Legislature(2005 - 2006)
04/22/2005 08:38 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HJR19 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 22, 2005
8:38 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Paul Seaton
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 19
Proposing amendments to the Constitution of the State of Alaska
relating to and limiting appropriations from the Alaska
permanent fund based on an averaged percent of the fund market
value.
- MOVED HJR 19 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HJR 19
SHORT TITLE: CONST. AM: PERMANENT FUND P.O.M.V.
SPONSOR(S): WAYS & MEANS
04/19/05 (H) READ THE FIRST TIME - REFERRALS
04/19/05 (H) W&M, JUD, FIN
04/22/05 (H) W&M AT 8:30 AM CAPITOL 106
WITNESS REGISTER
MICHAEL BURNS, Executive Director
Alaska Permanent Fund Corporation
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Testified in support of HJR 19.
ED MARTIN SR
Cooper Landing, Alaska
POSITION STATEMENT: Testified in opposition to HJR 19.
LAURA ACHEE, Research and Communications Liaison
Alaska Permanent Fund Corporation
Juneau, Alaska
POSITION STATEMENT: Offered information regarding the percent
of market value (POMV).
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 8:38:28 AM. Representatives
Weyhrauch, Samuels, Wilson, and Moses were present at the call
to order. Representatives Rokeberg and Gruenberg arrived as the
meeting was in progress.
HJR 19-CONST. AM: PERMANENT FUND P.O.M.V.
8:38:41 AM
CHAIR WEYHRAUCH announced that the only order of business would
be HOUSE JOINT RESOLUTION NO. 19, Proposing amendments to the
Constitution of the State of Alaska relating to and limiting
appropriations from the Alaska permanent fund based on an
averaged percent of the fund market value.
MICHAEL BURNS, Executive Director, Alaska Permanent Fund
Corporation (APFC), Department of Revenue, related that this
resolution is important to the APFC Board of Trustees because
they believe that a percent of market value (POMV) is the best
way to manage the fund. He emphasized that the trustees do not
see POMV as a fiscal plan, nor would POMV allow the legislature
greater access to the earnings in the fund. In fact, in most
years POMV would lower the amount available for appropriations
compared to the current system. The trustees believe that
implementation of POMV and the use of permanent fund earnings
for state government are two entirely separate issues. The POMV
is predictable and understandable by the people of Alaska versus
the current confusing and "archaic" distribution formula.
MR. BURNS turned to the real return formula, which is the total
return minus inflation. He related that the real return formula
is used by private and public foundations, pensions funds, and
endowments, and it's how the trustees, directors, and managers
of those organizations view their fiduciary duty and assignment.
As opposed to the real return formula, Alaska uses its own
version of return and income, which adds or subtracts any
unrealized gains or losses to the [total return] and from that
operating expenses and any appropriations are subtracted. The
aforementioned is what's called the "accounting net income."
From the accounting net income unrealized net income is
subtracted, which is the realized net income. From the realized
net income the Amerada Hess income is subtracted, and thus it
arrives at the statutory net income. The statutory net income
is the amount used in the distribution formula. He
characterized the aforementioned formula as confusing, out of
date, and unworkable.
MR. BURNS recalled that when the fund was created it was prudent
to restrict investment authority to a bond-only strategy in its
early stages. He explained that bond portfolios only generate
income in two ways which include, the interest or coupon income
that is actually received and capital gains from bonds sold at
appreciated prices. The distribution formula based upon the
aforementioned income types made sense for calculating
traditional realized net income, however, the fund's asset
allocation now incorporates investments that generate
significant unrealized gains as well as realized income. He
related that the current payout methodology and method used to
protect the principal no longer serve the fund as well as they
once did. The trustees believe that only a POMV payout limited
by the sustainable yield from the fund can provide the necessary
protection for the future, while allowing current generations
their equitable share of fund earnings, he added. Furthermore,
the trustees believe the only way to fully ensure protection of
the fund is to place this limitation in the state's
constitution. He offered that the POMV is simple because no
more than 5 percent of the average market value of the fund
averaged over the previous five-years may be appropriated from
the fund, which leaves a minimum of 95 percent of the fund
protected from spending in any given year. The POMV is not a
fiscal plan and with $50 oil the interest in and focus on a
fiscal plan may well be elsewhere. He indicated that this is
the opportune time to modernize and increase the transparency of
the fund so that it cannot only be managed in harmony with its
distribution formula but also understood by Alaskans when
difficult decisions must be made in the future. He urged the
committee to support this proposal because [the POMV]
modernizes, clarifies, and offers better protection.
8:44:19 AM
CHAIR WEYHRAUCH related that the legislature has had many
discussions regarding the POMV methodology so its workings are
fairly well understood.
8:44:47 AM
REPRESENTATIVE SAMUELS requested the aforementioned formulas,
and noted his agreement with Chair Weyhrauch regarding the
[legislature's] knowledge of the POMV.
8:45:07 AM
REPRESENTATIVE WILSON opined that the POMV seems like "the way
to go" and she requested a copy of all the testimony.
8:45:35 AM
REPRESENTATIVE GRUENBERG provided copies of a statutory POMV
proposal from a previous legislative session, which he recalled
was drafted during a special session. This statutory amendment
couldn't authorize getting into the principal of the fund, he
noted.
CHAIR WEYHRAUCH said that a statutory POMV has been discussed as
an alternative to a constitutional amendment.
REPRESENTATIVE GRUENBERG informed the committee that he has
several memos from David Teal, Legislative Fiscal Analyst,
Legislative Finance Division, on the subject.
8:48:27 AM
ED MARTIN SR. related his belief that there's absolutely no
compelling reason to change the present arrangement of earnings
payout. He urged the committee to leave the permanent fund
[earnings] alone unless it's put into the constitution as it is
currently managed. He indicated that many other Alaskan's share
his perspective. He related his understanding that
approximately 99 percent of the fund is invested outside of the
state, of which a portion is realized through the dividend. He
noted his desire for more in-state investment and urged the
legislature and permanent fund investors to analyze the direct
good it offers to citizens and the state. He concluded by
acknowledging that the [permanent fund] needs to be revamped,
although he urged the committee not to pass HJR 19.
8:54:07 AM
CHAIR WEYHRAUCH highlighted that the proposal in HJR 19 would
have go to a vote of the people, and therefore there is the
opportunity for public debate.
MR. MARTIN SR. said, "As it is written, I can almost guarantee
you that the people are not going to buy it." He suggested that
this resolution sends the wrong message to the citizens of
Alaska and violates their trust in the legislature.
8:55:28 AM
REPRESENTATIVE SAMUELS related that the POMV stabilizes the cash
flow no matter the daily market fluctuations. He then pointed
out that this resolution doesn't address how the earnings are
used, and therefore it could all be paid out in dividends. He
opined that the POMV keeps politicans' hands off the money.
8:56:44 AM
LAURA ACHEE, Research and Communications Liaison, Alaska
Permanent Fund Corporation, in response to Representative
Samuels, clarified that close to $2 billion is in the earnings
reserve.
8:56:52 AM
REPRESENTATIVE SAMUELS pointed out that currently the
legislature could appropriate that $2 billion tomorrow.
However, the POMV proposal [encompassed in HJR 19] actually
limits the amount the legislature can appropriate and stabilizes
the cash flow, which in turn benefits the dividend. He
acknowledged the political realities of the statutory POMV,
however, it doesn't address the market fluctuation problem or
erase the line between the corpus and the earnings. In fact, if
the market completely tanked, there would be no earnings to pay
out. Representative Samuels concluded by noting his support of
HJR 19.
CHAIR WEYHRAUCH closed public testimony.
8:57:44 AM
REPRESENTATIVE GRUENBERG acknowledged that under current law
there is the possibility of receiving no dividend in the event
the stock market tanks. He opined that most Alaskans understand
the aforementioned circumstances and further understand that
under the current system the principal is guaranteed, which they
appreciate.
8:59:24 AM
REPRESENTATIVE ROKEBERG moved and asked the consent of the
committee that the entire deliberations of the House Special
Committee on Ways and Means on the POMV concept of House Joint
Resolution 26 of the Twenty-Third Legislature be made part of
the record of this resolution. He characterized House Joint
Resolution 26 of the Twenty-Third Legislature as an important
historical document on this subject.
9:00:00 AM
REPRESENTATIVE GRUENBERG objected for discussion purposes, and
asked if the motion could be amended to include "all
committees."
CHAIR WEYHRAUCH proposed that the motion focus only on the House
Special Committee on Ways and Means.
REPRESENTATIVE GRUENBERG withdrew his objection.
CHAIR WEYHRAUCH, upon determining there was no further
objection, announced that the motion was adopted.
9:00:41 AM
MR. BURNS, in response to Representative Rokeberg, said that the
[Alaska Permanent Fund Corporation] uses a well-defined formula
albeit a confusing and arcane method.
REPRESENTATIVE ROKEBERG clarified his understanding that the
formula [makes assumptions about] the unrealized and realized
gains, values, and timing.
9:02:17 AM
MS. ACHEE added that the calculation is "well laid out,"
although the amount of realized earnings available could vary.
The amount of realized earnings could be artificially changed by
the action of the trustees or by direction from the legislature,
she specified.
9:02:51 AM
MR. BURNS, in response to Representative Rokeberg, related his
belief that a distribution formula based on realized income was
logical when the portfolio was 100 percent bonds. However, it
doesn't "fit" with the current management of the fund. The fund
is managed for the total return minus inflation, which gives the
real rate of return. The aforementioned is the type of
accounting upon which the distribution formula should be based
rather than the removal of "unrealized gains and loses, and the
Amerada Hess" funds because it leads to confusion from the
public, he said. He highlighted that the only two pieces of the
permanent fund in the constitution are the 25 percent that "goes
in" and the protection of the principal.
9:04:23 AM
REPRESENTATIVE ROKEBERG requested a memorandum on the formula
used to calculate the dividend.
MR. BURNS explained that there is a two-step process which
includes the dividend calculation formula and accounting
calculation used to determine what is available for the dividend
formula.
9:05:11 AM
REPRESENTATIVE ROKEBERG related he would like both the
aforementioned formulas. He related his belief that there is a
"problem" with memorializing the current statute in the
constitution. He highlighted that the statutory POMV has merit
in the sense that if the constitutional authority couldn't be
reached, it may provide a way in which the legislature can
educate the public. However, the statutory POMV is almost
valueless because it doesn't protect the downside market
situation in which there may be no funds for dividends or the
earnings reserve. He concluded by characterizing the POMV as a
simple mechanism process that's a central mechanism for a long-
range fiscal plan. The legislature has the opportunity to place
the POMV on the next general election ballot as a mechanism
concept, he added.
9:07:30 AM
REPRESENTATIVE WILSON moved to report HJR 19 out of committee
with individual recommendations and the accompanying fiscal
note. There being no objection, HJR 19 was reported from the
House Special Committee on Ways and Means.
ADJOURNMENT
9:08:19 AM
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:08 a.m.
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