  adopted in  1980.  For example,                                                                
subsection (a)  still has a  prudent investor rule.  In 1980, it                                                                
was a prudent man rule, but it has the same meaning and power as                                                                
the prudent investor rule.                                                                                                      
     (a) The board shall adopt regulations specifically                                                                         
     designating the types of income-producing investments                                                                      
     eligible for investment of fund assets. When adopting                                                                      
     regulations authorized by this section or managing and                                                                     
     investing fund assets, the prudent-investor rule shall                                                                     
     be applied by the corporation. The prudent-investor                                                                        
     rule as applied to investment activity of the fund                                                                         
     means that the corporation shall exercise the judgment                                                                     
     and care under the circumstances then prevailing that                                                                      
     an institutional investor of ordinary prudence,                                                                            
     discretion, and intelligence exercises in the                                                                              
     designation and management of large investments                                                                            
     entrusted to it, not in regard to speculation, but in                                                                      
     regard to the permanent disposition of funds,                                                                              
     considering preservation of the purchasing power of                                                                        
     the fund over time while maximizing the expected total                                                                     
     return from both income and the appreciation of                                                                            
     b) The corporation may not borrow money or guarantee                                                                       
     from principal of the fund the obligations of others,                                                                      
     except as provided in this subsection. With respect to                                                                     
     investments of the fund, the corporation may, either                                                                       
     directly or through an entity in which the investment                                                                      
     is made, borrow money if the borrowing is nonrecourse                                                                      
     to the corporation and the fund.                                                                                           
     (c) The board shall maintain a reasonable                                                                                  
     diversification among investments unless, under the                                                                        
     circumstances, it is clearly prudent not to do so. The                                                                     
     board shall invest the assets of the fund in in-state                                                                      
     investments to the extent that in-state investments                                                                        
     are available and if the in-state investments                                                                              
     (1) have a risk level and expected return comparable                                                                       
     to alternate investment opportunities; and (2) are                                                                         
     eligible for investment of fund assets under (a) of                                                                        
     this section                                                                                                               
     (d) The corporation may enter into and enforce all                                                                         
     contracts necessary, convenient, or desirable for                                                                          
     managing the fund's assets and corporate operations,                                                                       
     including contracts for future delivery to implement                                                                       
     asset allocation strategies or to hedge an existing                                                                        
     equivalent ownership position in an investment.                                                                            
     (e) Before adoption of a regulation under (a) of this                                                                      
     section, the regulation, in electronic format, shall                                                                       
     be provided to the Legislative Budget and Audit                                                                            
     Committee for review and comment. The board shall                                                                          
     submit investment reports to the committee at least                                                                        
MS.  RODELL  referred  to  subsection (e).  She  noted  that  the                                                               
language is  still included, but  now the  "allowable permissible                                                               
list" is not used, only  the prudent-investor rule. The allowable                                                               
investments are done through the  regulatory process and prior to                                                               
adoption of a regulation, it goes  before the LB&A for review and                                                               
comment, she said.                                                                                                              
10:41:29 AM                                                                                                                   
SENATOR  OLSON pointed  out the  U.S.  has been  enjoying a  bull                                                               
market that  has outlasted what  many people had  anticipated. He                                                               
asked  whether the  PFC  has any  plan in  place  to protect  its                                                               
assets if a financial crisis occurs, like the one in 2008.                                                                      
MS.  RODELL  said   she  would  talk  about  risk   and  how  the                                                               
corporation manages its  risk later in the  presentation, but the                                                               
diversification of  the portfolio helps  to protect the  fund and                                                               
it  is always  monitoring how  the  market is  changing. The  PFC                                                               
works to  identify any concerns  and makes decisions on  where it                                                               
needs to be more prudent or take measured risk.                                                                                 
10:42:39 AM                                                                                                                   
MS.  RODELL turned  to slide  14, "Historical  Asset Allocation,"                                                               
consisting  of  a  series  of  pie charts  based  on  the  actual                                                               
portfolio, including bonds, stocks,  real estate, private equity,                                                               
absolute return,  infrastructure, and asset allocation.  She said                                                               
she included  this slide  to visually  demonstrate how  broad the                                                               
allocation has changed over the years  [from 1980 - 2018] and how                                                               
diverse it has become. This  allows the corporation to manage its                                                               
risk  through diversification,  which Senator  Olson asked  about                                                               
10:43:25 AM                                                                                                                   
REPRESENTATIVE  WOOL  asked  for  further  clarification  on  the                                                               
meaning  of "absolute  return"  and  if "infrastructure"  differs                                                               
from real estate.                                                                                                               
MS.  RODELL  answered that  "absolute  return"  relates to  hedge                                                               
funds  that use  a specific  non correlation  in their  design to                                                               
counter  what one  thinks the  market  might be  to provide  risk                                                               
diversification.  Infrastructure includes  investments in  assets                                                               
that  have  term  contracts or  take-or-pay  contracts,  such  as                                                               
utilities, toll  roads, airports, fee-for-service types  of large                                                               
10:44:21 AM                                                                                                                   
REPRESENTATIVE   KREISS-TOMKINS  asked   about  the   portfolio's                                                               
current real  estate holdings. He  wondered which of  these asset                                                               
classes  are  predominantly  directly  managed  in-house  by  the                                                               
corporation and those that are primarily managed externally.                                                                    
MS. RODELL  referred to the  list on the  left side of  slide 14.                                                               
She reviewed the list:                                                                                                          
Bonds  have  been almost  100  percent  managed internally  since                                                               
1980,  and  currently  less  than   five  percent  is  externally                                                               
managed. The Department of Revenue  managed the bond portfolio in                                                               
house before it was moved over to the corporation.                                                                              
Stocks  are almost  exclusively managed  externally. The  PFC has                                                               
approximately  a  $2  billion portfolio  that  is  being  managed                                                               
internally, she said.                                                                                                           
Real  estate  is  internally  managed,  with  the  assistance  of                                                               
external managers.                                                                                                              
Private Equity  has both internal  and external  management. They                                                               
make  some direct  investments but  also perform  substantial due                                                               
The  PFC defines  internal management  as the  responsibility for                                                               
performing due diligence, by using  an investment decision rather                                                               
than using a fund to make that investment decision.                                                                             
Absolute  Return  is  externally  managed. The  PFC  selects  the                                                               
funds, but the funds do the investing.                                                                                          
Infrastructure is both internal and external.                                                                                   
Asset Allocation  is really the  treasury function of  the funds,                                                               
so  it means  managing  the  daily cash  and  working with  fixed                                                               
income. The corporation  uses a cash overlay program  to keep the                                                               
money  invested until  cash is  needed. It  also includes  a Risk                                                               
Parity  Program.  Without  getting  too  technical,  risk  parity                                                               
programs  are multi  assets, she  said. They  invest in  the same                                                               
assets  that  the  PFC  does,  but do  so  differently  than  the                                                               
corporation  in order  to generate  a different  type of  return.                                                               
They also have a foreign  currency overlay program to help manage                                                               
the   foreign   currency   exposure.  She   characterized   Asset                                                               
Allocation as  a strange catch-all  grouping that has  a treasury                                                               
function.  It is  internally managed,  but also  has some  pieces                                                               
that are externally managed.                                                                                                    
10:47:54 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS recapped  the  asset classes  that                                                               
the  PFC  internally manages  include  bonds,  real estate,  some                                                               
private  equity and  infrastructure. The  PFC externally  manages                                                               
most of its stocks, some  private equity, some infrastructure and                                                               
hedge funds. He said maybe it  is in the quarterly reports of the                                                               
LB&A, but he recalled that line  item in the operating budget for                                                               
the PFC  is approximately $15  million. He remarked that  this is                                                               
an  incredible  value  given  the massive  wealth  her  team  has                                                               
control  over.  Given  the  current   division  of  internal  and                                                               
external  management,  he  asked  whether she  is  interested  in                                                               
bringing  in more  assets into  internal management  and also  to                                                               
identify any limiting factors.                                                                                                  
MS. RODELL answered  that it continues to be a  priority to build                                                               
up  the PFC's  internal  management  capability. The  corporation                                                               
would  never  want  to  internally  manage  100  percent  of  its                                                               
portfolio given the sophistication and  change of the assets, but                                                               
having  internal managers  touch every  asset class,  as the  PFC                                                               
currently does,  creates a  much better  alignment of  goals with                                                               
its investments.                                                                                                                
She  said  that in  terms  of  private  equity, real  estate,  or                                                               
investing in  a real estate fund,  there is often a  need to turn                                                               
investments  on  a much  tighter  timeframe,  perhaps a  five  to                                                               
seven-year timeframe due to the  need for liquidity. However, the                                                               
PFC can also  hold its investments for a longer  time period. For                                                               
example, as previously  mentioned, the PFC has owned  some of its                                                               
real  estate since  1985, which  has allowed  the corporation  to                                                               
continue  to generate  income from  those assets.  The desire  to                                                               
hold these assets  is, in part, because the PFC  is not forced to                                                               
sell its assets  when the investors have  other demands. However,                                                               
she  acknowledged   that  creating   that  alignment   is  really                                                               
important to  the overall success  of the  corporation. Secondly,                                                               
it is  less costly to  manage internally than externally.  If the                                                               
bond portfolio were externally managed,  fees would easily exceed                                                               
$15  million per  year, which  is about  the same  as the  entire                                                               
PFC's budget of $17 million for FY2020.                                                                                         
She identified  the biggest challenge  as the uncertainty  of the                                                               
annual budget  and obtaining sufficient salaries  for staff. Just                                                               
like the  rest of  state government, the  PFC's employees  do not                                                               
receive  any  merit or  retention  increases.  She reported  that                                                               
about  85 percent  of  public  funds in  the  U.S. pay  incentive                                                               
compensation  to their  investment  personnel. The  PFC does  not                                                               
have  an  incentive compensation  program,  which  is a  limiting                                                               
factor to recruiting  and retaining talent. Based  on surveys she                                                               
has reviewed  the number  one reason people  turn down  offers at                                                               
the PFC is due to inadequate compensation.                                                                                      
10:51:43 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS asked  how much  the PFC  pays for                                                               
external management including net of fee payments.                                                                              
MS. RODELL answered  that including the net  of fee arrangements,                                                               
the  cost  is  in  excess  of  $350  million  on  a  $65  billion                                                               
REPRESENTATIVE  KREISS-TOMKINS  offered   his  belief  that  this                                                               
represents a huge opportunity for  Alaska, given that the PFC has                                                               
done  an   incredible  job  managing   the  state's   assets.  He                                                               
acknowledged that  the PFC  continues to  explore ways  to reduce                                                               
costs  in a  prudent manner,  in consultation  with the  Board of                                                               
Trustees, so  its assets can  be managed in-house.  He identified                                                               
the benefits of  in-house management, such that  when the payroll                                                               
stays  in Alaska,  it also  will build  a class  of sophisticated                                                               
asset managers.                                                                                                                 
10:53:22 AM                                                                                                                   
REPRESENTATIVE MERRICK  asked whether  the fees paid  to external                                                               
managers are  negotiated fees based  on investment returns  or if                                                               
they are based on a flat rate.                                                                                                  
MS.  RODELL answered  that it  is  both. The  contracts that  are                                                               
negotiated  with  the  external  managers tend  to  have  a  flat                                                               
management fee,  with a  fee for performance,  as well.  They are                                                               
obviously all  different depending  on the  contract and  when it                                                               
was entered into, but there  is generally a performance-based fee                                                               
component. They  must reach certain  rates of return in  order to                                                               
earn the fees.                                                                                                                  
10:54:12 AM                                                                                                                   
REPRESENTATIVE  MERRICK  asked  whether external  management  has                                                               
ever had negative results.                                                                                                      
MS. RODELL  answered yes; at one  point the PFC had  to claw back                                                               
fees and trying to collect was  really painful. The PFC has moved                                                               
away from that  to alternative fee structures.  However, during a                                                               
down market  the hope is that  the manager does not  lose as much                                                               
as the  market loses. However,  negative performance  will occur,                                                               
she said.                                                                                                                       
10:54:48 AM                                                                                                                   
REPRESENTATIVE  WOOL  asked whether  all  the  fees in-house  are                                                               
deducted  from  the  earnings,  which  would  be  a  pre-dividend                                                               
MS. RODELL answered yes.                                                                                                        
REPRESENTATIVE WOOL  asked whether  the asset  allocation changes                                                               
or is shaped by any incentive, such as offering a bonus.                                                                        
MS. RODELL  answered that it is  not affected by the  size of the                                                               
REPRESENTATIVE  WOOL calculated  that the  $250 million  cost for                                                               
external managers on [$65] billion  results in a little more than                                                               
a half  of one  percent. He acknowledged  that the  retention and                                                               
recruitment of  staff sounds challenging.  It seemed to  him that                                                               
people  would  want  to  work   where  they  receive  performance                                                               
MS.   RODELL  answered   that  if   the   [legislature  and   the                                                               
administration]   would   like   to   increase   in-house   asset                                                               
management, they need to recognize  that asset managers and other                                                               
PFC staff do  not fit the traditional  state employee definition.                                                               
The state needs  to think about what it will  take to recruit and                                                               
retain  that type  of  talent and  be willing  to  invest in  it.                                                               
Otherwise, the  state needs to  recognize it is not  possible "to                                                               
have it  both ways." It  is not possible  to build up  the talent                                                               
and expect  people to move to  Alaska when the market  demand for                                                               
this talent  in the  Lower 48  and worldwide is  high. It  is not                                                               
possible to expect  them to provide these services  for free, she                                                               
REPRESENTATIVE WOOL asked whether  in-house and external managers                                                               
have a portion of assets to compare performance.                                                                                
MS.  RODELL   answered  that  typically  the   decision  to  have                                                               
portfolios  allocated  outside  is  because  the  PFC  lacks  the                                                               
necessary expertise to manage it in-house.                                                                                      
10:57:59 AM                                                                                                                   
SENATOR  HUGHES mentioned  the comment  that "You  can't have  it                                                               
both ways." She asked whether  the board has considered trying to                                                               
retain some  of the $350 million  in fees by using  more in-house                                                               
managers or  if it better  to continue to use  external managers.                                                               
She further asked if any internal  managers are based in New York                                                               
or London or if everyone is located in Juneau.                                                                                  
MS.  RODELL answered  that  the  PFC has  looked  at  it. If  the                                                               
corporation  is to  be successful  in making  a change,  it would                                                               
take a lot of buy in by  the legislature. It will be difficult to                                                               
change the recruitment and compensation  structure as long as the                                                               
PFC's  budget  is  subject  to   the  annual  legislative  budget                                                               
appropriation  process.  First,  uncertainty as  to  its  overall                                                               
budget exists.  Second, it becomes  difficult to  distinguish the                                                               
corporation's  staff from  those of  other state  agencies during                                                               
the budget process.                                                                                                             
In  2018, the  board  worked  very hard  to  build an  acceptable                                                               
incentive compensation structure to  bring to the legislature and                                                               
the  governor. Ultimately,  given  the messages  coming from  the                                                               
governor and the  legislature, the board decided it  was not time                                                               
to bring  that proposal forward.  In fact, the FY2020  budget cut                                                               
salaries  to  the FY2019  level  without  including the  standard                                                               
three percent  merit increase  or cost  of living  adjustment. In                                                               
addition, the  board had requested  four new positions  that were                                                               
not funded.                                                                                                                     
MS. RODELL  stated that its  only office  and 100 percent  of its                                                               
staff is located in Juneau.                                                                                                     
11:01:00 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS expressed  interested in  learning                                                               
the budget  process used by  other sovereign wealth funds  in the                                                               
world.  He  would  like  to  strike a  balance  and  provide  the                                                               
corporation with  greater certainty,  but still have  some degree                                                               
of  public accountability.  He said  he  would defer  to the  Co-                                                               
Chairs to decide  if considering all aspects of the  fund and the                                                               
dividend is appropriate.  He wondered if there  was a possibility                                                               
of pursuing that question.                                                                                                      
11:02:01 AM                                                                                                                   
MS. RODELL turned to slide 15, Fund Value and Returns in                                                                        
     1977 The Permanent Fund receives its first deposit of                                                                      
          dedicated oil revenues totaling $734,000. Initial                                                                     
         Legislation permitted an investment list that                                                                          
         included only fixed income securities such as                                                                          
          treasury bonds.                                                                                                       
     1983 Following changes to the statutory investment                                                                         
          list, the Fund makes its first investment in the                                                                      
         stock market, and later that year, in directly                                                                         
          held real estate.                                                                                                     
     1990 After the Legislature expands the statutory                                                                           
         investment list, the Fund begins to invest in                                                                          
          stock and bond markets outside the United States.                                                                     
     2005 The Legislature makes a significant change in how                                                                     
          Permanent Fund investments are determined by                                                                          
          removing the allowed investment list from state                                                                       
          law. The Trustees will make investment decisions                                                                      
          under the guidelines of the prudent investor                                                                          
MS. RODELL  directed attention to  a graph  on the right  side of                                                               
the slide. She pointed out two  red bars that illustrate that the                                                               
returns  have stayed  within 0.0  percent and  15 percent.  There                                                               
were a couple  of outliers on the graph in  2008 and 2009, during                                                               
the financial crisis and the  Great Recession. The returns spiked                                                               
in 1984,  she said. She emphasized  that this also shows  that as                                                               
the risk profile grew and the  PFC was able to take on additional                                                               
asset  classes, it  changed limits  and  took more  risks on  the                                                               
portfolio on a  measured basis. In doing so the  fund was allowed                                                               
to really  grow and it  is now at  historical highs in  excess of                                                               
[$64] billion in assets.                                                                                                        
11:03:12 AM                                                                                                                   
CO-CHAIR  JOHNSTON  asked how  far  out  the board  projects  its                                                               
investment returns.                                                                                                             
MS.  RODELL answered  that every  year  Callan Associates,  Inc.,                                                               
consultants provide a capital market  forecast and review each of                                                               
the asset  classes. The  consultants set  an expectation  for the                                                               
average  return   over  a  ten-year  period.   They  analyze  the                                                               
deviation with  a plus  or minus variation  on the  expected ten-                                                               
year return for the fund. The  consultants provide a low case and                                                               
high case  benchmark, in  part, at request  of the  Department of                                                               
Revenue for its  spring and fall revenue  forecast. These figures                                                               
are on  the PFC's projection  worksheet on its website.  It shows                                                               
how the fund  is projected to grow using a  high, middle, and low                                                               
case scenario. Currently,  the fund is projecting  an average 10-                                                               
year return  of 6.65  percent. This means  looking back  that the                                                               
fund might  earn minus  20 percent  in some years  and a  plus 20                                                               
percent  in other  years, but  over  the ten-year  period it  has                                                               
earned an average of 6.65 percent.                                                                                              
11:05:12 AM                                                                                                                   
CO-CHAIR JOHNSTON asked whether 10-year projections are usually                                                                 
the maximum amount or if some projections go to 20 years.                                                                       
MS.  RODELL  said that  she  was  not  aware of  any  projections                                                               
greater  than  ten years.  She  said  that  the PFC  watches  the                                                               
markets  move and  market  volatility. She  said  looking at  the                                                               
months  of May  and  June  and observing  how  much markets  have                                                               
swung,  that  the  farther  out the  projection  goes,  the  less                                                               
validity  they have.  She  said that  she  would caution  against                                                               
using any forecast beyond ten  years because it would have little                                                               
to no value.                                                                                                                    
11:06:06 AM                                                                                                                   
SENATOR  HUGHES  asked for  an  estimated  timeframe of  when  to                                                               
expect the $65 billion fund would double.                                                                                       
MS.  RODELL asked  whether this  would  be based  on 6.5  percent                                                               
return and all things being  equal, that the legislature was also                                                               
not drawing from the fund.                                                                                                      
SENATOR HUGHES asked  when she thought the fund  would reach $130                                                               
MS. RODELL  answered that the chart  [on page 15] shows  that the                                                               
fund doubles  in value  about every ten  years. She  would expect                                                               
the  fund to  double about  20 years  from now,  but she  was not                                                               
CO-CHAIR JOHNSTON  said she thinks it  would put Ms. Rodell  at a                                                               
disadvantage  [to provide  an accurate  projection  for the  fund                                                               
balance] due to the structured draw in place.                                                                                   
MS. RODELL answered  that her estimate assumed there  was not any                                                               
structured  draw  since there  is  not  any  draw for  this  time                                                               
11:07:57 AM                                                                                                                   
CO-CHAIR  JOHNSTON  asked  the  record   to  be  clear  that  the                                                               
assumption was based on no structured draws.                                                                                    
11:08:13 AM                                                                                                                   
REPRESENTATIVE KREISS-TOMKINS  asked how assets were  managed the                                                               
first few years. He was looking at the period 1977 to 1980.                                                                     
MS. RODELL  answered that the  Department of Revenue  managed the                                                               
assets during that time.                                                                                                        
11:08:35 AM                                                                                                                   
REPRESENTATIVE WOOL said that it  was interesting to note that in                                                               
1986 and  2014 the fund  did really  well, but those  spikes were                                                               
also ones in  which the Alaska economy had a  very tough time. He                                                               
said it seemed  as though the fund does well  when oil prices are                                                               
MS.  RODELL said  that is  correct and  it speaks  to the  global                                                               
exposure the  portfolio has and  the non-Alaska  concentration of                                                               
the portfolio.  She said it is  very counter cyclical to  what is                                                               
happening in the state.                                                                                                         
11:09:49 AM                                                                                                                   
MS. RODELL said she was not going to read slide 17, "Today:                                                                     
Investment Responsibilities AS 37.13.120."                                                                                      
     When adopting regulations or managing and investing                                                                        
     fund assets, the prudent investor rule shall be                                                                            
     applied by the corporation. The corporation shall                                                                          
     exercise the judgment and care that an institutional                                                                       
     investor of ordinary prudence, discretion, and                                                                             
     intelligence exercises in the designation and                                                                              
     management of large investments entrusted to it, not                                                                       
     in regard to speculation, but in regard to the                                                                             
     permanent disposition of funds, considering                                                                                
     preservation of the purchasing power of the fund over                                                                      
     time while maximizing the expected total return from                                                                       
     both income and the appreciation of capital.                                                                               
     The corporation may not borrow money or guarantee from                                                                     
     principal of the fund the obligations of others.                                                                           
     Except the corporation may, either directly or through                                                                     
     an entity in which the investment is made, borrow                                                                          
     money if the borrowing is nonrecourse to the                                                                               
     corporation and the fund.                                                                                                  
     The board shall maintain a reasonable diversification                                                                      
     among investments unless, under the circumstances, it                                                                      
     is clearly prudent not to do so. The board shall                                                                           
     invest the assets of the fund in in-state investments                                                                      
     to the extent that in-state investments are available                                                                      
     and if the in-state investment provides the same risk-                                                                     
     reward benefit as other investment opportunities.                                                                          
11:09:59 AM                                                                                                                   
MS. RODELL  reviewed slide 18,  "Allocation Structure."  She said                                                               
that  the structure  that the  board  currently has  in place  is                                                               
basically organized in two ways.                                                                                                
     The asset allocation structure is organized by growth                                                                      
     and income strategies, as well as liquidity                                                                                
     This strategic categorization provides a framework for                                                                     
     ensuring that investment return targets are                                                                                
     commensurate with the risks undertaken.                                                                                    
     The Board of Trustees reviews the Asset Allocation                                                                         
MS. RODELL  reviewed the  Asset Allocation  Structure shown  on a                                                               
table in the slide. She  said that within "growth," liquid assets                                                               
are known  as public equities that  can be sold very  easily. She                                                               
said that  illiquid means  it can take  between three  months and                                                               
two  years to  get the  full  investment back.  The portfolio  in                                                               
income has a  very liquid allocation in terms of  bonds and cash.                                                               
The illiquid assets include real  estate and infrastructure. Each                                                               
asset class  contributes to  the total  fund return  and provides                                                               
quality and diversity of the portfolio's investments.                                                                           
11:12:22 AM                                                                                                                   
MS.  RODELL   turned  to  slide  19,   "Diversification:  Benefit                                                               
Reflected  in  VaR  Contribution."  The slide  contains  a  graph                                                               
showing  the ratio  of "Contribution  VaR" to  "Stand-alone VaR."                                                               
She said that  she included some slides that the  board sees on a                                                               
quarterly basis. These slides are  sent to Legislative Budget and                                                               
Audit  since they  get the  entire board  packet each  quarter as                                                               
part of the reporting. She said  this slide relates to an earlier                                                               
question Senator Olson had.                                                                                                     
She  said that  the  easiest way  to think  about  the reason  to                                                               
diversify is not to  have all of the eggs in  one basket. The PFC                                                               
wants to  ensure that  if one  asset class  is losing,  not every                                                               
asset class  is losing.  She emphasized that  it is  important to                                                               
observe  how markets  move, either  together or  apart from  each                                                               
other, which  is called correlation. Sometimes  asset classes are                                                               
very  tightly  correlated.  Public equity,  stocks,  and  private                                                               
equity,  which  is private  investment  into  companies, is  very                                                               
highly  correlated. In  other words,  the things  in the  economy                                                               
that are causing stocks to go  up are also causing private equity                                                               
valuations to go up.                                                                                                            
11:12:57 AM                                                                                                                   
MS. RODELL  said, in  converse though, some  assets will  move in                                                               
the  opposite  direction,  so  holding  bonds  that  are  not  as                                                               
correlated  will lose  value as  growth  occurs because  interest                                                               
rates are  staying low. One way  to measure the portfolio  in its                                                               
entirety is to look  at Value at Risk (VaR). VaR  is a measure of                                                               
the risk of loss for investments.  It estimates how much a set of                                                               
investments might  lose, with a  given probability,  given normal                                                               
market  conditions.   The  probability  the  PFC   uses  is  97.5                                                               
confidence given normal market conditions.                                                                                      
        • Private equity continues to have the highest                                                                          
          proportionate stand-alone VaR (45.1%), followed                                                                       
          by public equity (24.8%)                                                                                              
        • Given the high correlation between these two,                                                                         
         their respective contribution to overall risk                                                                          
          (VaR) is also high.                                                                                                   
        • On the other hand, the fixed income and real                                                                          
          estate exposures increase diversification                                                                             
          benefit, with much lower contribution                                                                                 
         proportions. Total Fund Asset Alloc. Absolute                                                                          
          Return FI Plus Infra & Pvt Crdt. Pvt Equity                                                                           
          Public Equity Real Estate $65.7 $3.7 $3.7 $15.5                                                                       
          $5.2 $8.4 $25.1 $4.0 17.4% 3.4% 4.6% 6.2% 14.3%                                                                       
          45.1% 24.8% 13.5% Asset Allocation $bn Standalone                                                                     
          VaR as % of respective portfolio NAV 40% 50% 60%                                                                      
          70% 80% 90% 100% Ratio of "Contribution VaR" to                                                                       
          "Stand-alone VaR" V                                                                                                   
MS.  RODELL   said  that  sometimes  asset   classes  are  highly                                                               
correlated. She referred  to the ratio in the chart  of the left,                                                               
not shown here.  This bar chart shows the  ration of contribution                                                               
to VaR to  Stand-alone- VaR. For example, with  public equity the                                                               
PFC  can lose  up to  24.8  percent of  the value  of the  public                                                               
equity portfolio based  on the risk it is  taking. Private equity                                                               
has the highest  risk association with it, so the  PFC could lose                                                               
up  to 45.1  percent of  the  portfolio with  97.5 confidence  in                                                               
normal market conditions. These  are the greatest contributors to                                                               
risk  in the  portfolio.  That is  the reason  the  PFC has  this                                                               
counter risk, which is fixed income in real estate.                                                                             
11:14:33 AM                                                                                                                   
MS.  RODELL  turned  to  slide   20,  "Asset  allocation  &  VaR:                                                               
Breakdowns"  depicting two  pie  charts labeled  "Asset Mix"  and                                                               
"VaR Mix," not shown below.                                                                                                     
     Risks are more concentrated                                                                                                
      ? The Asset mix 'seems' more diversified than actual                                                                      
     underlying risks.                                                                                                          
      ? Of the total risk pie, approximately 85% is equity                                                                      
     risk (private & public equity).                                                                                            
       ? Equity (related) risk is likely to exist within                                                                        
       Absolute Return and Asset Allocation portfolios as                                                                       
     ? Diversifiers (away from equity risk), which include                                                                      
      interest rates/spreads and real estate, aggregate to                                                                      
     only about 10% - 13%, in risk terms                                                                                        
She  referred to  the Asset  Mix, shown  on the  left pie  chart,                                                               
which shows  the dollar value to  each of the asset  classes. For                                                               
example, with  public equity  38 percent of  the dollar  value of                                                               
the portfolio  is exposed  to stocks. However,  if one  thinks of                                                               
that same group in  terms of risk, the VaR Mix,  shown on the pie                                                               
chart at  the right, the  public equity is  actually contributing                                                               
54 percent of overall risk of  the portfolio. While the asset mix                                                               
looks  like  a  highly  diversified   dollar  mix,  from  a  risk                                                               
perspective it  is actually  not as  diversified as  others might                                                               
want or  how other  portfolios might look.  This is  a deliberate                                                               
choice  by the  PFC  to take  on this  risk  because it  delivers                                                               
returns,  and  the  board  is  comfortable  with  the  risk  this                                                               
portfolio  is generating.  This  analysis provides  a measure  to                                                               
understand exactly  where the  risk lies and  to ensure  that the                                                               
board continues  to be  comfortable because  as markets  move, as                                                               
allocations on  the dollar side  change, this risk mix  will also                                                               
11:16:03 AM                                                                                                                   
MS. RODELL  turned to  slide, 21,  "Tail Risk:  Current Portfolio                                                               
During Extreme Events."                                                                                                         
Tail risk  is the risk (or  probability) of the chance  of a loss                                                               
occurring  due to  a rare  event, as  predicted by  a probability                                                               
distribution.  Tail  risks  include  events  that  have  a  small                                                               
probability  of occurring  and occur  at  both ends  of a  normal                                                               
distribution curve.                                                                                                             
Scenario                         Definition                                                                                   
2007 Credit Crisis               Credit & liquidity crisis                                                                      
                                 stemming from a severe slowdown                                                                
                                 in the housing market causing                                                                  
                                 significant widening of credit                                                                 
                                 spreads and increased implied                                                                  
2008 Market Crash                S&P 500 down 20% (2000 bps).                                                                 
US Downgrade 2011                The period starts with 50%                                                                     
                                 chance US downgrade indication                                                                 
                                 from S&P standards and ends with                                                               
                                 Operational Twist announcement                                                                 
                                 from the Fed (stock market                                                                     
                                 losses and bond market gains)                                                                
Fed Tapering Talk 2013           Equity & bond markets sold off.                                                                
                                 EM suffered badly due to hot                                                                   
                                 money flight back to U.S.                                                                    
Chinese Market Crash             Chinese stock market crash                                                                     
                                 beginning with the popping of                                                                  
                                 the stock market bubble on June                                                                
                                 12, 2015.                                                                                    
Rapid Deflation                  Oil down 60% (6000 bps); ST                                                                    
                                 Inflation down 350 bps; Mortgage                                                               
                                 spreads tighten 25 bps.                                                                      
Slow Deflation                   LT deflation down 200 bps; LT                                                                  
                                 Treasury Rates down 100 bps;                                                                   
                                 Mortgage spreads tighten 25 bps.                                                             
MS. RODELL  reviewed a  variety of historical  events as  if they                                                               
happen  to  the  portfolio  today,  to  the  total  fund  in  its                                                               
In 2008  and 2009, the  market crashed, and  the S&P was  down 20                                                               
percent,  the fund  would  lose  a little  over  20 percent,  but                                                               
compared  to  the  benchmark that  its  performance  is  measured                                                               
against,  it  would  lose  less  than  the  benchmark.  The  fund                                                               
diversification was creating some value  so the fund did not lose                                                               
as much  as the portfolio  would in  the benchmark. On  the other                                                               
hand, if  we had  a period  of slow deflation  and long  term and                                                               
long-term  deflation  is down  200  basis  points, with  treasury                                                               
rates  coming  down and  mortgage  spreads  tightening, the  fund                                                               
would lose  more than  the benchmark.  This is  due to  where the                                                               
fixed-income portfolio is invested, she said.                                                                                   
MS. RODELL  said this gives  a sense  of the magnitude  of losses                                                               
that  the   portfolio  made   with  certain   market  conditions,                                                               
especially  the  market  crises   that  occurred  and  are  often                                                               
11:17:54 AM                                                                                                                   
MS.  RODELL turned  to slide  22,  "Performance as  of March  31,                                                               
2019." She reviewed the table.                                                                                                  
                          FY 19        3 Years       5                                                                          
                          9 mos.                     Years                                                                    
 Total Fund               3.07%        9.33%         7.24%                                                                    
 Passive Index            2.39%        7.43%                                                                                  
 (60 Stocks|20 Bonds                                                                                                            
 |10RE|10 TIPs)                                                                                                                 
 Performance Benchmark    3.50%        8.31%         6.03%                                                                      
 Total Fund Return        4.60%        7.20%         6.47%                                                                    
 Objective | CPI+5%                                                                                                             
MS.  RODELL reviewed  the permanent  fund  performance. She  said                                                               
that this  chart compares  the performance based  on the  first 9                                                               
months of FY2019,  over three and five-year  periods. She pointed                                                               
out that  FY2018 will end  on Sunday,  June 30, 2019.  The FY2019                                                               
annual figures will be available in  about a month. Thus far, the                                                               
earnings  are 3.07  percent and  the passive  index benchmark  is                                                               
2.39 percent.  She said the passive  benchmark considers earnings                                                               
without any  active management of  the fund,  as if the  fund was                                                               
invested  in  a  computer-driven  index  model  with  60  percent                                                               
allocation to  stocks, 20  percent to bonds,  10 percent  to real                                                               
estate,  and 10  percent  to  TIPs [Treasury  Inflation-Protected                                                               
Security]. This replicates a passive  index benchmark as compared                                                               
to the PFC's asset allocation mix.                                                                                              
She said that  the performance benchmark came in  at 3.5 percent,                                                               
which is  a little  better than the  total fund  performance. The                                                               
[performance benchmark]  is for the most  part investable indices                                                               
that managers  are held to,  such as  the S&P 500.  She described                                                               
the calculation. The  board has its long-term  objective of CPI+5                                                               
percent,  which is  equated to  4.6 percent,  she said.  She said                                                               
that right now  the PFC is not keeping up  with the CPI+5 percent                                                               
in the current market.                                                                                                          
11:19:35 AM                                                                                                                   
REPRESENTATIVE KREISS-TOMKINS  referred back  to slide  21, "Tail                                                               
Risk."   He  asked   whether  the   board   or  the   corporation                                                               
intentionally made a decision in  allocating risk to provide more                                                               
protection for an  event similar to the 2008  market crash versus                                                               
a Chinese  market crash scenario in  which the PFC would  be more                                                               
MS. RODELL  answered that it is  intentional in the sense  of the                                                               
board's decision to focus on  creating growth. She explained that                                                               
this  allocation   dates  back   to  2016,  which   explains  the                                                               
directionality   into  alternatives   and   private  equity,   in                                                               
particular. Further, this is a  more U.S. weighted portfolio on a                                                               
total  fund  basis.  This  is  countered  by  the  public  equity                                                               
portfolio, which consists  of less of a U.S. tilt  and more of an                                                               
international  tilt  than  the   benchmark.  These  are  tactical                                                               
decisions and active  management. The board comes  in and defines                                                               
the risk  budget and allocation,  so when the board  indicates it                                                               
wants 38 percent  public equity, it is by  definition saying that                                                               
it wants  a 50 percent  risk allocation bucket. Then  within this                                                               
framework, managers  are investing. For example,  the director of                                                               
public equities makes the tactical  tilt when Brexit happened and                                                               
the market  plummeted, by  leaning in  to put  more money  in the                                                               
European  markets because  the director  thought  the market  was                                                               
overreacting and would be coming  back up. She cautioned that the                                                               
table shows  a spot in time  on March 31. However,  each day will                                                               
look slightly different based on market conditions.                                                                             
11:22:43 AM                                                                                                                   
REPRESENTATIVE MERRICK asked her to  briefly comment on how taxes                                                               
are  paid   under  the  fund   and  how  management   takes  into                                                               
consideration any changes to tax structure.                                                                                     
MS. RODELL  responded that the  permanent fund is not  subject to                                                               
U.S.  tax  code.  The  PFC  does   not  pay  any  taxes  on  U.S.                                                               
investments.  Further,  the corporation  is  not  subject to  any                                                               
corporate  tax requirements.  However, the  corporation does  pay                                                               
foreign taxes to foreign jurisdictions  because the PFC is viewed                                                               
as  a  taxable entity  in  some  foreign jurisdictions.  The  PFC                                                               
relies on the tax treaties  that the U.S. negotiates with foreign                                                               
governments to get tax relief  in various jurisdictions, which is                                                               
done country-by-country.                                                                                                        
11:23:40 AM                                                                                                                   
REPRESENTATIVE MERRICK asked about  taxes paid on the portfolio's                                                               
assets to foreign entities.                                                                                                     
MS.  RODELL  said that  these  figures  are normally  netted  out                                                               
before the PFC  sees the returns, and the returns  will be net of                                                               
that  payment. She  offered  to check  with  the Chief  Financial                                                               
Officer and report  back. She said there may be  something in the                                                               
notes of financial statements that she is not recollecting.                                                                     
11:24:14 AM                                                                                                                   
SENATOR  OLSON  referred  to  the performance  of  the  fund.  He                                                               
expressed concern  over the lag  time in changing  direction. For                                                               
example, during a  downturn [in 2009], when it  was obvious there                                                               
would be  losses, there was  a delay  in moving money  into safer                                                               
investments  to incur  less loss.  He  asked whether  the PFC  is                                                               
still plagued by an inability to move money faster.                                                                             
MS. RODELL  responded that nothing  prevents the PFC  from moving                                                               
money if the PFC thinks it  is necessary to do so. Currently part                                                               
of the reason to hold  larger cash balances than historically, is                                                               
the sense  that "we're topping up  on the market." The  PFC wants                                                               
to have  cash available to plow  into the market when  the market                                                               
falls, since  you want  to be  able to buy  on a  downswing. When                                                               
reviewing  2009,  of  course  we have  the  perfection  of  20-20                                                               
hindsight,  the  permanent  fund  should not  have  realized  any                                                               
losses, and  booked the unrealized  loss, let it  accumulate, and                                                               
let those  assets ride  out the downswing  since the  market came                                                               
back very fast. Within 2010, the  PFC had recouped a lot of those                                                               
losses. In reviewing  the gains in the funds,  the permanent fund                                                               
had recouped all of the losses  and had it stayed the course, the                                                               
permanent fund would be in  better shape today. Unfortunately, it                                                               
was not possible to know that at  the time, but the PFC just uses                                                               
its best  judgment. The challenge  is that a downturn  can extend                                                               
for years. One  of the beauties of the permanent  fund is that it                                                               
really relies on  its investors. The permanent  fund's purpose is                                                               
there  in perpetuity,  so  it  gets to  ride  out its  investment                                                               
losses and see if it can recoup some of these things.                                                                           
11:27:37 AM                                                                                                                   
CO-CHAIR JOHNSTON  recalled former PFC  CEO Mike Burns  said that                                                               
the fund is invested  for the long term and this  was a very long                                                               
11:28:10 AM                                                                                                                   
REPRESENTATIVE WOOL asked for further  clarification on the table                                                               
showing the CPI+5  percent equals 4.60 percent.  He asked whether                                                               
that is because the year is not over.                                                                                           
MS. RODELL agreed that the figure represents 9 months.                                                                          
11:28:33 AM                                                                                                                   
MS. RODELL turned to slide 23, "Awards and Accomplishments."                                                                    
     Marcus Frampton, CIO, named one of Private Equity                                                                          
     International's 40 under 40 Future Leaders of Private                                                                      
     Equity and Trusted Insight's Sovereign Wealth Fund CIO                                                                     
     of the Year for 2019.                                                                                                      
        • Jared Brimberry, Senior Portfolio Manager was                                                                         
          selected as one of Private Debt Investor's (PDI)                                                                      
          Rising Stars 2019                                                                                                     
        • Selected as North American Limited Partner of the                                                                     
         Year for 2018 by Private Equity International                                                                          
        • APFC received dual nominations for 2018                                                                               
          Partnership of the Year for Institutional                                                                             
          Investor's Allocators' Choice Awards and won the                                                                      
          award for our Capital Constellation Partnership:                                                                      
             o Private Market Partnership, Capital                                                                              
               Constellation - won                                                                                              
            o Public Market Partnership, Middle East                                                                            
               Africa South Asia (MEASA) Fund with McKinley                                                                     
               Capital - nominated                                                                                              
        • PEI's Private Debt Magazine recognized APFC in                                                                        
          their inaugural 30 Most Influential Investors in                                                                      
          Private Credit                                                                                                        
        • Recognized as North American Private Equity                                                                           
         Institutional Limited Partner Investor of the                                                                          
         Year for 2017 by Private Equity International                                                                          
        • Awarded Institutional Investor's Sovereign Wealth                                                                     
         Fund of the Year in Hedge Fund Investments in                                                                          
MS. RODELL  characterized this as  her "brag page."  She said it                                                                
speaks to  the internal management questions  raised earlier and                                                                
the  talent that  the  PFC has  been  able to  retain  in Juneau                                                                
because  people  who  are very  good  at  this  and  are mission                                                                
focused, yet want a lifestyle that Alaska offers.                                                                               
She said it  is important for Alaskans  to realize that when the                                                                
PFC wins these awards, they are nice individually, but they also                                                                
raise the corporation's  profile internationally. This creates a                                                                
"halo effect"  and the PFC  becomes a  preferred partner because                                                                
the awards  demonstrate skill and success.  The PFC continues to                                                                
see a lot of private  market flow and offers the corporation the                                                                
advantage of  selecting what it  wants and not what  it can get.                                                                
She  said the  PFC  can  be really  selective,  which  keeps the                                                                
returns up.                                                                                                                     
11:30:22 AM                                                                                                                   
MS. RODELL turned  to slides 24-25, "Structure  of the Fund" and                                                                
"The Fund."                                                                                                                     
          The Fund is comprised of two accounts which are                                                                       
          invested together under the same asset                                                                                
          •  The Principal is constitutionally established                                                                      
             and shall only be used for income-producing                                                                        
             investments specifically designated by law                                                                         
             under AS 37.13.120.                                                                                                
          • The Earnings Reserve Account (ERA) is                                                                               
             statutorily established under AS 37.13.145(a)                                                                      
             to hold the income of the Fund and shall be                                                                        
             invested in investments authorized under AS                                                                        
11:31:40 AM                                                                                                                   
MS.  RODELL   reminded  members   that  when  she   reviewed  the                                                               
legislative  findings and  mission of  the corporation,  she also                                                               
indicated that  the PFC is  mandated to  manage its funds  and to                                                               
manage risk.  She reviewed the  specific language,  including the                                                               
permanent  fund's  goal to  maintain  safety  of principal  while                                                               
maximizing  total return  and  that  the fund  should  be used  a                                                               
saving  device managed  to allow  the maximum  use of  disposable                                                               
income from  the fund for  the purposes designated by  law. There                                                               
is no liability  attached and the corporation is not  told to hit                                                               
a certain bogey of any kind and it never has been told to do so.                                                                
MS. RODELL  said this explains  the mechanics of how  money moves                                                               
through   the  permanent   fund,  which   is  important   to  the                                                               
discussion.   She   said   the   principal   of   the   fund   is                                                               
constitutionally established and may only be used for income-                                                                   
producing  investments. The  Earnings  Reserve  Account (ERA)  is                                                               
statutorily established under AS  37.13.145(a) to hold the income                                                               
of the fund  and may be invested in investments  authorized to be                                                               
invested under  the same statutes  as the principal of  the fund.                                                               
Historically, what the  corporation has done is  put the accounts                                                               
side by side and  give it a pro rata piece  of each investment to                                                               
the ERA holding.                                                                                                                
11:32:24 AM                                                                                                                   
MS. RODELL turned to slide 26, "Principal as of May 31, 2019."                                                                  
     The Alaska Constitution articulates that the Principal                                                                     
     shall only be used for income producing investments.                                                                       
     It is permanently protected for all generations of                                                                         
     Contributions to the Principal since Inception:                                                                          
     $17.2 Billion in Royalties                                                                                               
     The State Constitution directs "at least 25% of all"                                                                       
     Alaska's mineral royalties be deposited into the                                                                           
     Principal AS 37.13.010 (a)(1). Alaska Statute AS                                                                           
     37.13.010 (a)(2) directs an additional 25% for leases                                                                      
     after 1979.                                                                                                                
     $16.2 Billion in Inflation Proofing                                                                                      
     Protects the purchasing power of the Principal for all                                                                     
     generations of Alaskans. The statutory calculation, as                                                                     
     set forth in AS 37.13.145(c), is based on the Consumer                                                                     
     Price Index applied to the total Principal amount. It                                                                      
     is calculated at the end of each fiscal year based on                                                                      
     those two numbers and is subject to appropriation by                                                                       
     the Legislature.                                                                                                           
     $7.1 + 9.4 = $16.5 Billion in Special Legislative                                                                          
     Appropriations Based on legislative actions,                                                                               
     appropriations have been made to the Principal from                                                                        
     the Earnings Reserve Account $4.3B and the General                                                                         
     Fund $2.7B. For FY20 the 31st Alaska State Legislature                                                                     
     has also authorized a special appropriation of up to                                                                       
     $9.4 Billion from the ERA to the Principal of the Fund                                                                     
     to preserve these resources for generations of                                                                             
     $4.8 Billion in Unrealized Capital Gains/Losses                                                                          
     The Principal holds a pro-rata share of the cumulative                                                                     
     unrealized gains/losses on investment assets from the                                                                      
     time they are purchased to present. Once an asset is                                                                       
     sold, the realized gains/losses from the investment                                                                        
     are directed to the ERA.                                                                                                   
MS.  RODELL   referred  to  the   principal  of  the   fund.  The                                                               
Constitution of the  State of Alaska directs at  least 25 percent                                                               
of all Alaska's  mineral royalties be deposited  to the principal                                                               
of the  fund. Since  inception as  of May 31,  2019, the  PFC has                                                               
collected  $17.2 billion  in royalties  over the  42-year period.                                                               
She said  that $7.1 billion  has been  added to the  principal in                                                               
the  form  of  inflation  proofing.   She  said  the  legislature                                                               
authorized a special  appropriation of up to $9.4  billion in the                                                               
FY2020 budget from the ERA to  the principal of the fund, but she                                                               
was unsure  of the status.  Finally, the principal holds  a share                                                               
of its unrealized  capital gains and losses of  $4.8 billion. She                                                               
said that summarizes the principal or corpus of the fund.                                                                       
11:34:08 AM                                                                                                                   
MS.  RODELL reviewed  the chart  on slide  27, "Contributions  to                                                               
Principal  in millions."  This bar  graph  gives a  sense of  the                                                               
contributions  over  time.  In 2004,  a  reclassification  of  an                                                               
appropriation, which is the reason  for the negative "out" of the                                                               
ERA, which  she said is a  bit quirky. However, one  can view how                                                               
royalties  have been  straight-forward throughout  the years  and                                                               
how  oil prices  increased the  royalties even  though production                                                               
was less. It also demonstrates  the effects of inflation-proofing                                                               
to the principal of the fund.                                                                                                   
11:35:08 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS  commented  that  it  is  a  great                                                               
chart. He offered  his belief that the actual  transfer in FY2020                                                               
is now $5 billion.                                                                                                              
MS.  RODELL thanked  him  for the  update. She  said  that it  is                                                               
really  great that  a portion  of the  earnings reserve  is being                                                               
used for future  generations of Alaskans. She  offered her belief                                                               
that the  chart shows how  important it  has been to  continue to                                                               
build the  principal of the  account over time. It  really speaks                                                               
to the care that has been given to the fund.                                                                                    
11:36:07 AM                                                                                                                   
MS. RODELL reviewed slide 28, "Statutory Net Income AS                                                                          
          • The Constitution requires all "income" be                                                                           
            deposited into the General Fund, unless                                                                             
             otherwise provided by law.                                                                                         
          • AS 37.13.140(a) Statutory Net Income defines                                                                        
             what "income" to the General Fund is, excluding                                                                    
             unrealized gains and losses, and directs it to                                                                     
             the ERA.                                                                                                           
          • Net realized gains and investment income are                                                                        
            the funds in the ERA that are subject to                                                                            
           appropriation by a simple majority of the                                                                            
             Alaska Legislature.                                                                                                
          • Net realized gains = realized gains accumulated                                                                     
           during the fiscal year (-) minus realized                                                                            
             losses accounted for during the year                                                                               
MS. RODELL said the Constitution  of the State of Alaska requires                                                               
all income be  deposited into the general  fund, unless otherwise                                                               
provided  by law.  AS 37.13.140(a)  statutory net  income defines                                                               
what "income" to the general  fund is, excluding unrealized gains                                                               
and losses, and directs it to the ERA.                                                                                          
MS. RODELL, in  speaking to statutory net income,  stated that it                                                               
is  really hard  to spend  an unrealized  gain "because  when the                                                               
market is  moving intra-day and between  days - one day  you have                                                               
it, the next you don't - the  third day you have three times what                                                               
you had."  She said there is  the sense that you  can really only                                                               
spend  what you  have realized.  The  net realized  gains or  the                                                               
realized  gains  that have  accumulated  during  the fiscal  year                                                               
minus the realized  losses are trued up at the  end of the fiscal                                                               
year. When constitutional language  was passed, income was simple                                                               
income and it was not the  fair-market value of an investment. In                                                               
1997, generally  accepted accounting principles was  changed, and                                                               
the  definition  of  accounting income  was  changed  to  require                                                               
investments be the value of all  of the PFC's investments at fair                                                               
market value. The  change in value year after year  would be seen                                                               
as  net income,  she  said. That  is how  the  concept of  having                                                               
unrealized  losses  was embedded  in  the  definition of  income,                                                               
requiring  the  legislature  to  back that  out  and  create  the                                                               
definition of statutory net income.                                                                                             
11:38:00 AM                                                                                                                   
MS. RODELL reviewed slide 29, "Accounting Net Income."                                                                          
      • Accounting Net Income includes unrealized gains                                                                         
          and thus differs from Statutory Net Income which                                                                      
          does not.                                                                                                             
        • In 1997, Generally Accepted Accounting Principals                                                                     
          (GAAP) changed the definition of accounting                                                                           
          income, thus requiring APFC to value all                                                                              
          investments at fair market value.                                                                                     
        • Fund values must include unrealized gains and                                                                         
          losses based on this GAAP rule. This information                                                                      
          is provided on our monthly financial statements                                                                       
          and in the Annual Report.                                                                                             
      • Unrealized gains earned by Principal are part of                                                                        
          Principal, upon realization the gains are                                                                             
          transferred to the ERA adding to the amount                                                                           
          "realized for future appropriation."                                                                                  
11:38:51 AM                                                                                                                   
MS.  RODELL reviewed  the  chart  on slide  30,  "Net Income  and                                                               
Return [chart not shown]."                                                                                                      
MS. RODELL  said that looking over  the last ten fiscal  years as                                                               
how that income has reflected  versus the returns shows that they                                                               
tend  to  trend in  the  same  direction,  but they  can  diverge                                                               
wildly.  In 2011,  the accounting  net income  was very  big, but                                                               
statutory net income  was not. In 2018, it was  just the reverse,                                                               
with  more  statutory  net income  than  accounting  net  income.                                                               
Statutory  net  income  reflects   the  investment  activity  and                                                               
investment  decisions being  made by  staff and  it is  not being                                                               
driven  by  any  particular  return objective.  She  said,  "It's                                                               
really being  driven by it's time  to sell and if  there's a gain                                                               
we  have  to recognize  it  into  the Earnings  Reserve  Account;                                                               
therefore, it  increases statutory  net income."  Those decisions                                                               
are  really  investment in  nature  and  not  being driven  by  a                                                               
particular agenda, she said.                                                                                                    
11:39:16 AM                                                                                                                   
REPRESENTATIVE WOOL related his  understanding that statutory net                                                               
income is the  actual realized gains, which  determines the value                                                               
of the  permanent fund dividend. He  said if the PFC  holds on to                                                               
stocks, but  they do  not cash  them in, there  would be  no gain                                                               
[realized] and it would not affect the statutory net income.                                                                    
MS. RODELL answered that is correct.                                                                                            
REPRESENTATIVE  WOOL  asked  for  further  clarification  on  the                                                               
MS. RODELL answered that the  return is the percent. She referred                                                               
to the chart [on slide 22  related to performance], in which 3.07                                                               
percent was the  9-month return. This would be  the annual return                                                               
for each of those years shown on the right axis.                                                                                
11:40:22 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS,  continuing where  Representative                                                               
Wool was going, said statutory  net income does not seem entirely                                                               
divorced  from what  the market  is doing,  but it  seems like  a                                                               
quasi-arbitrary metric on which to base dividends.                                                                              
MS. RODELL answered that the  other thing to note about statutory                                                               
net income  is that  it is the  regularized cash  flow, including                                                               
bond interest payments or rentals  from real estate. If you think                                                               
about what  that asset  allocation looked  like in  1980, "you're                                                               
clipping coupons and  collecting rent," which was  cash income to                                                               
be  deposited into  the ERA.  She said  that made  sense in  1982                                                               
because the concept of fair market  value did not exist to affect                                                               
income.  Over time  the  concept of  dividend  based on  earnings                                                               
never changed but  everything around it did  since the accounting                                                               
rules and investments changed.                                                                                                  
REPRESENTATIVE KREISS-TOMKINS  asked whether  it was fair  to say                                                               
that as  the permanent  fund has invested  in more  and different                                                               
assets,  including private  equities and  other conservative  and                                                               
traditional assets in 1982, that  it widened the gap or potential                                                               
gap between how the market is  doing, the value of the fund, what                                                               
S&I [Savings & Interest] is, and the size of the PFD.                                                                           
MS. RODELL answered that is a fair assessment                                                                                   
11:42:33 AM                                                                                                                   
REPRESENTATIVE WOOL  said she previously mentioned  rent and real                                                               
estate. He asked for further  clarification if that rent would be                                                               
a realized gain,  since she had previously  mentioned rent coming                                                               
in  during the  80s was  cash deposited  to the  ERA. He  further                                                               
asked if  rent typically would  be used to  pay off the  loan. He                                                               
wondered if the property would be  devalued or if the rent coming                                                               
in would still be a cash gain.                                                                                                  
MS. RODELL  related a  scenario, if  she had  a real  estate mall                                                               
valued at $10  million, and collected $1,000 in rent,  net of all                                                               
the  expenses   for  mall  operations,   that  $1,000   would  be                                                               
considered income deposited  to the ERA. At the end  of the year,                                                               
she receives  an annual appraisal  and the mall is  now appraised                                                               
at $11 million. According to  GAAP [Generally Accepted Accounting                                                               
Principles], the  $1 million increase  is an unrealized  gain and                                                               
is income.  However, since she cannot  pay anything on it,  it is                                                               
allocated to the principal and the  ERA pro rata as an unrealized                                                               
gain. If  she kept  collecting rent  and sells  the mall  for $11                                                               
million, the  cost basis  was $10  million so  the $1  million in                                                               
gain becomes realized gain in its entirety in the ERA.                                                                          
REPRESENTATIVE WOOL  said the owner  is always going to  get rent                                                               
on the property even if it not a  gain. He was unsure if the rent                                                               
automatically would go into ?.                                                                                                  
MS.  RODELL  interjected  that regular  cash  flow  dividends  on                                                               
stocks  results in  $1.2  million per  year  in regularized  cash                                                               
11:45:08 AM                                                                                                                   
MS. RODELL turned to slide 31, "POMV AS 37.13.140(b)."                                                                          
          The  Board  of  Trustees has  long  supported  the                                                                    
          percent of market  value (POMV) concept, including                                                                    
          a  constitutional amendment  that would  ensure no                                                                    
          more than a sustainable  amount was taken from the                                                                    
          annual earnings of the Permanent Fund.                                                                                
             • Resolutions 18-04, 04-09, 03-05 and 00-13.                                                                       
          This  methodology is  designed to  create a  known                                                                    
          and manageable withdrawal  structure from the Fund                                                                    
          to provide  benefits for  both current  and future                                                                    
          generations of Alaskans.                                                                                              
          In  2018,  the  POMV   structure  was  created  in                                                                    
          statute (SB  26, CH16 SLA  18)   it allows  for an                                                                    
          annual draw from the Fund  of 5.25% (stepping down                                                                    
          to 5% in  FY22) based on the  average market value                                                                    
          of the  Fund for the  first five of  the preceding                                                                    
          six fiscal years.                                                                                                     
             • This draw is subject to annual appropriation                                                                     
               by the Legislature and can be used for any                                                                       
               state   government    service   or   program,                                                                    
               including the dividend program.                                                                                  
             • The POMV draw for FY19 was $2.7 billion and                                                                      
               for FY20 is $2.9 billion. It is estimated to                                                                     
               be $3.1 billion for FY21.                                                                                        
MS.  RODELL  said   that  in  2018  the   legislature  passed  AS                                                               
11:45:29 AM                                                                                                                   
SENATOR  HUGHES  asked  if  the  $2 billion  she  said  comes  in                                                               
annually is not affected by the market since it is from rentals                                                                 
MS.  RODELL  responded that  the  PFC  would reinvest  that  cash                                                               
rather than  sitting on it.  It is  used for new  investments, to                                                               
pay for operating  expenses, or to transfer to the  state for the                                                               
draws. She said that it can be affected by the market.                                                                          
SENATOR HUGHES clarified that the  $2 billion coming in is pretty                                                               
MS. RODELL agreed it was pretty reliable.                                                                                       
11:46:18 AM                                                                                                                   
REPRESENTATIVE  WOOL clarified  that it  is $1.2  billion not  $2                                                               
MS. RODELL agreed that was correct.                                                                                             
CO-CHAIR JOHNSTON  related her understanding that  permanent fund                                                               
dividends can be affected by the market.                                                                                        
MS. RODELL agreed  they can be. She explained that  the figure is                                                               
between $1.2  and $1.4  billion, that interest  rates go  up over                                                               
time and  the market rises, but  it is a pretty  regularized cash                                                               
SENATOR HUGHES asked for further  clarification on the amount for                                                               
rentals. She asked whether that was $2 billion.                                                                                 
MS.  RODELL said  that the  figure was  $1.2 billion.  In further                                                               
response  to Senator  Hughes, she  said  she was  unsure of  what                                                               
Senator von Imhof had mentioned.                                                                                                
11:47:30 AM                                                                                                                   
MS.  RODELL  reviewed  slide  31.  She said  that  the  Board  of                                                               
Trustees  has  supported  the  percent  of  market  value  (POMV)                                                               
concept  since  2003 when  the  board  passed  its first  set  of                                                               
resolutions. In fact,  the board had a resolution  dating back to                                                               
2000 related to  POMV. The board is very  supportive because this                                                               
methodology  is  designed  to   create  a  known  and  manageable                                                               
withdrawal structure from  the fund to provide  benefits for both                                                               
current and future generations of Alaskans.                                                                                     
She said that in 2018, the  POMV structure was created in statute                                                               
that allows  for an annual  draw from  the fund of  5.25 percent,                                                               
stepping  down to  5  percent  in FY2022,  based  on the  average                                                               
market value of the fund for  the first five of the preceding six                                                               
fiscal years. There is a lag  in the calculation and a known draw                                                               
amount prior  to the appropriation of  this amount and it  is not                                                               
an estimated amount that is to be included in a budget.                                                                         
MS. RODELL said  that in FY2019 the amount was  $2.7 million, for                                                               
FY2020 it is $2.9 million, and  the PFC is currently estimating a                                                               
$3.1 billion draw for FY2021.                                                                                                   
11:48:43 AM                                                                                                                   
REPRESENTATIVE  MERRICK  referred  to  the  5.25  percent  and  5                                                               
percent POMV,  based on  market value for  five of  the preceding                                                               
fiscal years.  She asked  whether there would  be any  benefit to                                                               
reducing the five years to three years to reduce the lag.                                                                       
MS. RODELL answered  that the reason for the  longer timeframe is                                                               
to smooth  out variations in  the market value. If  the timeframe                                                               
is  shortened  it  could  create more  volatility  in  that  time                                                               
period. She  referred to the  chart on  slide 30, for  net income                                                               
and return,  to the  three years  from 2009  to 2011,  versus the                                                               
five years between 2009 and 2013,  the loss would have had a much                                                               
bigger  impact on  that  draw in  three years,  but  it tends  to                                                               
smooth out with  a five year period. She said  it would result in                                                               
much more volatility in the draws by shortening the time period.                                                                
11:50:18 AM                                                                                                                   
MS. RODELL  reviewed the  chart on  slide 32,  "Illustrative POMV                                                               
Calculation & Distribution" [not shown here].                                                                                   
MS. RODELL  said the PFD  did a look  back to illustrate  the two                                                               
different calculations since they  are based on different things.                                                               
One is  based on the [percent  of] market value and  the other is                                                               
based on earnings  [or net income]. She wondered  what that would                                                               
look like  in previous years.  She pointed  out that in  2009 the                                                               
permanent fund  dividend transfer under the  earnings calculation                                                               
and time  period caused  the low dividend.  She said  members may                                                               
recall  an $800  and  $900  PFD in  2012  and 2013,  respectively                                                               
reflected the reduced earnings in  2009. However, the lag time in                                                               
the POMV creates  a smoother and steadier increase  over the time                                                               
period, she said.                                                                                                               
11:51:34 AM                                                                                                                   
MS. RODELL reviewed slide 33, "POMV Draws."                                                                                     
              Fund        Nominal POMV          Effective                                                                       
             Value                             POMV                                                                           
 FY           $64.9B      5.25 percent          4.20 percent                                                                  
 FY           $66.1       5.25 percent          4.44 percent                                                                  
 FY           $67.6       5.25 percent          4.57 percent                                                                  
     POMV is calculated on the average market value of the                                                                      
      Fund for the first five of the preceding six fiscal                                                                       
     Effective value is based on the projected fiscal year                                                                      
     six Fund value at the time of the draw.                                                                                    
MS. RODELL  said looking forward,  the nominal POMV draw  of 5.25                                                               
percent  is  an effective  draw  of  4.20  percent, but  it  will                                                               
increase  over time  due  to  the slower  increase  of the  total                                                               
permanent fund  value. She said that  if fund values are  flat or                                                               
declining,  the  effective percent  of  market  draw of  that  is                                                               
closer to  the actual nominal  POMV draw,  or it could  exceed in                                                               
some years.                                                                                                                     
11:52:21 AM                                                                                                                   
REPRESENTATIVE WOOL  related his  understanding that the  POMV is                                                               
calculated on the first five of the preceding six fiscal years.                                                                 
MS. RODELL  referred to  the chart  on slide  [32], and  said the                                                               
POMV calculation  in 2015,  would be based  on 2013,  2012, 2011,                                                               
2010,  and 2009.  She clarified  that in  FY2021 amount,  the PFC                                                               
will close  out FY2019, and will  know the fund value  by the end                                                               
of the  year. The  corporation will  consider fiscal  years 2019,                                                               
2018, 2017,  2016, 2015  and calculate  the amount  available for                                                               
FY2021.  When the  legislature convenes  in January,  legislators                                                               
will know  exactly how  much is available.  The earnings  are for                                                               
five years  so the fifth  year is  an estimated amount  since the                                                               
final  year  is  not  available at  the  time  the  appropriation                                                               
happens for a dividend transfer.                                                                                                
REPRESENTATIVE  WOOL   asked  whether  the  POMV   is  calculated                                                               
differently than  the earnings.  He asked whether  earnings could                                                               
also be calculated in that way by using a sixth gap year.                                                                       
MS. RODELL explained that the  year gap creates certainty for the                                                               
PFC.  If the  state did  not need  cash from  the permanent  fund                                                               
until  the last  quarter of  the fiscal  year, arguably  it would                                                               
provide  a couple  of  years  to plan  and  allow investing  more                                                               
fully.  But  with the  earnings  you  don't  know, and  it  would                                                               
require a statutory  change to remedy it, she said.  In 2016, the                                                               
legislature estimated the amount to be transferred.                                                                             
11:55:23 AM                                                                                                                   
MS. RODELL turned to slide 34, "Earnings Reserve Account."                                                                      
     The ERA is established under AS 37.13.145(a) as an                                                                         
     account to hold the net realized earnings from the                                                                         
     Permanent Fund's investment portfolio.                                                                                     
          This  includes   monthly  income  such   as  stock                                                                    
          dividends,  interest  from   bond  holdings,  real                                                                    
          estate   rental   fees,   as  well   as   realized                                                                    
          gains/losses  from  investments   that  have  been                                                                    
     Monthly financial statements posted on APFC's website                                                                      
      provide information as to the value of the Fund and                                                                       
     the ERA at the end of each month.                                                                                          
          As of  May 31, 2019,  the value of the  ERA totals                                                                    
          $19.0  billion.  This  includes $17.0  billion  of                                                                    
          accumulated  realized   earnings  of   which  $3.9                                                                    
          billion      is      recognized      as      being                                                                    
          committed/appropriated to  the FY20 POMV  draw and                                                                    
          to  Inflation Proofing  the  Principal. There  are                                                                    
          also $2.0  billion in unrealized  gains attributed                                                                    
          to the  ERA's pro-rata  share of  Fund investments                                                                    
          that have not been sold.                                                                                              
     On  June 30,  at  the  end of  each  fiscal year,  Fund                                                                    
     values are  "trued up" and  closed in  conjunction with                                                                    
     the  completion  of  an annual,  independent  financial                                                                    
     The ERA does not have its own investment mandate.                                                                          
     The ERA is subject to legislative appropriation.                                                                           
MS. RODELL sad  the ERA was established to hold  the net realized                                                               
earnings from  the permanent  fund's investment  portfolio, which                                                               
includes monthly  income. It is  posted every month  as unaudited                                                               
monthly financial statements. This gives  a sense of how both the                                                               
principal and ERA  are doing. She reviewed the figures  as of May                                                               
31, 2019, as reported on the slide.                                                                                             
She  emphasized that  the ERA  does not  have its  own investment                                                               
mandate or set  of trust principles that it has  deemed the board                                                               
to consider when investing the  ERA. It is subject to legislative                                                               
11:56:52 AM                                                                                                                   
MS.  RODELL reviewed  slide 35,  "Use of  Fund Earnings  from ERA                                                               
Since Inception."                                                                                                               
     Paid out of ERA = $30.8 B                                                                                                  
     • Dividend Transfers = $24.4B                                                                                              
         • POMV (FY19-20) & GF Appropriations = $6.1B                                                                           
         • Alaska Capital Income Transfers = $367.9 m                                                                           
     • Transfers from ERA to Principal = $21.4 B                                                                                
          • Inflation Proofing                                                                                                  
          • Special Appropriations                                                                                              
     • Unspent Realized Earnings in ERA = $13.7 B                                                                               
MS. RODELL  said the capital  income transfers of  $367.9 million                                                               
is money associated with State v. Amerada Hess.                                                                                 
She then reviewed the chart on the right.                                                                                       
Total $66.1 billion                                                                                                             
                      Transfers to                                                                                              
                      Principal- Saved                                                                                          
 Paid out to          for Future            Unspent Realized                                                                    
 current              Generations           Earnings                                                                          
 Earnings Spent $30.8 Billion                                                                                                   
 Earnings Saved 35.8 Billion                                                                                                  
11:57:48 AM                                                                                                                   
REPRESENTATIVE WOOL asked for the  definition of unspent realized                                                               
earnings  since he  assumed  all of  the funds  in  the ERA  were                                                               
MS. RODELL answered that the  balance of $13.7 billion recognizes                                                               
these transfers that  are expected to happen,  so the legislature                                                               
has spent portions of it, the  POMV. It also does not include the                                                               
unrealized earnings, only the realized earnings.                                                                                
11:58:51 AM                                                                                                                   
MS. RODELL reviewed slide 36, "Annual Use of ERA."                                                                              
      • POMV rules-based structure for Fund withdrawals                                                                         
         maintains the long term sustainability of the                                                                          
      • Inflation Proofing AS 37.13.145(c) protects the                                                                         
          future value of the Principal.                                                                                        
        • APFC's operations and investment management of                                                                        
          the Fund's assets are supported by the ERA.                                                                           
      • Agencies working on the collection of royalties                                                                         
          also receive appropriations from the ERA.                                                                             
 Operating Budget                    FY 2019          FY 2020                                                                 
 Percent of Market Value -      2,722,600,000    2,933,084,100                                                                
 Inflation Proofing the          942,000,000       943,000,000                                                                
 APFC Operations                  18,074,600        17,800,400                                                                
 APFC Investment Management      150,498,700       155,795,000                                                                
 Department of Law                 2,619,100         2,617,700                                                                
 Department of Natural             6,044,800         6,132,600                                                                
 Department of Revenue                94,500           97,900                                                                 
She pointed out  that the investment management fees  are tied to                                                               
the  performance  of  the  fund,   so  the  corporation  does  an                                                               
expectation  of   fund  growth   in  calculating  the   class  IV                                                               
management  investment fees.  The corporation  also pays  fees to                                                               
the  departments  of  Law, Natural  Resources,  and  Revenue  for                                                               
services,  mostly for  collection  of royalty  on  behalf of  the                                                               
11:59:47 AM                                                                                                                   
REPRESENTATIVE  WOOL  related  his understanding  that  the  POMV                                                               
model would only  take a set percentage every  year and inflation                                                               
proofing   was  not   necessary.  He   recalled  the   investment                                                               
management fees  were $350 million,  but these figures  are about                                                               
half that  amount. He  asked if these  figures were  for in-house                                                               
investment management fees.                                                                                                     
12:00:08 PM                                                                                                                   
MS. RODELL said  the $350 million also referred to  their net fee                                                               
arrangements. For example, property  managers receive a fee prior                                                               
to  remitting  rentals.  The  $155  million  refers  to  the  PFC                                                               
actually writing a check and  they need an appropriation to write                                                               
the check. Many  of the external public equity  managers are paid                                                               
in  this manner  for  gross  performance. In  terms  of POMV  and                                                               
inflation-proofing, she  said so long  as there are  two accounts                                                               
exist and  the principal account  does not get any  benefit other                                                               
than through  appropriation from  the investments that  it makes,                                                               
it will  not keep pace with  inflation. This is because  there is                                                               
no way  for the  principal account to  capture that  benefit, she                                                               
said. The corporation still  needs inflation-proofing, even under                                                               
the  statutory  POMV,  in  order to  ensure  that  the  principal                                                               
maintains its purchasing power for future generations.                                                                          
12:01:33 PM                                                                                                                   
CO-CHAIR JOHNSTON  related her understanding that  the investment                                                               
management fees  are negotiated fees for  outside management. She                                                               
asked  whether the  fund  has control  on them  as  they go  from                                                               
FY2019  to FY2020,  since  this represents  an  estimate of  $5.3                                                               
MS. RODELL agreed the $5.3 million  is an estimate. She said that                                                               
in some years, such as in  2017, the PFC requested a supplemental                                                               
appropriation because the market was  really booming, and the PFC                                                               
needed  to be  certain it  had enough  authority to  expend these                                                               
CO-CHAIR  JOHNSTON  asked  whether  the   PFC  would  ask  for  a                                                               
supplemental appropriation  if the amount  in the budget  for the                                                               
next fiscal year does not contain the PFC's estimated amount.                                                                   
MS. RODELL answered yes.                                                                                                        
12:02:58 PM                                                                                                                   
REPRESENTATIVE KREISS-TOMKINS referred [to  slide 36] to the APFC                                                               
Operations of $17,800,400 and asked  what percentage of assets in                                                               
value are managed internally versus externally.                                                                                 
MS.  RODELL answered  that approximately  40 percent  are managed                                                               
internally, and 60 percent are managed externally.                                                                              
REPRESENTATIVE    KREISS-TOMKINS   estimated    the   ratio    is                                                               
approximately 90/10  or 85/15 in  terms of cost of  management of                                                               
corporate  investment assets.  He asked  the reason  why external                                                               
portfolio  management   is  proportionately  more   expensive  as                                                               
compared to internal management.                                                                                                
MS. RODELL  responded that  it is important  to recognize  all of                                                               
the resources an external manager  brings to bear on managing the                                                               
portfolio. She  said that the corporation  expects its investment                                                               
managers to  have expertise  and to  understand the  markets. For                                                               
example,  if the  PFC has  an investment  in an  emerging market,                                                               
such as in  China, the public equity managers must  be experts on                                                               
the  Chinese  stock  market.  That   expertise  has  an  expense,                                                               
including the  overhead, data, and  technology necessary  to stay                                                               
on   top  of   the   market,  so   it   requires  investment   in                                                               
infrastructure.   The  external   managers'  basic   compensation                                                               
structure is commensurate with the  expertise being provided, she                                                               
12:05:02 PM                                                                                                                   
REPRESENTATIVE  WOOL  said  outside  investment  managers  handle                                                               
approximately  60 percent  of the  assets. He  asked for  further                                                               
clarification  on the  percent of  return  attributed to  outside                                                               
managers and  whether they bring in  more than 60 percent  of the                                                               
MS.  RODELL answered  that  she did  not wish  to  over or  under                                                               
characterize one  group. She  offered to  research it  and report                                                               
back to the committee.                                                                                                          
12:05:46 PM                                                                                                                   
MS.  RODELL turned  to the  pie chart  on slide  37, "FY  20 Fund                                                               
Appropriations  HB 39  Language."  She said  that  when she  left                                                               
Juneau  this  morning  [prior to  Governor  Dunleavy's  operating                                                               
budget  vetoes], the  FY2020 appropriation  from the  ERA to  the                                                               
general fund  was $2.9 billion  based on the POMV.  An additional                                                               
$27  million was  directed to  the  Capital Income  Fund for  the                                                               
(Amerada  HESS)   portion,  with   $943  million   for  inflation                                                               
proofing.  She related  her understanding  that the  $9.4 billion                                                               
special  appropriation post-veto  amount is  now $5  billion. She                                                               
said that the  appropriation designated to the  principal to meet                                                               
the constitutional mandate for royalties  was $329.2 million with                                                               
$251 million for prepayment for statutory royalties.                                                                            
MS. RODELL  reminded members that  by statute, 25 percent  of the                                                               
royalties from  leases entered into after  1979 are to go  to the                                                               
principal of  the fund. However,  that has not  been appropriated                                                               
in the last  few years. It has been capped  at the constitutional                                                               
requirement of  25 percent. This  year's operating budget  had an                                                               
effort  to restore  this difference  by depositing  an additional                                                               
$251 million into the principal.                                                                                                
MS. RODELL said that this allows the PFC to use best practices.                                                                 
12:07:28 PM                                                                                                                   
MS. RODELL turned to slide 38, "The Fund: Alaska's                                                                              
Renewable Resource."                                                                                                            
     Board of Trustees Resolutions 18-01 and 18-04                                                                              
     Affirm the Importance of a Rules Based System                                                                              
       Structure and Predictability                                                                                             
       Ability to Plan                                                                                                          
       Investment Management Best Practice.                                                                                     
     The Math                                                                                                                   
       More Drawn = Less Available for Future Expenditures                                                                      
     and Generation of Investment Income.                                                                                       
       Spend Today or Invest for Tomorrow.                                                                                      
She emphasized  the importance  of the  POMV and  the rules-based                                                               
system  since  it  provides   structure  and  predictability,  an                                                               
ability to  plan, and  allows the  corporation to  use investment                                                               
management  best practices.  She said,  "It's quite  simple. It's                                                               
not magic."                                                                                                                     
12:08:11 PM                                                                                                                   
REPRESENTATIVE KREISS-TOMKINS  referred to slide 23.  He said the                                                               
Alaska  Permanent Fund  Corporation  is one  of  the best  things                                                               
Alaska has  going for it right  now and it's important  to set it                                                               
up for success  in the future. He expressed  appreciation for Ms.                                                               
Rodell's work and the corporation employees.                                                                                    
12:08:43 PM                                                                                                                   
REPRESENTATIVE WOOL  thanked Ms. Rodell for  the presentation. He                                                               
said there  is a lot  of talk about  a $3,000 PFD,  concern about                                                               
overdrawing  the POMV,  and if  it occurred  once or  in multiple                                                               
years. He  referred to the  statutory PFD. He asked  whether this                                                               
would mean  the ERA will  be depleted.  He surmised that  the PFC                                                               
has  modeled  this. He  wondered  if  saying the  permanent  fund                                                               
dividend is not sustainable means that the ERA gets drawn down.                                                                 
MS.  RODELL said  what's important  is  to recognize  there is  a                                                               
limit to  how much can  be spent. The  PFC was encouraged  by the                                                               
POMV  because  it  recognizes  that  limits  were  necessary  and                                                               
manageable. It  created a rule  that the  PFC could use  as long-                                                               
term investors  and the legislature  can use as it  looks towards                                                               
revenue  sources for  many  different types  of  things. How  the                                                               
legislature wants to  use that amount is the reason  the group is                                                               
here today,  and it is a  really challenging debate. The  PFC has                                                               
talked at length  about the 5.25 percent versus  stepping down to                                                               
5  percent being  reasonable.  She said  the  PFC would  strongly                                                               
encourage everyone  to maintain those requirements.  However, how                                                               
the legislature spends  $2.9 billion or $3 billion is  the job of                                                               
the legislature and  not the corporation, she  said. Further, the                                                               
corporation believes that the 5.25  percent of POMV stepping down                                                               
to 5  percent was a reasonable  set of rules that  everyone could                                                               
live with,  which is why it  is so important to  maintain it, she                                                               
12:12:08 PM                                                                                                                   
CO-CHAIR JOHNSTON made announcements before the break for lunch.                                                                
12:12:50 PM                                                                                                                   
CO-CHAIR JOHNSTON recessed the meeting.                                                                                         
^Fiscal Models                                                                                                                  
                         Fiscal Models                                                                                      
12:59:08 PM                                                                                                                   
CO-CHAIR JOHNSTON reconvened the  meeting. She announced that Mr.                                                               
Teal  will  provide  the  working  group  members  with  modeling                                                               
scenarios for the permanent fund dividend (PFD).                                                                                
12:59:33 PM                                                                                                                   
DAVID  TEAL, Director,  Legislative Fiscal  Analyst, Division  of                                                               
Finance,  Alaska State  Legislature, Juneau,  said the  Permanent                                                               
Fund   Working  Group   asked  him   to  present   the  long-term                                                               
projections for  three different scenarios that  were assigned to                                                               
the working group teams.                                                                                                        
MR. TEAL  explained that Scenario  A is the  "statutory dividend"                                                               
that happens  to be $3,000 this  year, Scenario B is  a repeat of                                                               
2018  for  a $1,600  dividend,  and  Scenario  C is  a  "dividend                                                               
without deficit"  that simply matches  the available  revenue. He                                                               
said he will  start with the FY2020 fiscal situation  and how the                                                               
cost of dividends is computed.                                                                                                  
He  directed  attention  to  slide   2,  the  6/11/19  Conference                                                               
Committee  calculations  for  a  PFD that  maintains  a  balanced                                                               
budget.  It shows  the traditional  revenue, primarily  from oil,                                                               
from the  Department of  Revenue (DOR)  projection for  price and                                                               
production  forecasts. That  amount is  $2.304 billion.  He noted                                                               
that underneath the revenue forecast  is the percentage of market                                                               
value (POMV) payout,  which is $2.933 billion.  The total revenue                                                               
projected in FY2020 is approximately $5.2 billion.                                                                              
He  explained  that  the next  calculation  is  the  unrestricted                                                               
general   fund    (UGF)   appropriations   that    is   operating                                                               
appropriations  from  the   "conference  committee  budget."  For                                                               
"capital,"  the   capital  budget   was  funded   primarily  with                                                               
constitutional  budget  reserve  (CBR) funds,  which  failed,  so                                                               
there is  very little  capital budget in  the reserve  funds. The                                                               
"capital"  amount  noted in  the  analysis  is primarily  "mental                                                               
health"  with some  transfers. He  said the  "total spending"  is                                                               
approximately $4.4 billion, leaving a surplus of $800 million.                                                                  
1:02:21 PM                                                                                                                    
REPRESENTATIVE  WOOL asked,  if  the  PFD was  funded  in a  more                                                               
traditional way through general funds,  could the $4.4 billion go                                                               
up another $170 million to $200 million.                                                                                        
MR.  TEAL replied  that if  $200  million was  added, the  amount                                                               
should  cover both  the fiscal  notes that  were funded  from the                                                               
Power Cost  Equalization (PCE), a  little more than  $30 million,                                                               
and then $170 million with  the capital projects that were funded                                                               
with the  CBR. Add  those to  the general  funds and  the surplus                                                               
drops to $600 million.                                                                                                          
He explained  that a  surplus of  $800 million can  pay a  PFD of                                                               
$1,178 per  person. With an  assumed budget surplus,  PFDs larger                                                               
than  the  affordable  $1,178  will  require  the  budget  to  be                                                               
balanced  with  cuts,  new  revenue,  or  by  taking  money  from                                                               
reserves. Increasing the  budget surplus by $100  million to $900                                                               
million will result  in a $1,334 PFD. A $1,600  PFD will need new                                                               
revenue, cuts,  or reserves totaling $270  million. Similarly, to                                                               
pay the statutory  PFD of $3,000, $1.1 billion  would be required                                                               
from reserves, budget reduction, or increased revenue.                                                                          
MR. TEAL explained that the remainder  of the chart on slide 2 is                                                               
a POMV split where the model  computation shows how to get to the                                                               
dividend  with cost  calculations. The  model simply  repeats the                                                               
computations for several years into  the future. The computations                                                               
are not complicated to forecast with various options.                                                                           
He turned to slide 3,  "Scenario A: Current Dividend Statute." It                                                               
shows the full  statutory dividend model using  the Department of                                                               
Revenue (DOR) spring  forecast for price and  production. This is                                                               
about  half of  the state's  revenue.  Revenue is  the base  with                                                               
limited options for  the forecast. The DOR  forecast provides the                                                               
best numbers.  If there is  a concern  about how risky  the model                                                               
might be, then a lower price  or lower production scenario can be                                                               
1:08:22 PM                                                                                                                    
REPRESENTATIVE  WOOL  asked  if  the spring  forecast  means  the                                                               
forecast was  made in  the spring  of 2019 for  a future  time or                                                               
that the forecast has already been realized.                                                                                    
MR. TEAL  explained that DOR  biannual forecast is put  out every                                                               
spring and fall  for price, production, and revenue  for the next                                                               
10  fiscal   years.  He   noted  that   FY2019  and   FY2020  are                                                               
projections, the  numbers are not  known. He summarized  that the                                                               
spring forecast  is a  projection of  the revenue  through FY2028                                                               
based on DOR's forecast.                                                                                                        
SENATOR  HUGHES  directed attention  to  the  assumptions in  the                                                               
middle column  that lists a  2.25 inflation  rate as well  as the                                                               
population growth rate.  She asked if both  those assumptions are                                                               
plugged into  the growth  of the budget.  She explained  that her                                                               
understanding is factoring  in both those assumptions  was one of                                                               
the  problems  with the  constitutional  spending  cap being  too                                                               
MR. TEAL  answered yes,  and he  will address  that later  in the                                                               
He explained that  the starting point of the  operating budget is                                                               
the  Conference  Committee.  Now   that  the  vetoes  are  known,                                                               
downward adjustments will  be made to the model.  The growth rate                                                               
that Senator Hughes noted in  Scenario A is inflation. The budget                                                               
starts with  the FY2020 budget  and is  increased by the  rate of                                                               
inflation.  The  budget  is  not  increased  for  population.  As                                                               
previously  noted,   the  population  growth  rate   is  used  to                                                               
calculate dividends.                                                                                                            
He said  the rate  of inflation  is used in  a base  scenario. He                                                               
emphasized that regardless of the  scenario, the same assumptions                                                               
need to  be used. He described  the problems that occur  when all                                                               
scenarios are not run under the same set of assumptions.                                                                        
He  continued with  Scenario A  and  noted that  the model  shows                                                               
school debt at  100 percent reimbursement. The  capital budget in                                                               
Scenario   A  is   the   House  budget,   except   all  the   CBR                                                               
appropriations  are  replaced  with  unrestricted  general  funds                                                               
(UGF).  The UGF  budget  is approximately  $175  million to  $180                                                               
million, a calculation that also  grows at the rate of inflation.                                                               
The model  also assumes a  $50 million supplemental  budget which                                                               
is  done  annually  and  is  based a  bit  on  history.  He  said                                                               
supplemental  budgets are  unpredictable but  should not  be left                                                               
out because they are an annual fact of life.                                                                                    
1:13:48 PM                                                                                                                    
He pointed to the revenue variables  in Scenario A and noted that                                                               
the  calculation has  no  sales taxes,  income  taxes, and  other                                                               
taxation options. No additional revenue is in the model.                                                                        
He said the  model uses the 2.25 percent inflation  rate that the                                                               
permanent  fund and  their advisor  Callan uses.  The model  also                                                               
uses an investment return of  6.55 percent. The population growth                                                               
rate  comes  from  Department  of   Labor  statistics,  which  is                                                               
approximately 0.5 percent per year.  CBR earnings is not critical                                                               
for Scenario A; the minimum CBR  balance is just an option within                                                               
the model.  The model does  not allow unplanned  earnings reserve                                                               
account  (ERA) draws.  He said  he  would explain  why that's  so                                                               
critical in a moment.                                                                                                           
MR.  TEAL said  the  plan under  Senate  Bill 26  is  for a  5.25                                                               
percent payout to the UGF through  FY2021 with a 5 percent payout                                                               
thereafter.  He  said  the  modeling   has  nothing  to  do  with                                                               
statutory  net income  so that  variable  will not  be used.  The                                                               
calculation for the  dividend program is the existing  law. It is                                                               
not based on the POMV and there  is no cap on a minimum dividend.                                                               
The  model is  inflation proofed  and it  uses some  of the  $5.4                                                               
billion that  will be appropriated  from the earnings  reserve to                                                               
the  corpus, which  will pay  for  the inflation  proofing a  few                                                               
years in advance.                                                                                                               
1:16:18 PM                                                                                                                    
He described the  output for the dividends. The  upper right area                                                               
for  Scenario A  shows  the graph  for  dividends. The  statutory                                                               
dividend  is roughly  $3,000 that  will be  increasing under  the                                                               
assumptions  in the  model. The  bar  graph in  Scenario A  shows                                                               
whether the  permanent fund is  keeping pace with  inflation. The                                                               
first bar for  each fiscal year shows the  permanent fund growing                                                               
at the  rate of inflation.  The second  bar for each  fiscal year                                                               
shows what  the permanent fund is  doing under the model  and the                                                               
bars show  that the permanent  fund is basically  maintaining its                                                               
current  value. The  reason  why  the bar  graph  shows that  the                                                               
permanent fund does not completely  maintain its current value is                                                               
because  the payout  is too  big.  He explained,  "We've got  6.5                                                               
percent earnings and 2.25 percent  goes out, leaving 4.75 percent                                                               
available for  a payout  and we  are paying  out 5.0  percent, or                                                               
close to it. So, we don't quite keep pace with inflation."                                                                      
REPRESENTATIVE WOOL referred to the  PFD graph on the upper right                                                               
of the Scenario  A slide. He asked  why the graph shows  a dip in                                                               
the payout between FY2023 and FY2024.                                                                                           
MR. TEAL explained that it reflects  the drop in payout from 5.25                                                               
percent to  5.0 percent  beginning in FY2021.  He noted  that the                                                               
dip ultimately  recovers. He  said, "It's just  the way  the math                                                               
works when  your payout declines  from 5.25  to 5.0, and  the lag                                                               
that it takes to be seen or filled."                                                                                            
REPRESENTATIVE  WOOL summarized  his understanding  that the  PFD                                                               
shown  in the  Scenario A  graph is  based on  the statutory  net                                                               
income,  which is  independent  of POMV,  so  the decreased  draw                                                               
would keep  the permanent fund  a little bit larger.  He conceded                                                               
that  he does  not  understand  all the  factors  going into  the                                                               
1:19:06 PM                                                                                                                    
MR. TEAL explained that FY2018 was  big year with returns of some                                                               
10.7 percent. That  return factors in for 5  years. Going forward                                                               
that large  return fades away  and is ultimately replaced  with a                                                               
constant 6.5 percent return.                                                                                                    
He pointed  to the table at  the bottom right of  Scenario A that                                                               
shows the  dividend payout and  what's left for the  general fund                                                               
after the dividend  is paid each year. In FY2020  it shows $1.944                                                               
billion,  then it  goes  up  $2 billion,  and  finally near  $2.3                                                               
billion  a year.  The general  fund gets  whatever is  left after                                                               
paying  dividends. This  table also  shows what  is left  for the                                                               
general fund after the dividend is paid.                                                                                        
1:22:55 PM                                                                                                                    
MR. TEAL directed  attention to the table at the  lower left that                                                               
shows deficits up to $1.8 billion  a year. The money to fill that                                                               
gap must come from somewhere. In  this version of the graph there                                                               
are no unplanned  ERA draws so the CBR is  used up rather quickly                                                               
and will be  gone after FY2020. The bar  graph shows expenditures                                                               
and revenue  with the dark  line indicating  expenditures without                                                               
PFDs and the  dotted line with PFDs. A balanced  budget means the                                                               
bars  must reach  the  dotted  line. The  white  space means  the                                                               
scenario is not  valid because, "You are spending  money that you                                                               
don't  have."  Having white  space  means  the option  cannot  be                                                               
considered, he said.  The way the model  addresses this situation                                                               
is to first assume the white spaces from the CBR.                                                                               
This scenario  shows the  budget is filled  from the  CBR through                                                               
FY2020, but it fails in FY2021  because the balance in the CBR is                                                               
insufficient. If there  isn't any money in the CBR  and there are                                                               
no taxes, the only alternative is  to fill deficits from the ERA.                                                               
Such ad hoc or unplanned draws  are beyond the 5 percent POMV and                                                               
this causes  the ERA  balance to decline  which results  in lower                                                               
returns and declining dividends in  the future. By FY2028 the ERA                                                               
is almost depleted.                                                                                                             
MR. TEAL said the conclusion from  Scenario A is that a statutory                                                               
PFD  is unsustainable  at  projected  revenue, expenditures,  and                                                               
earnings. The $3,000  dividend works if $1.6 billion  is cut from                                                               
spending or revenue  is increased that amount.  It's not possible                                                               
to continue to pull $1.6 billion from reserves.                                                                                 
1:26:59 PM                                                                                                                    
REPRESENTATIVE  WOOL speculated  that when  the earnings  reserve                                                               
runs out in FY2028, the POMV  draw would also go down because the                                                               
overall value  of the permanent  fund is depleted. He  noted that                                                               
Ms. Rodell previously  said the permanent fund  is receiving cash                                                               
from rent  and other realized gains.  He asked if the  cash could                                                               
immediately be dispersed in PFDs if nothing else were to change.                                                                
MR. TEAL  replied that works  if earnings  are similar to  the 10                                                               
percent earned in  2018, but they are unpredictable  from year to                                                               
year.  The earnings  this year  are  closer to  3 percent,  which                                                               
means  earnings of  only $1.8  billion.  A $3  billion payout  is                                                               
unsustainable when  earnings are  just $2 billion.  Depleting the                                                               
ERA puts  the state  in the  serious position  of not  only being                                                               
unable to pay  dividends but also having to cut  the budget. This                                                               
will affect state  hiring; career employees can't  be expected to                                                               
accept jobs  when there is  risk of  layoffs every year.  He said                                                               
it's not  that the statutory  dividend formula  is unsustainable,                                                               
it's that approximately $1.6 billion  will have to be permanently                                                               
cut from the budget to make the formula sustainable.                                                                            
1:32:32 PM                                                                                                                    
CO-CHAIR  JOHNSTON asked  if the  budget  will be  static for  10                                                               
years if  $1.6 billion  is cut  from the  budget and  there isn't                                                               
MR. TEAL agreed  that cutting $1.6 billion and  paying a dividend                                                               
results in a CBR that is  relatively steady and an ERA that keeps                                                               
pace  with inflation.  He said  the Budget  Reserve chart  on the                                                               
middle left  shows whether or  not a  scenario if viable.  If the                                                               
budget reserve  looks good, the  permanent fund also  looks good.                                                               
Deficits of  $200 million  to $300 million  turn to  surpluses in                                                               
the out years.                                                                                                                  
CO-CHAIR  JOHNSTON  explained  that  the  modeling  scenario  she                                                               
requested was  suggested by Senator  Hughes. She conceded  that a                                                               
couple  of large  "ifs" would  be involved  with $1.6  billion in                                                               
cuts and inflation is always changing as well.                                                                                  
SENATOR HUGHES clarified that her  intent was to ensure that both                                                               
inflation  and population  growth  weren't used.  That's why  the                                                               
constitutional spending cap  doesn't work; only one  or the other                                                               
is needed.                                                                                                                      
CO-CHAIR JOHNSTON  said population growth  is not being  used and                                                               
she would guess that inflation is used.                                                                                         
1:36:47 PM                                                                                                                    
MR. TEAL responded as follows:                                                                                                  
     What I did  here Madam Chair is just  say $400 million,                                                                    
     and that's  approximately what was  vetoed today  - UGF                                                                    
     vetoes,  so an  easy thing  to put  in there.  We still                                                                    
     have  draws, we  still have  deficits of  $1.5 billion,                                                                    
     declining to $1.3 billion.                                                                                                 
CO-CHAIR  JOHNSTON  remarked that  with  the  current vetoes  the                                                               
state still has deficits.                                                                                                       
MR. TEAL answered yes.                                                                                                          
REPRESENTATIVE WOOL asked  if the assumption is  that the current                                                               
vetoes would be extended and that  budget would be used in future                                                               
MR. TEAL  answered yes;  there's a  $400 million  reduction every                                                               
year. The  assumption is  that vetoes are  repeatable so  that is                                                               
the new level of spending. He  added that dividends start to fall                                                               
because the ERA is being used  at more than a five-percent payout                                                               
in order to fill the deficits.                                                                                                  
SENATOR  OLSON   asked  about  the  school   debt  reimbursement.                                                               
MR.  TEAL  explained that  the  $400  million in  vetoes  already                                                               
includes a  veto of some  of the school  debt. He noted  that the                                                               
school  debt  reimbursement was  used  early  in the  session  to                                                               
create  a legislative  budget, but  the  vetoes are  done and  it                                                               
should  be left  at  100  percent. However,  there  is about  $50                                                               
million of  the $400 million that  is counted in the  school debt                                                               
reimbursement line.                                                                                                             
1:39:13 PM                                                                                                                    
SENATOR  HUGHES offered  her  understanding  that the  governor's                                                               
plan is to  continue reducing the budget next year.  She asked if                                                               
he  could show  the $400  million is  left in  this year  and the                                                               
additional unknown amount is added for next year.                                                                               
MR. TEAL replied  he could do that but it  gets more complicated.                                                               
Different  scenarios  could  be  run  but  the  purpose  of  this                                                               
modeling is  to look  at the scenarios  for the  $3,000 dividend,                                                               
the $1,600  dividend, and the  deficit. He said he  could fulfill                                                               
the  request but  the easiest  way  is to  use -1  percent for  a                                                               
growth rate  and by doing  so the  budget falls. The  model shows                                                               
that the CBR  is not recovering, but not as  bad. Deficits are at                                                               
$500 million, falling to almost zero. He continued as follows:                                                                  
     With continued cuts you can  get there, it doesn't have                                                                    
     to  happen all  in one  year. You've  got $400  million                                                                    
     this year;  you can see  that that isn't going  to give                                                                    
     you  a   sustainable  plan.  If  there   are  continued                                                                    
     reductions,  it  will,  but then  you  are  looking  at                                                                    
     budgets that are  falling and if that's  your intent it                                                                    
     works. You can see that while  you are using the ERA in                                                                    
     an unplanned way for a  while, you stop, and that means                                                                    
     things  will  look even  better  as  you extend  beyond                                                                    
MR.  TEAL said  he agreed  with Ms.  Rodell's previous  testimony                                                               
that the legislature is fooling  itself by looking beyond FY2028.                                                               
He opined  that just projecting  three years in advance  is hard.                                                               
He   emphasized  that   his  model   does  projections   and  not                                                               
predictions. He  added that projections  change when  changes are                                                               
made to assumptions.                                                                                                            
1:42:15 PM                                                                                                                    
REPRESENTATIVE WOOL commented that  the biggest variables are oil                                                               
pricing  and oil  production projections  that is  basically two-                                                               
fifths of the state's income.                                                                                                   
MR. TEAL  reiterated that the object  of the model is  not to try                                                               
to make things  look good by making  some optimistic assumptions.                                                               
The object  of the model is  to look at expectations  of what can                                                               
realistically  be achieved.  He  cited the  previous modeling  on                                                               
continued budget reductions as an  example. Some people might say                                                               
the governor  is committed to  continued budget  reductions while                                                               
others might say that the legislature  has been trying to cut the                                                               
budget for  several years  and the capital  budget cannot  be cut                                                               
further. The question is whether  or not additional cuts from the                                                               
operating budget  continue. Once  these programs  are eliminated,                                                               
departments will be  eliminated at some point.  That's fine, it's                                                               
just a matter of how much goes  to dividends and how much goes to                                                               
government, he said.                                                                                                            
MR. TEAL moved to slide  4 titled, "Scenario B: $1,600 Dividend."                                                               
He  explained  that  under  this  scenario  there  are  continued                                                               
unplanned  ERA  draws and  the  CBR  is extended  but  ultimately                                                               
vanishes.  The $1,600  dividend is  probably workable.  The model                                                               
shows the  ERA is  growing but  there are  still deficits  on the                                                               
order of $400 million to $600  million. He said a balanced budget                                                               
will probably occur  in the mid-2030s. However, having  no CBR is                                                               
risky because  there is no  easy place  to turn to  for balancing                                                               
the budget  if oil prices  plummet. The  state will have  to pull                                                               
from  the  ERA  which  leads  to  declining  real  value  of  the                                                               
permanent fund.                                                                                                                 
1:46:46 PM                                                                                                                    
REPRESENTATIVE WOOL speculated that because  the CBR has a higher                                                               
threshold,  it's  more likely  that  the  ERA would  be  depleted                                                               
MR. TEAL  replied that one option  in the model says  to not pull                                                               
from  the CBR,  but it  doesn't make  that much  difference. That                                                               
would  address the  risk  factor  but the  problem  has not  been                                                               
fixed. That just provides some time to fix the problem.                                                                         
CO-CHAIR JOHNSTON asked him to model no draws from the CBR.                                                                     
MR. TEAL replied that he would  model a CBR minimum balance of $2                                                               
billion with  draws strictly  from the  ERA. That  shows slightly                                                               
larger  deficits  than before.  He  reiterated  the warning  that                                                               
running multiple scenarios tends to get confusing.                                                                              
1:49:44 PM                                                                                                                    
REPRESENTATIVE KREISS-TOMKINS  asked how  much larger the  CBR is                                                               
getting  as  a result  of  the  governor's  budget not  having  a                                                               
reverse sweep.                                                                                                                  
MR. TEAL  answered that  he couldn't answer  because he  does not                                                               
know precisely what  is being swept. He explained  that without a                                                               
reverse sweep, the  $172 million in the  Statutory Budget Reserve                                                               
(SBR) gets swept  as well as several hundred  million in standard                                                               
sweepable things like the worker safety and hazard waste funds.                                                                 
He  said  the big  controversy  revolves  around the  Power  Cost                                                               
Equalization (PCE)  Fund and the  Education Endowment  Fund being                                                               
swept. If  the two  funds are  swept, then  the PCE  endowment is                                                               
gone as of  June 30 and there  will be no money  for PCE benefits                                                               
in  FY2020. He  noted that  the crime  bill was  funded with  PCE                                                               
funds so if the  PCE fund is swept, the crime  bill will not have                                                               
money to back it. If the  Education Endowment Fund is swept, then                                                               
there would be  no funding for things  ranging from scholarships;                                                               
grants  to the  university;  funds for  the Washington,  Wyoming,                                                               
Alaska, Montana,  and Idaho (WWAMI) School  of Medical Education;                                                               
and the Homework Help program for libraries.                                                                                    
1:53:00 PM                                                                                                                    
He reiterated  that until there  is a  list of actual  funds that                                                               
are swept, he does not know what  is going to happen. He said the                                                               
sweep  gets confusing  on something  like the  Vaccine Assessment                                                               
Fund,  a fund  established from  a bill  sponsored by  the Senate                                                               
president. That is  a $21 million fund  that essentially consists                                                               
of   voluntary  contributions   from  healthcare   and  insurance                                                               
providers. He  said if the reverse  sweep does not occur  for the                                                               
Vaccine  Assessment Fund,  chances  are low  that healthcare  and                                                               
insurance providers will continue  to contribute to that program.                                                               
He remarked that  trying to predict what is going  to happen in a                                                               
special session and  whether the governor vetoes  a reverse sweep                                                               
is beyond his capabilities.                                                                                                     
1:54:48 PM                                                                                                                    
MR.  TEAL  moved  to  slide  5  titled,  "Scenario  C:  'Surplus'                                                               
Dividend," a scenario for what  happens if dividends are based on                                                               
what  remains after  spending. In  this scenario,  dividends drop                                                               
substantially and then go back up  as a result of revenue and the                                                               
POMV payout increasing  in the future. As revenue  goes up faster                                                               
than expenditures  are climbing, then  PFDs will go back  up. The                                                               
CBR grows steadily,  meaning there are surpluses.  The ERA grows,                                                               
keeping  pace  with  inflation. There  are  no  deficits  because                                                               
whatever  is  left after  spending  on  the  budget is  spend  on                                                               
He  opined that  Scenario C  is  not as  trouble free  as it  may                                                               
appear. On  the positive  side, if PFDs  depend on  spending then                                                               
the people would  be interested in what is spent  and there would                                                               
be pressure  to move the budget  downward. Right now there  is no                                                               
income tax  and no link  between spending, the dividend,  or what                                                               
people pay for government, but there  would be a link in Scenario                                                               
C. Oil is  a very volatile commodity and  spending during surplus                                                               
years will  be chaotic without  rules governing the  dividend. He                                                               
observed that wouldn't  be any worse than  the current situation.                                                               
He suggested it  would be a lot easier to  settle the question of                                                               
the dividend  right now  if there  was a set  of rules  to follow                                                               
that  are sustainable  and affordable.  He acknowledged  that the                                                               
legislature will  spend a lot of  time and effort to  get to that                                                               
1:59:11 PM                                                                                                                    
REPRESENTATIVE  MERRICK  remarked  that spending  during  surplus                                                               
years requires  a conversation about  a spending cap.  She opined                                                               
that  government cannot  help itself  and  will spend  everything                                                               
where there is no surplus and no dividend.                                                                                      
REPRESENTATIVE KREISS-TOMKINS asked him  to comment on the spring                                                               
revenue and production forecasts for North Slope oil.                                                                           
MR.  TEAL  suggested  he  hold   his  question  for  Commissioner                                                               
Tangeman from the Department of Revenue.                                                                                        
REPRESENTATIVE  KREISS-TOMKINS  asked  if the  model  reflects  a                                                               
production forecast of 499,000 barrels per day.                                                                                 
MR.  TEAL answered  that  the projection  for  FY2020 is  530,000                                                               
barrels per  day and that  appears to  be a little  optimistic. A                                                               
decline is  projected and then  production goes up to  500,000 by                                                               
2:02:44 PM                                                                                                                    
REPRESENTATIVE WOOL noted that Mr.  Teal commented about Scenario                                                               
C that  uses the "leftover change"  after the budget for  the PFD                                                               
as well as the added  downward budgetary pressure to increase the                                                               
PFD,  something that  the legislature  is  currently feeling.  He                                                               
said his hope  is that the committee will ultimately  look at the                                                               
underlying PFD formula and figure  out a structure, not just pull                                                               
numbers out  of the hat  and the  PFD discussion continues  to be                                                               
MR. TEAL  explained that the  model will help legislators  to see                                                               
what  is sustainable  and  what is  affordable.  The model's  big                                                               
advantage is  extending things out  because deciding  whether the                                                               
state  can  afford to  pay  a  $3,000  dividend  in FY2020  is  a                                                               
different question than  the state being able to afford  to pay a                                                               
$3,000 dividend every  year. Paying a $3,000 PFD as  opposed to a                                                               
$1,600 PFD costs  an extra $1 billion. He remarked  that he would                                                               
be  willing to  pay  an  extra $1  billion  to,  "Just have  this                                                               
problem go away."                                                                                                               
REPRESENTATIVE  MERRICK said  Mr.  Teal brought  up an  important                                                               
point regarding the goal for the  working group. She asked if the                                                               
working group's  goal is to  recommend an amount for  this year's                                                               
PFD or to say what is sustainable into the future.                                                                              
2:06:41 PM                                                                                                                    
CO-CHAIR JOHNSTON suggested  that she read the  resolution of how                                                               
the  working group  was  created and  she will  find  all of  the                                                               
above.  She said  a  short-term  goal has  been  forced upon  the                                                               
working group  for the  next special  session. The  working group                                                               
will continue  to address a project  that is not easy  and cannot                                                               
be done quickly because great thought is required.                                                                              
SENATOR HUGHES  replied that  in an ideal  world knowing  what is                                                               
affordable and  sustainable would be  helpful, but there  will be                                                               
people in  and out  of legislative seats  over time.  She pointed                                                               
out that  whatever is  in statute the  legislature can  choose to                                                               
follow it or  not. She opined that the PFD  must be settled where                                                               
it cannot  be changed  on the whims  of future  legislatures. She                                                               
said she does  not see going forward without  settling the matter                                                               
in the constitution and having the  people onboard in a fair way.                                                               
She pointed out  that legislators who thought the  PFD should not                                                               
be  put   into  the   constitution,  including   herself,  should                                                               
reconsider because the dividend matter  must be settled, or it is                                                               
going to continue forever.                                                                                                      
2:11:47 PM                                                                                                                    
^Revenue Models                                                                                                                 
                         Revenue Models                                                                                     
2:12:32 PM                                                                                                                    
CO-CHAIR JOHNSTON reconvened the meeting.                                                                                       
2:22:19 PM                                                                                                                    
BRUCE  TANGEMAN,  Commissioner,   Department  of  Revenue  (DOR),                                                               
Anchorage, said  he agrees with  almost everything that  Mr. Teal                                                               
just stated. He and Mr. Teal met  two days ago to ensure that the                                                               
inputs to their  models were the same  and as a result,  a lot of                                                               
the   outputs  are   identical.  One   difference  is   that  his                                                               
presentation has  a 20-year projection  to give a better  view of                                                               
the long term. He reminded  the committee that forecasts are just                                                               
a prediction from a point in time  so a 10-year forecast is a bit                                                               
of  a  stretch. A  20-year  forecast  is  meant to  provide  some                                                               
He said  he believes he'll  be able to answer  members' lingering                                                               
questions as  he goes through  his slides. He noted  that several                                                               
members asked what  happens if oil prices spike,  what happens if                                                               
production spikes, and what happens  when there are new people in                                                               
office.  He  said  he  would  not  speak  to  the  constitutional                                                               
amendments  but he  would address  questions associated  with the                                                               
spending limit. If there was a  spending limit in place, it would                                                               
take  care of  an oil  price spike  and it  would limit  what new                                                               
legislators can and cannot do.                                                                                                  
2:25:38 PM                                                                                                                    
COMMISSIONER TANGEMAN  displayed slide 2, "A  Contributing Factor                                                               
to Why the ERA is Currently  at $19 billion:" He pointed out that                                                               
a big reason  for the $19 billion ERA relates  to the reduced PFD                                                               
distributions for  FY2017, FY2018, and FY2019.  The statutory PFD                                                               
for those three  years totaled about $4.8 billion  and the amount                                                               
paid  was about  $2.5  billion.  The $2.3  billion  that was  not                                                               
distributed remained in the ERA  and earned about $400 million in                                                               
interest. He emphasized that contrary  to what some people think,                                                               
that money  was not used  for government. He said  another factor                                                               
that  contributed to  the large  ERA balance  was that  inflation                                                               
proofing  was  not paid  out  for  2016-2018. He  estimated  that                                                               
accounted for another $2 billion.                                                                                               
2:27:28 PM                                                                                                                    
SENATOR  HUGHES said  she knows  that  in FY2017  and FY2018  the                                                               
undistributed money was not used  for government, but she thought                                                               
some was used for government in FY2019.                                                                                         
COMMISSIONER TANGEMAN said the POMV  started in FY2019 so part of                                                               
the  ERA did  go to  pay for  some government.  The undistributed                                                               
$886 million  that remained in  the ERA was  part of the  pool in                                                               
the POMV  calculation, but it did  not go to pay  for government.                                                               
He stressed that there is no direct correlation.                                                                                
SENATOR HUGHES  asked if at least  $886 million from the  ERA was                                                               
used for government.                                                                                                            
COMMISSIONER  TANGEMAN  replied  the POMV  calculation  was  $2.7                                                               
SENATOR  HUGHES responded,  "So there  would have  been at  least                                                               
$886 million that went to pay for government. Correct?"                                                                         
COMMISSIONER TANGEMAN answered yes.                                                                                             
2:29:14 PM                                                                                                                    
CO-CHAIR  JOHNSTON asked  if the  reason for  the separation  was                                                               
because of the two distinctly different statutes.                                                                               
COMMISSIONER TANGEMAN said not necessarily,  but that brings up a                                                               
good point because  there has been a lot of  discussion about the                                                               
two  competing  statutes.  He  said they're  both  law,  but  the                                                               
concept that  surrounds the POMV  discussion is different  and he                                                               
believes  incomplete. He  reminded  the committee  that the  POMV                                                               
debate centered  on how much the  draw would be and  how it would                                                               
be spent.  The first part  was a  math equation and  the decision                                                               
was  to establish  a  5.25  percent draw  that  steps  down to  5                                                               
percent over time.                                                                                                              
The second  part of the equation  is how the draw  will be split.                                                               
The administration's  perspective is  that until  the legislature                                                               
makes a  decision and the  Governor agrees, the  calculation will                                                               
be the PFD calculation that is  on the books. He said he believes                                                               
that everybody knew  that whatever the ERA draw was  going to be,                                                               
there was a hole in the equation at the time.                                                                                   
2:32:20 PM                                                                                                                    
CO-CHAIR JOHNSTON said she has  to agree with Senator Hughes that                                                               
it  could be  easily argued  that the  undistributed 2019  amount                                                               
[was used for government].                                                                                                      
2:32:33 PM                                                                                                                    
REPRESENTATIVE MERRICK asked why  the old statute wasn't repealed                                                               
when Senate Bill 26 (2018 POMV) was passed.                                                                                     
COMMISSIONER TANGEMAN  replied everyone was under  the assumption                                                               
that the  split portion  of the equation  would be  addressed the                                                               
next year.  He said he imagines  the old formula was  left on the                                                               
books  because repealing  the calculation  in statute  would have                                                               
eliminated the  function in place  to pay the dividend.  The idea                                                               
was that  it could  be repealed  once the  legislature came  to a                                                               
conclusion on the calculation going forward.                                                                                    
2:33:30 PM                                                                                                                    
REPRESENTATIVE WOOL  related his  understanding that  Senate Bill                                                               
26  was  a heavy  lift  and  the Senate  and  the  House came  to                                                               
different  conclusions on  the  split.  The conference  committee                                                               
solution was  to make  the draw  one year  and address  the split                                                               
later. To  that point, he  said there  is nothing that  says that                                                               
the formula  has to  have anything  to do  with the  POMV because                                                               
other revenue sources could be used for the PFD.                                                                                
He referenced the $2.3 billion  that was not distributed over the                                                               
last three  years and said one  could argue that the  FY2019 5.25                                                               
percent POMV  draw was used  for budgetary purposes. He  asked if                                                               
that was what he said.                                                                                                          
COMMISSIONER  TANGEMAN said  yes,  but  he did  not  want to  get                                                               
wrapped around the  axle on the amount that was  spent. The point                                                               
is  that if  the statutory  PFD formula  had been  followed those                                                               
three years,  there would be $2.3  billion less in the  ERA right                                                               
2:35:43 PM                                                                                                                    
SENATOR  HUGHES asked  him to  comment  on Representative  Wool's                                                               
statement that revenue sources other  than the POMV could be used                                                               
to  pay the  PFD. She  offered her  perspective that  the PFD  is                                                               
supposed to come from the ERA, not from other revenue sources.                                                                  
COMMISSIONER  TANGEMAN said  he  understands what  Representative                                                               
Wool is  saying, but he agrees  more with Senator Hughes  and the                                                               
way it's been done for several  decades. That is that the statute                                                               
gives the  formula and calculation  and says that the  money will                                                               
be drawn  from the ERA  and go  into the permanent  fund dividend                                                               
REPRESENTATIVE WOOL  commented that the  way it has been  done is                                                               
not working. He  said he suggested other  revenue sources because                                                               
the question of paying a dividend  remains if and when oil prices                                                               
drop to  zero. "If  there's no  oil revenue, do  we need  all the                                                               
permanent fund revenue  to keep the lights on or  is there enough                                                               
revenue to give  out a check?" He suggested  everyone think about                                                               
that  before  committing to  a  large  check in  perpetuity  when                                                               
there's no oil revenue.                                                                                                         
2:38:08 PM                                                                                                                    
COMMISSIONER TANGEMAN told members that  he waited to release his                                                               
presentation  until after  the Governor's  rollout at  11:00 this                                                               
morning  and Mr.  Teal did  not have  the opportunity  to present                                                               
that scenario.                                                                                                                  
He  continued   the  presentation  and  reviewed   the  following                                                               
? FY20 Budget (UGF Only):                                                                                                       
     ? Legislature's - $4.4B Op & $150mm Cap                                                                                    
     ? Governor's - $4.0B Op & $150mm Cap                                                                                       
          ? $4B ERA transfer  to Corpus (after Inflation Proofing                                                               
          and POMV)                                                                                                             
? Base  Revenue Forecast: Spring  2019 Revenue Sources  Book page                                                               
     ? Extrapolated beyond 2028                                                                                                 
? Production Scenarios: Fall 2018 RSB page 63                                                                                   
     ? Declining at 3% after 2028                                                                                               
? Inflation: 2.25% (from Callan)                                                                                                
     ? Agency Operations and Capital Items Grow with Inflation                                                                  
? Population Growth: 0.5% (Department of Labor)                                                                                 
? Permanent Fund Returns:                                                                                                       
     ? FY20-FY29: 6.55%                                                                                                         
     ? FY30+: 5% + inflation                                                                                                    
? CBR Balance at End of FY19: $1.77 billion (Treasury)                                                                          
? Recommended Minimum CBR Balance: $1 billion                                                                                   
COMMISSIONER TANGEMAN clarified that  for consistency he used the                                                               
legislature's  $4.4 billion  operating  budget  and $150  million                                                               
capital budget. For the Governor's  budget he used the $4 billion                                                               
operating  budget  that  was  released  at  11:00  a.m.  and  the                                                               
additional $4 billion ERA transfer to the corpus.                                                                               
He explained that the fall  forecast is the official forecast for                                                               
the next  fiscal year and the  price is updated the  next spring.                                                               
The production forecast  is made in the fall only.  He noted that                                                               
his graphs  go out 20 years  and the official forecast  is for 10                                                               
years. The  assumptions he made for  the next 10 years  include a                                                               
production decline of  3 percent. He acknowledged  that there was                                                               
no science  behind that  number; it  was that  he didn't  want to                                                               
show an overly optimistic number.                                                                                               
COMMISSIONER TANGEMAN  referenced an  article in the  paper today                                                               
and confirmed that the numbers  were coming in under forecast for                                                               
the  year. He  highlighted that  the Willow  and Pikka  oil field                                                               
plays are  included in  that forecast and  that those  plays have                                                               
made him  more optimistic about  what the forecasts will  show in                                                               
the future. That  won't be clear until December,  but he believes                                                               
those will come  out of the heavily risked  evaluation phase into                                                               
the  under development  phase. The  production forecast  for this                                                               
fall  should be  very different,  he said.  He said  the forecast                                                               
shows about a  5 percent decline over 10 years  and it wasn't too                                                               
long ago that  the declines were 6-8 percent  annually. He opined                                                               
that flat was  a comfortable place for the state  to be right now                                                               
with the other opportunities that are coming along.                                                                             
2:42:45 PM                                                                                                                    
COMMISSIONER  TANGEMAN  recounted  that   he  used  2.25  percent                                                               
inflation, 0.5 percent population  growth, 6.55 percent permanent                                                               
fund returns, and 5 percent  plus inflation for FY2030 to FY2040.                                                               
The CBR  balance at the  end of FY2019  is projected to  be $1.77                                                               
billion. He  acknowledged that  the lack  of reverse  sweeps will                                                               
affect that number  but the presentation does not  take that into                                                               
account. He said  he used the recommended minimum  CBR balance of                                                               
$1 billion,  whereas Mr. Teal  did not set  a minimum so  the CBR                                                               
disappears in some of his scenarios.                                                                                            
2:44:04 PM                                                                                                                    
COMMISSIONER  TANGEMAN displayed  the bar  graph on  slide 4  and                                                               
read  the problem  statement: "Under  the current  projections of                                                               
revenues and  investment earnings, there  is not enough  money to                                                               
fund the  size of budget passed  by the legislature and  the full                                                               
PFD  for  more than  10  years."  He  said that  statement  still                                                               
applies  despite  the  $400  million  the  Governor  cut  to  the                                                               
[operating] budget the legislature passed.                                                                                      
COMMISSIONER TANGEMAN  reviewed the  graph. The  black represents                                                               
base revenues,  the purple represents the  statutorily calculated                                                               
dividend, the  orange represents the POMV,  the yellow represents                                                               
ERA draws  in excess of  the POMV,  and the red  represents taxes                                                               
that  will be  required to  fill the  budget shortfall.  He noted                                                               
that  the budget  shortfall in  2028 that  forces taxes  was also                                                               
reflected in Mr. Teal's slides.  However, unlike the CBR, the ERA                                                               
does regenerate through annual earnings.  He calculated that 6.55                                                               
percent on $65  billion yields $4.5 billion. If the  POMV draw is                                                               
$3 billion, more is coming in  than going out, which is reflected                                                               
in subsequent years.                                                                                                            
2:46:39 PM                                                                                                                    
REPRESENTATIVE WOOL  questioned whether the ERA  would regenerate                                                               
because the additional draws would  reduce the balance upon which                                                               
to generate returns.                                                                                                            
COMMISSIONER TANGEMAN  agreed that the additional  draws from the                                                               
ERA,  which  are over  $1  billion  in  2022  and 2023,  are  not                                                               
inconsequential. However, the permanent  fund balance (light blue                                                               
background) is not declining. He  pointed to the vertical axis on                                                               
the right of the graph. He  said this is despite the 6.55 percent                                                               
forecast for 10  years, the 5 percent plus inflation  draw in the                                                               
out years,  and the annual  5 percent POMV draw.  He acknowledged                                                               
that the draws do keep the fund from reaching triple digits.                                                                    
2:48:35 PM                                                                                                                    
REPRESENTATIVE WOOL requested help interpreting the chart.                                                                      
COMMISSIONER  TANGEMAN  explained  that  the  light  blue  shaded                                                               
background  is  the  permanent  fund itself  and  the  dark  blue                                                               
tringle on the left shows the ERA going to zero [in 2028].                                                                      
REPRESENTATIVE WOOL asked the value and  type of tax that will be                                                               
needed in 2028.                                                                                                                 
COMMISSIONER TANGEMAN clarified that he  used the word "tax" in a                                                               
general  sense. It's  to show  that something  needs to  fill the                                                               
$800 million gap when the ERA drops to zero in 2028.                                                                            
2:49:58 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  referenced  the  assumptions  and                                                               
asked  if the  5 percent  plus inflation  for the  permanent fund                                                               
returns in  FY2030 and beyond  uses Callan's inflation  figure of                                                               
2.25 percent.                                                                                                                   
COMMISSIONER TANGEMAN confirmed that was correct.                                                                               
REPRESENTATIVE KREISS-TOMKINS  said he calculated a  7.25 percent                                                               
return  on a  $70 billion  fund for  FY2030 and  beyond and  that                                                               
assumption equates to  $0.5 billion in extra  earnings each year.                                                               
He  asked  the  commissioner  to  speak  to  the  basis  for  the                                                               
assumption that  returns would  increase 0.5  percent in  the out                                                               
COMMISSIONER TANGEMAN responded  that the permanent fund  is in a                                                               
position to  invest for the long  term so it has  the opportunity                                                               
to  invest for  higher returns.  He said  he believes  that using                                                               
inflation  adjusted  4.3  percent  for  the  next  10  years  and                                                               
inflation adjusted  5 percent for  long returns is  realistic. He                                                               
reiterated that he  was showing the 10 years  beyond the official                                                               
forecasts and  he could have  plugged in a different  number that                                                               
would show a  different outcome. But if he stayed  with a 10 year                                                               
forecast,  he'd be  showing the  same graph  Mr. Teal  showed. "I                                                               
wanted  to stretch  out  what changes  now mean  over  a 20  year                                                               
period  potentially.  So  we  could  run it  at  4  percent  plus                                                               
inflation  or 8  percent plus  inflation and  it would  certainly                                                               
show different numbers," he said.                                                                                               
REPRESENTATIVE  KREISS-TOMKINS said  his  initial hesitation  was                                                               
the assumption that  there will be increased  returns starting in                                                               
FY2030. Second, given what is  already known about how assets are                                                               
managed, it's more  likely that returns will go  down because the                                                               
ERA is going to zero. He asked the commissioner to comment.                                                                     
COMMISSIONER TANGEMAN said returns over  the last five years have                                                               
ranged from 1 percent  to 12 percent which is a  big delta over a                                                               
relatively  short time.  That's  why it's  important  to rely  on                                                               
history and  the experts at the  permanent fund to say  what they                                                               
think is a realistic expectation.  And 6.65 percent is the number                                                               
they've projected for the next ten  years. He agreed that for the                                                               
past  30 years  the permanent  fund has  only had  to manage  for                                                               
revenue that  would be  spun off of  dividends, but  that changed                                                               
last year when  the legislature passed the POMV. A  lot of widely                                                               
ranging scenarios were  put forward in 2017 and 2018  and when he                                                               
puts  on his  permanent  fund  trustee hat  that  makes him  very                                                               
nervous. That  is why the  POMV legislation was so  important. It                                                               
narrowed  the sideboards  for potential  draws  which calmed  the                                                               
concerns of the permanent fund, Wall Street, and the state.                                                                     
COMMISSIONER  TANGEMAN said  it's not  the job  of the  permanent                                                               
fund to suggest  how to spend the money. Rather,  their job is to                                                               
work with the legislature to  establish an appropriate POMV. That                                                               
gives them comfort for investing  moving forward. When they heard                                                               
proposals to draw  $8 billion to fund a budget,  they had to stay                                                               
liquid to meet  that potential draw. Now that they  know what the                                                               
POMV looks  like, they can  draw in  those sideboards to  a great                                                               
extent as  to what the  liquidity needs will  be for the  next 12                                                               
2:57:22 PM                                                                                                                    
CO-CHAIR JOHNSTON  asked how many  years the department  looks at                                                               
in its spring and fall forecasts.                                                                                               
COMMISSIONER TANGEMAN answered 10 years.                                                                                        
CO-CHAIR JOHNSTON  asked how  many years Callan  looks at  in its                                                               
COMMISSIONER TANGEMAN  said he wasn't  sure but it's  probably 10                                                               
CO-CHAIR JOHNSTON  said she appreciates  that he wears  two hats,                                                               
that  forecasts  beyond  five   years  get  squiggly,  that  he's                                                               
included population  and inflation  in the  model, and  that he's                                                               
been honest  and said some  holes in his  model might need  to be                                                               
filled in later  years. However, she is concerned  that the model                                                               
depletes the  ERA in the early  years. She asked, as  a permanent                                                               
fund  trustee  if he  would  manage  differently  as the  ERA  is                                                               
COMMISSIONER  TANGEMAN  said  he  labeled  slide  4  the  problem                                                               
statement because it demonstrates that  it's not possible to give                                                               
a  full  dividend and  let  the  full  budget grow.  He  directed                                                               
attention to  the next slide  that illustrates the  "Surplus PFD"                                                               
Option.  It's the  legislature's budget  and the  POMV draw  then                                                               
whatever is not  needed for government is left  for dividends. He                                                               
said that is the first option.                                                                                                  
3:01:47 PM                                                                                                                    
SENATOR HUGHES  asked if the  legislature did  projections during                                                               
the years that the budget was  growing that might have shown that                                                               
a  future  legislature  would  need  to  deal  with  the  current                                                               
COMMISSIONER TANGEMAN  said he assumes  there were  forecasts but                                                               
he didn't really know because he wasn't around at the time.                                                                     
3:02:32 PM                                                                                                                    
REPRESENTATIVE WOOL asked how accurate  DOR's projections were 10                                                               
years ago in forecasting the situation today.                                                                                   
COMMISSIONER TANGEMAN  said price  and production  forecasts have                                                               
been fairly accurate for the  first two years but each subsequent                                                               
year is  less and  less accurate and  "more squiggly."  Ten years                                                               
ago some production forecasts were  in the 300s and it's actually                                                               
REPRESENTATIVE WOOL observed that predicting  the return on a $60                                                               
billion fund might be easier  than predicting oil revenues in the                                                               
next 10  or 20 years.  He described predicting total  revenue and                                                               
how it  will be dispersed  as a  guessing game regardless  of the                                                               
assumptions   that  are   made.   He  noted   that  unlike   this                                                               
presentation, Mr. Teal's presentation did not include taxes.                                                                    
COMMISSIONER  TANGEMAN responded  that  there  wasn't a  workable                                                               
spending cap when there were  spikes in prices and production was                                                               
up. The money  was spent and therefore was not  available for the                                                               
down years.  That is the importance  of a spending cap,  he said.                                                               
He noted that  there is a spending cap in  the constitution right                                                               
now  and the  proposal is  to fix  the problem  with the  formula                                                               
which is population and inflation.  Since 1982 that has exploded,                                                               
which is  another reason to  put a cap  in place. He  agreed that                                                               
forecasts are  inaccurate as  soon as they  are printed  which is                                                               
why it's important  to have sidebars so you save  in the up years                                                               
to pay for the down years.                                                                                                      
REPRESENTATIVE WOOL  said the legislature has  saved some because                                                               
they've been  using those savings  the last few years  to balance                                                               
the budget.  "The revenue wasn't  there but  we pulled it  out of                                                               
CBR savings," he said.                                                                                                          
COMMISSIONER TANGEMAN said that's true  and he believes that kept                                                               
people  from recognizing  that  Alaska was  in  a recession.  The                                                               
budget was not in line with  the revenues that were coming in and                                                               
the legislature  relied on  savings to  balance the  budget. That                                                               
works for  the short term  but that was  done several years  in a                                                               
row and the  fund dropped from $15 billion to  where it is today.                                                               
He  said  the fact  that  spending  didn't follow  revenues  down                                                               
caused a faster bleed on the CBR.                                                                                               
3:06:50 PM                                                                                                                    
SENATOR OLSON highlighted that he  was first elected in 2000 when                                                               
things  were fairly  rough and  that was  followed by  spikes and                                                               
subsequent  declines.  Mr.  Teal worked  in  Legislative  Finance                                                               
throughout that  time and  in 2006 he  warned the  Senate Finance                                                               
Committee that if  the legislature didn't get a  handle on things                                                               
it would  get away from  them. The  problem was that  the warning                                                               
fell on deaf ears because the  state was swimming in money at the                                                               
3:08:08 PM                                                                                                                    
COMMISSIONER  TANGEMAN continued  to review  slide 5.  The legend                                                               
indicates that  black is base  revenue, light blue  is principal,                                                               
dark blue  is the ERA,  and green  plus the checkered  segment is                                                               
the  POMV  draw. Those  two  and  the  black represent  the  base                                                               
budget.  The  solid  purple  is  the surplus  that  is  left  for                                                               
dividends. The checkered  segment is meant to show  the amount of                                                               
the calculated  dividend that goes  to government. It  shows that                                                               
in 2022  the dividend drops to  about $500 and then  it starts to                                                               
grow. He  reiterated that  this scenario  shows the  imbalance in                                                               
the legislature's budget.  It uses base revenue  plus whatever is                                                               
needed of the POMV to balance  the budget and the leftover is for                                                               
the dividend. In  this scenario, the principal, the  ERA, and the                                                               
CBR all go up. In 2040 it shows about $120 billion in reserves.                                                                 
3:10:25 PM                                                                                                                    
COMMISSIONER TANGEMAN  moved to  slide 6 titled,  "The Governor's                                                               
Option (Step 1): Reduce the  Budget to $4.2 billion ($400 Million                                                               
in  Vetoes)"  that  shows  what   the  Governor  introduced  this                                                               
morning.  Even  with  the  $400   million  in  vetoes  above  the                                                               
reductions  the  legislature  passed,   it  does  not  solve  the                                                               
problem. The ERA  lasts a little longer but it  is still depleted                                                               
by 2028-2029.  Dividends could  still be paid  in the  future but                                                               
the  savings in  the ERA  go away.  The POMV  draw would  rely on                                                               
annual returns.  It shows that  for the first couple  years there                                                               
will be  extra draws from  savings and the  ERA. He said  this is                                                               
illustrative but it's  just the first of a two-step  plan. Step 2                                                               
of  the  Governor's  plan  is  to bring  revenues  in  line  with                                                               
expenditures next year.                                                                                                         
3:11:48 PM                                                                                                                    
COMMISSIONER  TANGEMAN moved  to slide  7 titled  "The Governor's                                                               
Option (Step #2):  Reduce the Budget to  $3.6 billion (Governor's                                                               
Proposed Budget)."  This proposal  shows that  the ERA  starts to                                                               
stabilize, total  reserves are  over $100  billion, and  the full                                                               
PFD is  paid under the current  formula. He noted that  even with                                                               
additional  reductions to  the  FY2021  budget, additional  draws                                                               
from savings and the ERA will be required through FY2027.                                                                       
3:12:45 PM                                                                                                                    
REPRESENTATIVE KREISS-TOMKINS  asked if the additional  ERA draws                                                               
are in excess of 5 percent of the market value.                                                                                 
COMMISSIONER TANGEMAN agreed that the  draws are in excess of the                                                               
3:13:24 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  asked what  the  administration's                                                               
position  is on  draws from  the ERA  that are  in excess  of the                                                               
COMMISSIONER  TANGEMAN said  the  Governor would  have to  answer                                                               
that question. He's said to follow  the law but now there are two                                                               
laws  that  slightly  contradict  one  another.  He  offered  his                                                               
perspective that  one law has been  on the books and  working for                                                               
40  years, whereas  the law  that has  been on  the books  for 12                                                               
months won't be complete until it  addresses how the POMV will be                                                               
split. Once the  split is established, it will be  clear how much                                                               
of the  POMV will  go to the  dividend and how  much of  the POMV                                                               
will be left for government.  Under this administration that will                                                               
balance  because  this  Governor  says that  revenue  must  match                                                               
expenditures. He  acknowledged that  future governors  and future                                                               
legislatures may make different decisions.                                                                                      
3:15:09 PM                                                                                                                    
REPRESENTATIVE KREISS-TOMKINS  said it  would be helpful  to know                                                               
what  the Governor's  position is  on  drawing in  excess of  the                                                               
COMMISSIONER TANGEMAN said he'd ask  and pass the answer along to                                                               
the group.                                                                                                                      
3:15:20 PM                                                                                                                    
REPRESENTATIVE   KREISS-TOMKINS   said  the   Governor's   budget                                                               
proposal was released  under the pretense that  revenues would be                                                               
in line  with expenditures. Theoretically  that was the  one year                                                               
plan  but those  didn't align  because that  budget used  savings                                                               
from AIDEA  and other sources.  He asked why the  budget proposal                                                               
that Governor released in February did not define revenue.                                                                      
COMMISSIONER  TANGEMAN  said he  believes  it  did; the  Governor                                                               
presented a balanced budget.                                                                                                    
REPRESENTATIVE   KREISS-TOMKINS   interjected,   "Without   using                                                               
COMMISSIONER TANGEMAN said  he'd leave the details  to the Office                                                               
of  Management  and  Budget  (OMB) because  he  didn't  know  the                                                               
details. He mentioned petroleum properties.                                                                                     
REPRESENTATIVE KREISS-TOMKINS  said, "I'm sorry to  interrupt but                                                               
that's a big detail and you're the commissioner of revenue."                                                                    
COMMISSIONER  TANGEMAN  responded,  "I'm  not  the  OMB  director                                                               
though so I can only answer to  the level that I understand and I                                                               
know."   He  said   there  were   large  portion   that  required                                                               
legislative changes  such as petroleum property  taxes and AIDEA,                                                               
but  they   didn't  get  traction.  Therefore,   the  budget  the                                                               
legislature  passed  and  the portions  the  Governor  vetoed  is                                                               
significantly different  than the  budget the Governor  passed in                                                               
February.  The  Governor's  goal  to  have  revenues  align  with                                                               
expenditures hasn't  changed, which is  why the one-year  plan is                                                               
now a two-year plan.                                                                                                            
3:17:27 PM                                                                                                                    
REPRESENTATIVE WOOL  referenced the  statement that  the year-old                                                               
statute only addressed the draw  and was therefore incomplete. He                                                               
asked if the Governor would still  cut the budget $1.3 billion in                                                               
the next  two years if  the legislature follows all  the statutes                                                               
relevant  to  the  draw  and  replaces the  old  formula  with  a                                                               
sustainable  PFD formula,  all  of which  is  within the  current                                                               
revenue  stream. Or  is the  cut  only to  pay the  full PFD,  he                                                               
COMMISSIONER TANGEMAN said finishing the  second part of the POMV                                                               
is just  the revenue  part of the  equation, not  the expenditure                                                               
side. Base  revenue and the POMV  that's on the books  is a fixed                                                               
amount and if the budget isn't  reduced to that level, there will                                                               
be a gap  that can't be ignored. This  administration proposes to                                                               
address  that  gap  by reducing  expenditures  to  meet  whatever                                                               
revenue comes  in. If expenditures  aren't reduced to  that level                                                               
or  the next  governor  decides  to grow  the  budget beyond  the                                                               
available revenue, that  evil red slice (taxes)  may perhaps come                                                               
into  play, he  said. He  said the  bottom line  is does  revenue                                                               
minus expenditures balance.                                                                                                     
REPRESENTATIVE WOOL commented that a  lot of expenditure were cut                                                               
today  and the  tension is  that the  PFD formula  is sacrosanct.                                                               
That's  the   disagreement  between  some  legislators   and  the                                                               
Governor and not all legislators agree.                                                                                         
COMMISSIONER  TANGEMAN  said  some people  believe  the  dividend                                                               
should be  paid with the  surplus, whereas the  Governor believes                                                               
the  dividend should  be paid  first and  expenditures should  be                                                               
reduced to balance with revenue.                                                                                                
REPRESENTATIVE  WOOL pointed  out  that the  middle ground  would                                                               
change the formula to make the purple bar smaller.                                                                              
COMMISSIONER TANGEMAN acknowledged the point.                                                                                   
3:21:54 PM                                                                                                                    
SENATOR HUGHES  referred to an  earlier comment that the  PFD has                                                               
not been  working the last few  years and said she  believes it's                                                               
the budget  that has not been  working, and that ought  to be the                                                               
focus. Turning back to slide 7  she questioned the need to have a                                                               
robust ERA up to 2040 if  the legislature abided by the 5 percent                                                               
draw, perhaps because it was in the constitution.                                                                               
COMMISSIONER  TANGEMAN said  it's a  good point  if an  endowment                                                               
model is  followed. This  shows the  current situation,  but once                                                               
things are  balanced and the  legislature has figured out  part 2                                                               
of the  POMV question, the ERA  isn't needed if you  stick within                                                               
those parameters, he said.                                                                                                      
3:23:52 PM                                                                                                                    
CO-CHAIR  JOHNSTON  related her  understanding  that  the ERA  is                                                               
necessary to pay out the structured draw.                                                                                       
SENATOR  HUGHES highlighted  that  the Governor's  Option Step  1                                                               
shows that  the ERA is depleted  and the dividend is  still paid,                                                               
whereas  the Governor's  Option  Step  2 shows  that  the ERA  is                                                               
COMMISSIONER  TANGEMAN said  the  excess ERA  goes  away but  the                                                               
annual returns  are spinning off revenue  to pay for the  POMV in                                                               
the particular  year. The  ERA is  not building,  but commitments                                                               
are being met.                                                                                                                  
3:24:52 PM                                                                                                                    
REPRESENTATIVE  MERRICK asked  if the  administration supports  a                                                               
change to the formula if it goes to a vote of the people.                                                                       
COMMISSIONER TANGEMAN  replied the  Governor has been  very clear                                                               
that as long as  it goes to a vote of the  people, he will accept                                                               
to any change the legislature makes.                                                                                            
COMMISSIONER TANGEMAN reviewed the following conclusions:                                                                       
        • There are many ways to address the fiscal issues                                                                      
          facing the state                                                                                                      
             • Cutting the PFD is the most  regressive way                                                                      
               to solve the problem                                                                                             
COMMISSIONER  TANGEMAN clarified  that the  next two  bullets are                                                               
his  own  thoughts. The  POMV  is  a  significant change  to  the                                                               
revenue stream and  in a perfect world it  would dictate starting                                                               
over  from  a zero-based  budget.  The  question is  what  should                                                               
Alaska's  budget look  like now  that the  revenue stream  is oil                                                               
plus  something   else.  He  emphasized  that   continued  fiscal                                                               
restraint will  be critical moving forward  because production is                                                               
down and  there are no forecasts  for oil price booms.  He opined                                                               
that is  why it's critical  to correct the spending  limit that's                                                               
currently on the books.                                                                                                         
             • Alaska's budgets have been built for decades                                                                     
               on one revenue stream                                                                                            
             • We have entered a  new  period in  Alaska's                                                                      
               history and  "picking up  where we  left off"                                                                    
               by  merely  making  tweaks  to  the  existing                                                                    
               budget is not sufficient for the long term                                                                       
             • Continued fiscal restraint will be critical                                                                      
               moving forward                                                                                                   
        • The "fiscal crisis" we are trying to solve may                                                                        
          not exist                                                                                                             
             • There are a lot of good things happening on                                                                      
               the North  Slope which may help  resolve much                                                                    
               of  the   problem.  The  Legislature   &  the                                                                    
               Governor took an important  first step in the                                                                    
              right direction on the FY20 budget.                                                                               
             • We all have more  work to  do  in order  to                                                                      
               right-size  the   government  for   the  next                                                                    
               generation ["It will require more cuts."]                                                                        
        • We may be trying to solve a temporary problem                                                                         
          with a permanent solution                                                                                             
             • It is prudent  to gather  more  information                                                                      
               before making drastic changes                                                                                    
             • We are still the envy of most other states                                                                       
             • Let's keep things   in  perspective     our                                                                      
               financial reserves  will allow us to  pay the                                                                    
               full PFD while we  all make prudent decisions                                                                    
               for the future of Alaska                                                                                         
3:29:19 PM                                                                                                                    
COMMISSIONER  TANGEMAN  noted  that, as  requested,  he  provided                                                               
additional  information on  the CBR.  He also  included a  fairly                                                               
robust  synopsis of  the CBR  including the  Sub Account  and the                                                               
investment history.                                                                                                             
3:29:42 PM                                                                                                                    
CO-CHAIR  JOHNSTON  related that  she  asked  how the  investment                                                               
policy  changed when  the legislature  started taking  draws from                                                               
the CBR and how that affected the return on investments.                                                                        
COMMISSIONER TANGEMAN referred  to the chart on  slide 11 titled,                                                               
"CBR Return History." He said  the gold bars representing the Sub                                                               
Account show that account was  invested at a much more aggressive                                                               
rate than the  main account. When there was up  to $14 billion in                                                               
the CBR  the fund  could afford some  longer term  investments to                                                               
earn those returns. However, more  liquidity was necessary as the                                                               
CBR was  drawn down. The need  for more liquidity is  the primary                                                               
reason that the subaccount was zeroed out in 2015.                                                                              
3:30:55 PM                                                                                                                    
CO-CHAIR JOHNSTON  asked what the  current rate of return  is for                                                               
the CBR.                                                                                                                        
COMMISSIONER TANGEMAN answered that it's 2.38 percent.                                                                          
3:31:24 PM                                                                                                                    
REPRESENTATIVE KREISS-TOMKINS  asked if  he would  provide charts                                                               
5,  6, and  7  with  a 6.55  percent  assumption  for FY2030  and                                                               
COMMISSIONER TANGEMAN asked for  clarification that he was asking                                                               
to have the  6.55 percent assumption that's used in  the first 10                                                               
years to  be mirrored  in the  second ten  years. [Representative                                                               
Kreiss-Tomkins  said  yes  and Commissioner  Tangeman  agreed  to                                                               
provide the charts.]                                                                                                            
3:31:53 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS asked  for an  explanation of  the                                                               
Sub Account.                                                                                                                    
COMMISSIONER TANGEMAN explained that  the Sub Account was created                                                               
because the  legislature wanted  to invest a  portion of  the CBR                                                               
that would earn a higher return  than 2.38 percent. He noted that                                                               
the dates when that took place were in the handout he provided.                                                                 
REPRESENTATIVE KREISS-TOMKINS asked  how the administration plans                                                               
to invest  the cash  infusion into  the CBR  from the  sweep that                                                               
could be in the billions.                                                                                                       
COMMISSIONER  TANGEMAN  said  he  doubts the  CBR  will  grow  by                                                               
billions  because  of the  sweep,  but  he  will continue  to  be                                                               
conservative  on the  CBR  investments until  some  of the  large                                                               
decisions are made.                                                                                                             
3:34:22 PM                                                                                                                    
REPRESENTATIVE KREISS-TOMKINS questioned how  the sweep would not                                                               
be in the billions when  the power cost equalization endowment is                                                               
just short  of a billion  and that is  just one of  many accounts                                                               
that will be swept.                                                                                                             
COMMISSIONER  TANGEMAN said  he  wasn't part  of the  discussions                                                               
when the vetoes took  place and so he'll need to  catch up on the                                                               
effects of the accounts that will not be reversed.                                                                              
CO-CHAIR JOHNSTON  asked Ms. Rodell and  Commissioner Tangeman to                                                               
discuss  how  the  management  of  the ERA  will  change  if  the                                                               
structured draw isn't followed.                                                                                                 
3:36:22 PM                                                                                                                    
MS. RODELL  said the first step  is to articulate the  purpose of                                                               
the ERA.  In the  last couple  of years  the discussion  has been                                                               
that it  has turned from  being a  receptacle of earnings  of the                                                               
fund  to  a  budget  stabilization or  reserve  fund.  While  the                                                               
characterization of how  the fund is used has  changed, there has                                                               
been no  change to  the investment  mandate, she  said. Secondly,                                                               
moving $4 billion from the ERA back  to the corpus as a result of                                                               
the Governor's  vetoes will leave  about $12 billion in  the ERA.                                                               
When Senate  Bill 26  was debated  it included  discussions about                                                               
lookbacks  to decide  whether the  draws were  sustainable. There                                                               
was also  talk about  having a  regular sweep  of any  amounts in                                                               
excess over 4  years. That is somewhat in line  with the creation                                                               
of the Sub Account and Main  Account. The idea of the Sub Account                                                               
was that a  portion of the budget reserve wouldn't  be needed for                                                               
at least 5 years so it could  have a longer outlook. If there are                                                               
4 years  of POMV draws left  behind and everything else  is swept                                                               
into the corpus,  it looks more like what was  envisioned for the                                                               
CBR as well.                                                                                                                    
If that  is the  direction the legislature  and the  Governor are                                                               
going to  take the ERA, her  recommendation to the board  will be                                                               
about de-risking  by investing  on a short  to medium  term basis                                                               
for  the purpose  of  funding important  services  of the  state.                                                               
However,  before doing  that the  trustees  would like  direction                                                               
from the legislature.                                                                                                           
3:40:11 PM                                                                                                                    
CO-CHAIR  JOHNSTON  reminded  the  members  that  the  investment                                                               
profile would change from higher  risk, higher yield to something                                                               
more similar to the original fund.                                                                                              
MS.  RODELL said  she believes  so  but depending  on the  market                                                               
environment, fixed  income assets can  do very well.  Duration of                                                               
the investment also  makes a difference because you  have to time                                                               
the maturities to the expectation.                                                                                              
3:41:31 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  noted  that she  said  she  would                                                               
recommend an  adjustment in the  way the ERA is  invested because                                                               
of  the  requirements  for greater  liquidity.  That  means  less                                                               
investments which  means all the math  in all the slides  is that                                                               
much uglier. He asked if that's wrong.                                                                                          
COMMISSIONER TANGEMAN said  it's not wrong at all  and that's why                                                               
it's critical to get on the  same page. The first graph shows the                                                               
ERA will bottom out in  2028, which clearly demonstrates it's not                                                               
possible  to go  to that  well again  and again  to support  this                                                               
budget and a full dividend.                                                                                                     
3:43:12 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  highlighted   that  even  in  the                                                               
Governor's ideal  vision, there  are ERA draws  in excess  of the                                                               
POMV. He said per your  testimony that would result in management                                                               
changes, which would  mean lower investment returns.  Even Step 2                                                               
of  the Governor's  Option  shows ERA  overdraws.  He said  these                                                               
don't  reconcile  and  increasing  investment  returns  65  basis                                                               
points starting in 2030 further fails to reconcile.                                                                             
COMMISSIONER TANGEMAN  said he  inserted the  extra ten  years to                                                               
demonstrate that after  Step 2 of the Governor's  plan the budget                                                               
eventually balances.  Once things  are synced  up and  brought in                                                               
line,  it  will  be possible  to  look  at  the  long term  in  a                                                               
different light, he said.                                                                                                       
3:44:46 PM                                                                                                                    
REPRESENTATIVE KREISS-TOMKINS  said we're  talking about  a 10-20                                                               
year  outlook and  the  administration has  failed  to provide  a                                                               
truly balanced  budget. He said  it's difficult to  consider this                                                               
as a serious fiscal vision when the math doesn't work.                                                                          
COMMISSIONER TANGEMAN  said he  respectfully disagrees.  When the                                                               
Governor says  that revenues will match  expenditures, that means                                                               
there will be a balanced budget for FY2021 on December 15.                                                                      
3:46:06 PM                                                                                                                    
CO-CHAIR  JOHNSTON  advised  that  when Alaskans  voted  for  the                                                               
permanent fund  in 1976,  revenues went to  the general  fund. In                                                               
1982  after  the constitutional  challenge  of  the dividend,  50                                                               
percent of those  revenues went to the dividend. The  rest of the                                                               
revenues didn't  go into the general  fund, but a portion  of the                                                               
earnings was  reinvested, which grew  the fund  tremendously. She                                                               
described it  as a  partnership in  which one  partner reinvested                                                               
earnings  to grow  the  company  and the  other  partner took  50                                                               
percent. She said that would  change her view of the partnership.                                                               
While  it's not  part  of  the fund's  discussion,  she said  the                                                               
working  group needs  to consider  the partnership,  the original                                                               
mission, what the 1982 division was, and how the fund has grown.                                                                
3:48:34 PM                                                                                                                    
CO-CHAIR  JOHNSTON asked  Mr. Teal  to briefly  describe how  the                                                               
Governor's  vetoes affect  the  dividend and  what  he's done  by                                                               
taking  $1 billion  of the  $2.9  billion out  of the  structured                                                               
MR. TEAL said  his response would be based on  the first dividend                                                               
calculator  sheet and  the assumption  that the  general fund  is                                                               
used.  He calculated  that with  the $400  million in  vetoes the                                                               
$600 million surplus  becomes $1 billion. He said  there was also                                                               
a $1 billion  veto of the POMV payout. As  the Governor said, the                                                               
budget is  balanced and $1  billion is left  in the ERA.  He said                                                               
that money is available for the  5.25 percent payout and there is                                                               
enough for  a $1,600  dividend, but  he doubts  that is  what the                                                               
Governor meant given his claims  that he wants a $3,000 dividend.                                                               
He said  he suspects the only  solution is to use  the $1 billion                                                               
that's left in  the ERA and then draw an  extra $1 billion, which                                                               
is unstainable.                                                                                                                 
CO-CHAIR  JOHNSTON asked  if $1,600  would be  available for  the                                                               
next dividend without the additional draw.                                                                                      
MR. TEAL said that's correct.                                                                                                   
3:54:53 PM                                                                                                                    
CO-CHAIR  JOHNSTON  noted  that  about   a  week  ago  there  was                                                               
discussion that if Governor Hammond's  dividend had gone forward,                                                               
the inflation  adjusted dividend  today would be  $3,000. Senator                                                               
Bishop wanted  it on  the record  that in  1980 the  general fund                                                               
budget  was $1.74  billion. Adjusted  for  inflation that  budget                                                               
would be $5.14 billion in 2019.                                                                                                 
3:56:05 PM                                                                                                                    
SENATOR HUGHES  highlighted that part  of the reason the  PFD was                                                               
proposed was the worry that the budget was growing so quickly.                                                                  
CO-CHAIR   JOHNSTON  noted   that  Governor   Hammond's  dividend                                                               
stipulated that it would be paid as funds were available.                                                                       
3:56:47 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  said  it's worth  noting  that  a                                                               
$1,050  dividend  existed  in  the   context  of  the  durational                                                               
residency formula.  Alaskans who had  not lived in Alaska  for 21                                                               
years would receive a dividend that was less than $1,050.                                                                       
CO-CHAIR JOHNSTON shared that her dividend would have been $200.                                                                
3:57:30 PM                                                                                                                    
MR.  TEAL  said  the  50   percent  share  made  sense  when  the                                                               
assumption  was  that  the  government would  also  take  its  50                                                               
percent. But  the government  didn't do  that. He  referenced Ms.                                                               
Rodell's  presentation   that  looked  at   the  constitutionally                                                               
mandated  portion  of the  permanent  fund,  which was  some  $17                                                               
billion. He said it could be  argued that everything in excess of                                                               
the $17 billion  was royalty deposits, but it  was actually money                                                               
the government put into the fund. It was not royalty at all.                                                                    
MR. TEAL said  that if you were trying to  make the argument that                                                               
the 40-year-old formula  is valid, you might also  say you should                                                               
get 50 percent  of the earnings on all the  royalty deposits. The                                                               
original concept  of the  permanent fund was  that 25  percent or                                                               
more of mineral  royalties would go into the  fund. The situation                                                               
now  is that  only  about 30  percent of  the  permanent fund  is                                                               
royalties and the  rest was added by the legislature.  He said if                                                               
you follow  the formula for  50 percent  of earnings and  get the                                                               
$3,000  dividend and  you know  that only  30 percent  is royalty                                                               
deposits, you  could say the  dividend should be just  30 percent                                                               
of $3,000,  which is  about $900.  He said  that is  arguably the                                                               
formula that was envisioned when the formula was developed.                                                                     
4:00:15 PM                                                                                                                    
SENATOR HUGHES said the record is  very clear that the PFD was to                                                               
be paid  first. Government taking  50 percent was  not envisioned                                                               
but the record does talk  about being available when oil revenues                                                               
went down.  She said the  partnership metaphor  doesn't resonate,                                                               
because it  wasn't that  type of relationship.  She thinks  of it                                                               
like grandparents and grandchildren.  The grandparents might want                                                               
to reinvest the money for the  next generation, which is what the                                                               
state was  doing. The grandchildren  could have some now  but the                                                               
dividends would continue  in the future. She  reiterated her view                                                               
that the  PFD isn't  broken, it's the  budget that's  broken. She                                                               
said she also doesn't buy into  the concept of living within your                                                               
means in this context. If oil were  to drop to $10 per barrel, it                                                               
would  be  very difficult  for  the  state  to provide  the  most                                                               
essential services.                                                                                                             
She said  all eyes have  turned to this  PFD cookie jar,  and she                                                               
wants all eyes back on the budget  and figure out what is a right                                                               
sized  budget  in  Alaska.  She  said she  feels  as  though  the                                                               
legislature has  been throwing darts  in the  dark to get  to the                                                               
right number so  she's asked the Office of  Management and Budget                                                               
(OMB)  to tease  out  the right  size when  all  the factors  and                                                               
Alaska's  unique challenges  are  taken  into consideration.  She                                                               
said  she would  support a  full-scale  audit by  someone who  is                                                               
nonpartisan to  understand where  things could  be shored  up, or                                                               
combined  for efficiency,  and what  isn't  meeting statutory  or                                                               
constitutional  obligations.  It's  been  very  frustrating  that                                                               
we've been  going about this  all wrong,  she said. The  focus on                                                               
the PFD  has led to  a chaotic  situation in the  legislature the                                                               
last few years and it really needs  to be settled so we can focus                                                               
on the budget, she said.                                                                                                        
4:05:35 PM                                                                                                                    
REPRESENTATIVE  MERRICK asked  if there  was ever  any discussion                                                               
about dividing  the permanent  fund and  providing a  portion for                                                               
the people and a portion for government.                                                                                        
CO-CHAIR  JOHNSTON recalled  there  were  many discussions  about                                                               
doing different things with the permanent fund.                                                                                 
4:06:06 PM                                                                                                                    
REPRESENTATIVE KREISS-TOMKINS  asked the  record to  reflect that                                                               
Cliff Groh  was in  the audience. He  was legislative  staff when                                                               
the permanent fund was established and  he shared a 90 or so page                                                               
private  contemporaneous history  of  how the  sausage was  made.                                                               
That blew up  some of my assumptions, he said.  It doesn't answer                                                               
Representative  Merrick's question  but it  has rich  detail that                                                               
may be  helpful to  the working  group. He  offered to  share the                                                               
document with Mr. Groh's permission                                                                                             
4:07:13 PM                                                                                                                    
REPRESENTATIVE  WOOL said  the original  intent of  the permanent                                                               
fund is important,  but it is not the defining  issue. He said he                                                               
doesn't entirely  agree with  Senator Hughes  that the  budget is                                                               
the problem.  Perhaps spending  could be  reduced a  little less,                                                               
but per  capita and adjusted  for inflation it's not  the highest                                                               
it's ever  been. There are  efforts to  keep the budget  in check                                                               
but needs change  as the population changes.  He highlighted that                                                               
when about  100,000 Alaskans voted  to put the permanent  fund in                                                               
the constitution,  the population  and composition of  the voters                                                               
was  different than  it is  today. He  said most  people realized                                                               
that spending needed  to be controlled after the  first oil money                                                               
was spent  so quickly. On  the other hand, infrastructure  in the                                                               
state at the time needed to catch  up. He said the PFD never came                                                               
to  the people  for a  vote; it  just became  a statute  and that                                                               
worked  well up  until  3-4  years ago.  He  acknowledged that  a                                                               
spending cap is not  a bad idea. He said oil  has dropped from 90                                                               
percent  of the  state's revenue  to just  40 percent  and nobody                                                               
knows where  it's going next.  He drew a parallel  to demonstrate                                                               
the need  to change models  when it's prudent  to do so.  The oil                                                               
industry is aware  of this and they're getting  into solar, wind,                                                               
and other forms of energy. He  also noted the changes in northern                                                               
and western Alaska  where the ice is  disappearing. He emphasized                                                               
that the  consumption of hydrocarbons  may change in the  next 10                                                               
years because  the revenue structure  the state has  been relying                                                               
on is changing.                                                                                                                 
REPRESENTATIVE WOOL said  he does not support  cutting the budget                                                               
$1.3  billion to  $1.6 billion  over the  next two  years because                                                               
it's too  drastic and will  cause people  to leave the  state. He                                                               
noted that  people are already  leaving the state because  of the                                                               
cuts  to  the   university.  He  emphasized  the   need  for  the                                                               
legislature to look at revenue,  the revenue projections, the PFD                                                               
formula, and prioritize what is important to Alaskans today.                                                                    
4:11:21 PM                                                                                                                  
CO-CHAIR  JOHNSTON  thanked  everyone  for their  hard  work  and                                                               
stated that the next  meeting would be on July 8  at 9:00 a.m. in                                                               
4:12:12 PM                                                                                                                    
There  being no  further business  to come  before the  Bicameral                                                               
Permanent  Fund Working  Group, Co-Chair  Johnston adjourned  the                                                               
meeting at 4:12 p.m.                                                                                                            

Document Name Date/Time Subjects
01 - Alaska Permanent Fund Presentation for June 28, 2019, meeting.pdf JPFG 6/28/2019 10:00:00 AM
Bicameral Permanent Fund Working Group
02 - Legislative Finance Presentation to Permanent Fund Working Group, 28 June 2019.pdf JPFG 6/28/2019 10:00:00 AM
Bicameral Permanent Fund Working Group
03 - DOR Presentation to Permanent Fund Working Group, 28 June 2019.pdf JPFG 6/28/2019 10:00:00 AM
Bicameral Permanent Fund Working Group
04 - Angela Rodell response to June 28 working group questions, 2 July 2019.pdf JPFG 6/28/2019 10:00:00 AM
Bicameral Permanent Fund Working Group