Legislature(2003 - 2004)
03/29/2004 09:04 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
March 29, 2004
9:04 AM
TAPES
SFC-04 # 60, Side A
SFC 04 # 60, Side B
SFC 04 # 61, Side A
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:04 AM.
PRESENT
Senator Gary Wilken, Co-Chair
Senator Lyda Green, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Ben Stevens
Senator Donny Olson
Senator Lyman Hoffman
Also Attending: SENATOR BERT STEDMAN; BILL ROLFZEN, State Revenue
Sharing, Municipal Assistance, National Forest Receipts, Fish Tax,
PILT, Division of Community Advocacy, Department of Community and
Economic Development; EDDIE JEANS, Manager, School Finance and
Facilities Section, Education Support Services, Department of
Education and Early Development; ROB CARPENTER, Fiscal Analyst,
Division of Legislative Finance; PHELAN STRAUBE, staff to Senator
B. Stevens;
Attending via Teleconference: From an offnet location: JOHN
BOLLING, City Administrator, City of Craig; RON ERICKSON, School
Superintendent, Craig School Board; DOC WATERMAN, School Board
President, Craig School District; DOUG RHODES, Principal, Craig
High School; KEN DUCKETT, Executive Director, United Southeast
Alaska Gillnetters
SUMMARY INFORMATION
SB 328-NATIONAL FOREST INCOME PROGRAM/DCED REGS
The Committee heard from the sponsor, the Department of Community
and Economic Development, and representatives of the City of Craig
and the Craig School District. An amendment was adopted and the
bill was reported from Committee.
SB 322-SALMON ENHANCEMENT TAX
The Committee heard from the sponsor and an industry
representative. The bill was reported from Committee.
SB 326-PERMANENT FUND INVESTMENTS
The Committee heard from the Permanent Fund Corporation and the
bill was reported from Committee.
SB 374-PERMANENT FUND INCOME DISTRIBUTION
The Committee heard from the sponsor and the Division of
Legislative Finance. The bill was held in Committee.
SJR 3-CONST AM: APPROPRIATION/SPENDING LIMIT
This bill was scheduled but not heard.
SPONSOR SUBSTITUTE FOR SENATE BILL NO. 328
"An Act relating to the national forest income program in the
Department of Community and Economic Development and to the
authority of the department to adopt regulations; making
conforming amendments; and providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, "provides the Department of
Community and Economic Development with the necessary authority to
adopt regulations necessary to implement a federal program commonly
known as national forest receipts."
Co-Chair Wilkin referenced an amendment made to the bill when last
heard by the Senate Finance Committee. Amendment #1 adjusted the
average daily membership requirement to apply only to children
physically residing in the school districts receiving a share of
the national forest income program.
SENATOR BERT STEDMAN testified that he has been in contact with
representatives of the City of Craig and the Craig School Board and
received their financial calculations. The representatives
expressed concerns about the funding cuts, especially concerning
the Craig City School District and the limited amount of time it
would have to adjust to the reduced funding.
Co-Chair Wilken stated that an effective date, if agreed upon,
should be specified for the provisions of Amendment #1.
Senator Stedman informed that his earlier intention was to suggest
an effective date of July 1, 2005, but recent input from the
Department of Community and Economic Development indicates that an
immediate effective date would not change funding.
BILL ROLFZEN, State Revenue Sharing, Municipal Assistance, National
Forest Receipts, Fish Tax, PILT, Division of Community Advocacy,
Department of Community and Economic Development, testified that
Section 1(m), added to the bill in the amendment, would impact the
Craig City School District's funding for the FY 05 school year were
it given a July 1, 2004 effective date. Similarly, a July 1, 2005
effective date would affect the District's funding for the FY 06
school year.
Co-Chair Wilken asserted that an effective date of July 1, 2005
would be appropriate.
Mr. Rolfzen affirmed.
Senator Stedman agreed.
Amendment #2: This conceptual amendment provides that AS
41.15.180(m) has an effective date of July 1, 2005.
Co-Chair Wilken moved for adoption.
There was no objection and the amendment was ADOPTED.
Co-Chair Wilken referred a document titled "Department of Education
and Early Development, Prepared on 3/24/04: Forest Receipt/Altered
Statewide Correspondence ADM" [copy on file] which informs that six
of 381.75 correspondence students in the Craig City School District
reside within the District. He then referenced a second spreadsheet
titled, "Department of Education and Early Development, Prepared
3/11/04, Correspondence History FY99-FY05 Projected" [copy on file]
which shows considerable growth in the Craig City School District's
PACE correspondence program.
Senator Dyson requested a repeat of Mr. Rolfzen's earlier testimony
Mr. Rolfzen presented his earlier testimony.
Senator Dyson communicated that this legislation would ensure that
the City of Craig would receive forest receipts for the
correspondence students who reside within the Craig City School
District.
Mr. Rolfzen confirmed.
Senator Dyson clarified that under Amendment #1 the City of Craig
would not receive forest receipts for correspondence students who
do not reside within the District.
Mr. Rolfzen affirmed.
JOHN BOLLING, City Administrator, City of Craig, testified via
teleconference from an offnet location in Craig to express
appreciation for the adoption of the effective date. He requested
that any correspondent student residing within the Tongass National
Forest be eligible for forest receipts.
Senator Stedman interpreted Mr. Bolling's request to amend
Amendment #1 to include all students living within the Tongass and
Chugiak National Forests.
Senator Dyson understood that the request asked that all students
residing within the national forest be eligible for the forest
receipt funding even if enrolled in a correspondence school
headquartered outside the boundaries of the national forest.
Senator Stedman explained that a school must be located within a
national forest to receive forest receipts.
Senator Dyson clarified that Mr. Bolling's request does not
encompass students receiving their education from an institution
located outside the national forest.
Senator Stedman affirmed.
RON ERICKSON, School Superintendent, Craig School Board, testified
via teleconference from an offnet location in Craig about recent
impacts of budget reductions and the "devastation" that additional
reductions would have on the district without the adoption of
Amendment #2. He also reiterated Mr. Bolling's request and urged
the consideration of providing forest receipts for those students
residing within the Tongass National Forest.
Co-Chair Wilken asked if the correspondence students actually
reside in the Craig City School District.
Mr. Erickson answered no, that many correspondence students reside
in other communities in the Tongass National Forest such as
Ketchikan and would not otherwise be eligible for timber receipts
because they are not enrolled in the Ketchikan School District, or
any other school system.
Co-Chair Wilken requested further clarification.
EDDIE JEANS, Manager, School Finance and Facilities Section,
Education Support Services, Department of Education and Early
Development, explained that the City of Craig is serving 215.9
students who reside in the Ketchikan Gateway Borough. Mr. Bolling
and Mr. Erickson are asking that the City of Craig receive forest
receipts for those 215.9 students because they reside within the
Tongass National Forest.
Co-Chair Wilken expressed his understanding of the request.
Senator Dyson understood Mr. Bolling and Mr. Erickson are
requesting timber receipt funding for students enrolled in the
Craig City School District and who also reside in the Tongass
National Forest.
Mr. Jeans affirmed this assessment.
Senator Dyson asked the amount of forest receipts received per
student.
Mr. Jeans was unsure and deferred to Mr. Rolfzen.
Senator Dyson asked how the 0.9 per student figure is calculated.
Mr. Jeans explained the fraction represents a student who was
enrolled for a portion of the school year.
Mr. Rolfzen informed that in FY 04 the forest receipt amount per
student is approximately $1,000.
DOC WATERMAN, School Board President, Craig City School District,
testified via teleconference from an offnet location in Craig that
the purpose of the federal forest receipts program is to provide
education to students residing in the Tongass National Forest. If
the Craig City School District is the only district providing
education to a student living in the Tongass National Forest, Craig
should be eligible to receive the receipts allocated to that
student.
DOUG RHODES, Principal, Craig High School, testified via
teleconference from an offnet location in Craig to support earlier
testimony from the City of Craig and the Craig City School
District.
Senator Dyson offered a motion to report SS SB 328, 23-LS1620\H
from Committee, as amended, with accompanying fiscal note and
individual recommendations.
There was no objection and CS SS SB 328 (FIN) MOVED from Committee
with zero fiscal note #1 from the Department of Community and
Economic Development.
SENATE BILL NO. 322
"An Act relating to the rate of the salmon enhancement tax."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill "authorizes the regional
aquaculture associations who hold elections to change the tax rate
for the salmon enhancement tax."
Senator B. Stevens reinforced that the changes proposed in this
bill are optional and are intended to provide options to reduce
debt burden.
KEN DUCKETT, Executive Director, United Southeast Alaska
Gillnetters, testified via teleconference from an offnet location
that the current fishery tax system works well and therefore this
legislation is unnecessary. Fishermen in his area are not
interested in a situation whereby an additional assessment could be
imposed on their income. He referenced his letter to the Committee
outlining this position dated March 28, 2004 [copy on file].
Senator B. Stevens offered a motion to report the bill from
Committee with individual recommendations and accompanying fiscal
note.
Without objection SB 322, 23-LH1421\H, MOVED from Committee with
fiscal note #1 from the Department of Revenue in an indeterminate
amount.
CS FOR SENATE BILL NO. 326(STA)
"An Act relating to investments of Alaska Permanent Fund
assets; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, offered by the Senate Rules
Committee by Request of the Division of Legislative Audit,
"modifies the investment guidelines for the Alaska Permanent Fund."
BOB STORER, Executive Director, Alaska Permanent Fund Corporation,
testified that whereas most public funds merely follow the prudent
investor rule to make their asset allocation decisions, the
Permanent Fund is additionally guided by a statutory list, which
dictates criteria for the types of investments that could be made.
This legislation is requesting increased flexibility in the
management of the fund for two reasons. First, in the near future
the Fund would reach its statutory limitations, forcing it to sell
assets based solely on these restrictions. Second, this flexibility
could be utilized to develop a future management tool.
Mr. Storer gave a Power Point presentation as follows.
1
Alaska Permanent Fund
Senate Finance Committee
Senate Bill 326
Investment Flexibility
2
Summary of Fund's statute changes
1980 - SB 161, Sponsored by Sen. Tim Kelly, Sen. George
Hohman, Sen. Mike Colletta, and Sen. John Sacket
SB 161 created the Alaska Permanent Fund Corporation to
manage the Permanent Fund and started the existing
statutory list of allowed investments. This list extended
beyond the Fund's initial investment limitation of
Treasury bonds to include corporate bonds, certificate of
deposits and bankers acceptances. The list initially
allowed the Permanent Fund to invest in shares of savings
and loans associations, but this provision has since been
removed.
1982 - SB 684, sponsored by Gov. Jay Hammond
SB 684 allowed the Permanent Fund to invest in common
stocks, partial ownership of real estate properties (not
to exceed 40%), loans for commercial real estate and
deposits of US dollars held oversees.
1989 - HB 69, Sponsored by Gov. Steve Cowper
HB 69 gave the APFC authority to invest in non-domestic
(International) stocks and bonds.
3
Summary of statute changes (cont.)
1992 - SB 39, sponsored by the Senate Finance Committee
SB 39 gave the APFC authority to invest in A rated
corporate bonds to a maximum of 5%. Prior to this change,
the Fund could only be invested in bonds rated AA or
higher.
1994 - HB 373, sponsored by Legislative Budget and Audit
Committee
HB 373 allowed the fund to own up to 100% in real estate
properties worth less than $150 million, and up to 67% in
properties worth greater than $150 million.
1996 - HB 525, sponsored by the House Finance Committee
HB 525 gave the APFC authority to invest in corporate
bonds rated BBB or higher.
1999 - HB 156, sponsored by the Legislative Budget and Audit
Committee
HB 156 allowed the Fund to leverage real estate
investments and increased asset allocation limit for
stocks to 55% of the total market value of the Fund. HB
156 also created the "basket clause" that allows up to 5%
of the Fund to be invested in alternative investments or
to be applied to existing asset allocations to expand
their limits. In addition, HB 156 allowed the Permanent
Fund to be the sole owner of any real estate property,
regardless of value.
Mr. Storer responded to criticism that increasing the flexibility
of the Fund would be too risky, by emphasizing that the Fund's
prudent use of the basket clause must be considered. The Fund has
only now begun to utilize the basket clause provisions established
five years ago.
4
Fund's historical asset allocation
[This graph demonstrates the percent of funds allocated to:
U.S. Fixed Income, U.S. stocks, Non-U.S. Fixed Income, Non-
U.S. stocks and Real estate, between the years 1978 and 2002.]
Mr. Storer emphasized the changes in the asset allocation of the
Permanent Fund as it was "given the ability to invest in expanded
legislative authority". He emphasized the judicious nature of the
Permanent Fund in expanding investments.
5
Benefits of proposed changes
· Investment flexibility
· Increased returns
· Increased diversification
Mr. Storer qualified that the Fund needs increased investment
flexibility to enable future administrators of the Fund to meet the
needs of the dynamic investment management industry. Additionally,
increasing the Fund's investment flexibility would make a five-
percent real rate of return more probable. Increased investment
flexibility does not necessarily translate into increased risk, but
rather into greater diversification. Investing in diverse
investment classes actually reduces risk. Mr. Storer added that,
"risk is measured not by losing money, but by the volatility of
returns from year to year."
6
Potential questions
· Too much risk?
· How will the Board of Trustees use this flexibility?
· Derivatives?
Mr. Storer reiterated the traditional judiciousness of the
Permanent Fund. Considering other public funds, the increased
investment flexibility proposed in this legislation would be a
conservative structure.
Mr. Storer continued by giving some specific examples of the Fund's
possible implementation of this legislation.
7
Permanent Fund asset allocation
[This bar graph demonstrates the percentage of the Fund that
was, or would be invested in: Traditional asset classes,
Basket clause-stocks, Basket clause-private equities, and
Basket clause-hedge funds, on the following dates: 12/31/03,
6/30/04, 12/31/04 and 6/30/05]
Mr. Storer stated that recently, because of the appreciation in the
equity market, the Fund has begun utilizing the basket clause. The
Fund would soon implement two more strategies, which fall under the
basket clause: a hedge fund strategy, and a diversified portfolio
referred to as private equities. Within a few years, the Fund's
five-percent of alternative investments allowed for in the basket
clause would be exhausted.
Co-Chair Wilken asked if all Permanent Fund managers have access to
the provisions of the basket clause.
Mr. Storer replied that not all of the managers have access to the
basket clause. Specific managers are granted the authority to use
the provisions of the clause based on resolutions, statutes and
individual contracts.
Senator Bunde asked how the Permanent Fund would have been affected
if the hedge fund and private equities strategies that are proposed
for 2005, were enacted in 1995.
Mr. Storer responded that higher returns would have been realized
if the proposed allocations were implemented in 1995; however, if
they were enacted in 2000 the private equity portion would not have
done well and the hedge fund portion would have "added superior
returns".
Senator Bunde inquired as to how the Permanent Fund's investment
portfolio would have been affected as a whole, given the scenario.
Mr. Storer speculated that given the bear market, the overall
result would have been similar to what is currently being achieved
by those investment strategies.
Senator B. Stevens asked for a clear interpretation of the bar
graph on slide seven titled, "Permanent Fund asset allocation".
Mr. Storer clarified that the bar graph represents the existing
investment authority of the Fund.
Senator B. Stevens asked if requiring a five-percent limit in each
investment class, and considering certain alternative investment
strategies are appreciating in value, is forcing the Fund to
utilize realized earnings to remain within the five-percent limit.
Mr. Storer affirmed and elaborated that the Fund would be forced to
liquidize securities and take the realized gains if the five-
percent limit was approached.
Senator B. Stevens suggested that if the percentage limit was
increased to 10 percent, and distribution guidelines were retained,
the need to use realized earnings would diminish. As a result the
realized earnings would not grow at the rate they are currently.
Mr. Storer qualified that during this period the Fund's other
investments would also be realizing earnings, especially private
equities. The amount of realized earnings would be significant,
although less than if forced liquidation were required. Under the
expanded clause, the realized earnings would likely be equal to or
greater then the current basket clause.
Senator B. Stevens asked if the investment status quo were
maintained and the basket clause increased, whether the potential
for realized earnings would diminish.
Mr. Storer predicted realized earnings would increase over the long
term: a period of five or more years.
SFC 04 # 60, Side B 09:51 AM
Mr. Storer continued that in the in near term, if the basket clause
were expanded, he would expect realized earnings to be the same or
higher than current earnings. The differences would be attributed
to market performance and Fund policy not dictated by statute.
Senator B. Stevens remarked that every managed fund has imposed
limitations on investment classes and when those limits are reached
the fund is forced to realize earnings. Possible reductions in
realized earnings due to an extended basket clause would be
incidental under the Percent of Market Value (POMV) pay out plan,
but the possible reduction in realized earnings could significantly
affect the current pay out method.
Mr. Storer informed that when the Fund develops asset allocation a
target allocation is established for each asset class. Restrictions
are then created to avoid a high-turnover environment, which would
result in high transaction costs. He informed that policy currently
imposes these bans and that this legislation would make the bans
statutory.
Senator B. Stevens asked if these provisions are not already
statutory.
Mr. Storer replied that statutory provisions have always existed;
however, the Fund is nearing the limitations for the first time in
its history.
Senator Hoffman clarified that allowing the Fund administrators to
alternatively invest 10 percent of the assets of the Fund would
translate into making accessible $2.8 billion. He recalled dialog
on this legislation in the Senate State Affairs Committee in
conjunction with the Board of Trustees' other recommendation that
the Fund be managed under a POMV system. He expressed concern that
when dependent upon a certain income source, higher risk investment
options are not taken. He used the example of a retirement
investment fund that is invested in higher risk ventures when the
worker is younger and transitions to lower risk investments as the
worker nears retirement. If the POMV plan were implemented,
dependence on the Fund's earnings would gradually increase
suggesting investment in lower risk ventures.
Mr. Storer replied that when developing a portfolio, an investment
time horizon, risk tolerance, and expected returns are considered
in order to ensure a sufficient cash flow. He noted that unlike a
retirement fund, an endowment fund with a POMV method is not
managed for eventual liquidation of assets but rather the real
income is used to supply a predictable cash flow. The POMV plan
would insure the long-term viability of a fund. If the Fund's
earnings were eventually used to fund both dividends and State
government, its investment portfolio must be restructured to
maintain multiple cash flows. He spoke to the advantages of
investment flexibilities to enhance the Fund's ability to provide
revenue.
Senator Bunde referenced Senator B. Stevens' earlier comment that
the current payout system forces sale of high performing
investments resulting in realized gains. If this legislation were
adopted under the current payout system, dividends would likely be
higher. However, if both this legislation and the POMV plan were
adopted, fluctuation of dividend amounts would decrease. He
cautioned against forcing poor management decisions to increase
dividend amounts, warning that the future value of the Fund would
be jeopardized. He was undecided on the matter.
Senator B. Stevens spoke to Senator Hoffman's point, expressing
agreement with Senator Hoffman's example of the management of a
"finite pool" of capital. However, Senator B. Stevens emphasized
that the Permanent Fund is not a finite capital fund because it
receives royalty payments and statutory inflation proofing funds.
Co-Chair Wilken asked the witness to comment on Senator Bunde's
statement.
Mr. Storer responded that the current pay out methodology is based
on a five year moving average of realized income. To date, the
income from the Fund has been used for three purposes: dividend
payments, special appropriations to the principal of the Fund, and
inflation proofing of the Fund. More realized income translates to
a greater pool of money available for distribution. Due to the
current strict formula for distribution, any program that
accelerates realized income would produce a larger dividend.
Senator Olson introduced members of the Kotzebue High School
Leadership Program who were attending the meeting.
Co-Chair Green recalled that adoption of the basket clause was
discussed extensively during 1998 and 1999, with some parties
viewing the provision with skepticism and others "with a great deal
of faith". Through those discussions she came to realize that
placing a ceiling within a system creates constraints on choices
leading to success. The State expects the Permanent Fund's Trustees
to have the ability to invest "widely and deeply". Constraints
diminish that ability and at times force the Fund's Trustees to
compromise the profitability of the Fund. The dividend should not
be the focus of discussion when considering this legislation, but
rather the two clear objectives that are stated in the Alaska
Permanent Fund Corporation's "Sponsor statement for SB 326" [copy
on file].
Mr. Storer agreed. He assured that the Corporation has been
judicious in exercising the authority granted to it by the
legislature. At no time in past discussions with the legislature
has the dividend been the focus. The goals of this legislation
remain twofold: to insert housekeeping legislation to express the
need and intent of the basket clause and to increase the basket
clause from five to 15 percent. Senator Stedman made a motion,
supported by the Permanent Fund's Board of Trustees, to reduce the
limit to 10 percent, which would provide the Permanent Fund
Corporation with flexibility in the next few years. The Trustees'
eventual alternative investment goal remains 15 percent.
Co-Chair Wilken questioned the language in Section 1, amending AS
37.13.120 (e), which states that the Corporation could "borrow
money if the borrowing is without recourse to the corporation and
the fund." He asked if this language would allow the Corporation to
not repay loans.
Mr. Storer replied that the Corporation could not pledge the
principal of the Fund. The Corporation only has a small amount of
leverage to borrow from within its real estate portfolio,
approximately 15 percent of assets. The Fund operates subsidiaries
as limited liability corporations and collection on loans made to
these subsidiaries could not access the Permanent Fund.
Co-Chair Wilken noted the delay in publication of the Producer
Pricing Index for January and February 2004 and asked whether the
Trustees have discussed this.
Mr. Storer responded that the matter has not been discussed in
detail. He informed that the Producer Pricing Index figures for
December 2003 are being studied extensively as they will be used to
determine the level of inflation proofing.
Co-Chair Wilken commented that this information affects inflation
and interest rates.
Mr. Storer relayed that inflation appears to be rising, but very
slowly.
Senator Hoffman asked if the Board of Trustees considered the
State's future dependency on the Fund when crafting the proposed
legislation.
Mr. Storer answered, "absolutely". The Trustees' strategy is to
focus on investment diversification, which will enhance the Fund's
ability to meet the State's future needs.
Senator Bunde suggested that under the current payout system the
Board of Trustees could be pressured into selling assets to
increase realized earnings, and consequently, a greater dividend.
He asked the witness if this scenario is feasible. Further, he
inquired if the proposed legislation would prohibit such
exploitation by a future Board of Trustees.
Mr. Storer acknowledged that a Board of Trustees could affect
realized gains either for good reason or artificially, and stated
that such a probability exists whether or not this legislation is
implemented.
Co-Chair Green offered a motion to report the bill from Committee
with individual recommendations and accompanying fiscal note.
There was no objection and CS SB 326 (STA) MOVED from Committee
with zero fiscal note #1 from the Department of Revenue.
SENATE BILL NO. 374
"An Act relating to calculation of the amount to offset the
effect of inflation on the principal of the Alaska permanent
fund, and to transfers of money from the earnings reserve
account; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, sponsored by Senator B. Stevens,
"establishes a mechanism to repay the Constitutional Budget Reserve
(CBR) after Permanent Fund dividends and inflation proofing and
maintaining a $250 million balance in the earnings reserve account,
any excess moneys are transferred to the CBR. In addition, Senate
Bill 374, new deposits from natural resources [deposited] into the
corpus of the Permanent Fund are considered when calculating the
amount needed to inflation proof."
Senator B. Stevens testified this legislation would maintain the
current dividend payout calculation, and ensure dividend payouts as
the first priority of distribution of earnings of the Permanent
Fund, as has occurred since the year 1980. This bill would amend
statutes pertaining to the procedures for inflation proofing. The
existing inflation proofing calculation takes the market value of
the Permanent Fund and multiplies it by the average of two years'
Consumer Price Index figures. The product would be transferred from
the Permanent Fund's earnings reserve account to the principal of
the Permanent Fund. The proposed method would deduct annual royalty
deposits from the inflation proofing calculated amount. This method
guarantees that inflation-proofing requirements are met and also
provides a "baseline balance" in the earnings reserve account. Over
the history of the earnings reserve account the legislature has
made approximately six modifications to the balance, and in each
instance at least $100 million was retained. This balance
consistently provided for "ample" dividends. This legislation would
require a conservative minimum balance in the earnings reserve
account of $250 million allowing for the account's first priority,
annual dividend distribution, to be achieved.
Senator B. Stevens continued that this legislation proposes the
balance of the earnings reserve account after dividends, inflation
proofing, and less the $250 million balance, be deposited into the
Constitutional Budget Reserve (CBR) fund. The balance swept into
the CBR would serve to repay the debt incurred by withdrawals made
from that fund to balance the State budget. If the deposits into
the CBR eventually come to equal withdrawals, then the proposed
statues will be repealed and the original statutes reinstituted.
Senator B. Stevens expressed that the intent of this legislation is
to repay the CBR when excess funds remain in the earnings reserve
account, thus "maintaining the life of the Constitutional Budget
Reserve".
Senator Bunde noted this legislation would provide repayment to the
CBR until the existing debt is settled. This bill would not provide
a long-term solution to restoring the CBR because future
withdrawals could be made.
Senator B. Stevens explained that once deposits into the fund equal
the amount of withdrawals, the repayment plan proposed in this
legislation would cease. However, he remarked that future
legislatures would have the ability to make appropriations from the
Constitutional Budget Reserve. While in affect, this legislation
would provide the ability to repay funds withdrawn from the CBR in
the past and in the future.
Senator Bunde characterized this proposal as a revolving line of
credit the legislature would provide itself. This plan would
"bridge our [State legislatures'] current problems" and meet the
criteria of a long-range fiscal plan to fund State services.
Senator B. Stevens restated that the objective of this legislation
would be to provide a long-range plan to replenish the CBR. The
future use of the CBR would be determined by future legislatures.
Co-Chair Wilken commented that the proposal to include royalty
income in the inflation-proofing amount is a major component of
this legislation.
Senator B. Stevens stated this legislation is comprised of two
major components, one being the method used to meet the obligation
of inflation proofing the Permanent Fund. The other major component
is a minimum balance requirement for the earnings reserve account
and the allowance of a transfer of funds into the CBR. If a State
savings account is to be kept, it should be within the CBR, not the
earnings reserve account.
ROB CARPENTER, Fiscal Analyst, Division of Legislative Finance,
testified that the projections included in the series of
spreadsheets prepared by the Legislative Finance Division dated
3/22/2004 9:32 am [copy on file] were conservative at Senator B.
Stevens' request. The data on the spreadsheet titled "Model
Concept/Parameters" assumes a general fund budget growth rate of
two-percent from FY 05, a three-percent rate of inflation,
population figures from the Department of Labor and Workforce
Development and information relating to the Permanent Fund from the
Permanent Fund Corporation monthly models.
Senator Hoffman asked the reason why the spreadsheet listed a
negative growth rate for FY 04.
Mr. Carpenter explained this rate reflects the reduction in general
fund spending between the FY 03 to FY 04 enacted budgets.
Co-Chair Wilken asked for clarification on the "Model
Concept/Parameters" spreadsheet data, and using FY 05 as an
example. He asked if the formula used in the "Statutory Net Income"
column was the same formula used in the "Statutory Net Income"
column of the spreadsheet titled "Alaska Permanent Fund Financial
Projections 2004-2014 as of December 31, 2003" issued by the
Permanent Fund Corporation [copy on file].
Mr. Carpenter replied that yes, the two columns were referring to
the same concept. He added that the information on the series of
spreadsheets was based on the January 2004 monthly financials, and
did not take into account the February 2004 monthly financials.
Senator B. Stevens pointed out that the monthly financial
projections fluctuate significantly.
Co-Chair Wilken asked the definition of "MV".
Mr. Carpenter responded "MV" is an acronym for "market value".
Co-Chair Wilken clarified that the data referenced on the "Model
Concept/Parameters" spreadsheet represents a "snapshot in time".
Mr. Carpenter outlined the data in the spreadsheet included in the
packet prepared by the Legislative Finance Division titled "Status
Quo", using FY 05 as an example. He proceeded to detail the
information in the FY 05 column of this spreadsheet.
Senator Dyson asked for a definition of the phrase "reserved ending
balance".
Senator B. Stevens referenced the "Reserved Fund Balance" versus
"Unreserved Fund Balance" sections of the "Alaska Permanent Fund,
Financial Projections 2004-2014" spreadsheet. The unreserved fund
balance includes the earnings reserve account, and the reserved
fund balance consists of the Permanent Fund's unrealized gains and
the dedicated principal of the Fund, which includes deposits,
inflation proofing and realized gains.
Mr. Carpenter continued to detail the FY 05 data in the "Status
Quo" spreadsheet.
Co-Chair Wilken asked which figures were used to derive the
Permanent Fund's FY 05 market value ending balance of $29.443
billion.
Mr. Carpenter answered that the market value ending balance is the
sum of the Fund's principal ending balance, accumulated unrealized
earnings and the ending balance of the earnings reserve account.
Co-Chair Wilken clarified that the ending balance of the earnings
reserve account reflects the balance after dividend distribution,
inflation proofing, and potential withdrawals to compensate for the
State's fiscal gap.
Senator B. Stevens referred to the "Status Quo" spreadsheet in
pointing out that the ending balance of the CBR would be zero in FY
07 because withdrawals would exceed the balance. Following the
exhaustion of the CBR, the spreadsheet assumes that the earnings
reserve account would be the only resource available to fill the
State's fiscal gap. The projection predicts that the earnings
reserve account would reach a zero balance in FY 11.
Co-Chair Green asked if the projections included in the status quo
model are based on hypothetical evaluations of the actual price of
oil rather than outdated forecasts.
Senator B. Stevens answered no.
SFC 04 # 61, Side A 10:39 AM
Senator B. Stevens clarified, using the spreadsheet included in the
packet provided by the Legislative Finance Division titled "Model",
that the projected unrestricted general fund revenue amounts for FY
03, FY 04 and FY 05 are derived from the adjusted fall forecast oil
prices and current production levels. Beginning in FY 06 the
general fund revenue projection assumes a rate of $22 per barrel of
oil under current production levels.
Senator Bunde understood the status quo model demonstrates that,
after the CBR Fund is depleted and funds are appropriated from the
earnings reserve account to balance the State budget, adequate
funding remains in the earnings reserve account to issue dividends
and inflation proof the Permanent Fund.
Senator B. Stevens affirmed and added that dividend payouts and
inflation proofing are required statutorily.
Mr. Carpenter and Senator B. Stevens then outlined the spreadsheet
titled "Model", which assumes the implementation of this
legislation.
Senator B. Stevens explained that beginning in FY 05 the "Model"
spreadsheet demonstrates that transfers from the earnings reserve
account into the CBR are visible in the CBR ending balance. The
primary dissimilarity in the balance of the earnings reserve
account between the "Status Quo" and "Model" spreadsheets is the
amount "swept" into the Permanent Fund for inflation proofing: in
FY 05 the "Status Quo" spreadsheet reflects a transfer of $712
million whereas the "Model" spreadsheet reflects a transfer of $460
million. The divergence exists because in the "Model" spreadsheet
the Permanent Fund's dedicated revenue, consisting of royalty
deposits, is counted towards the inflation proofing calculation.
Thus, the inflation proofing calculation of $712 million is arrived
at by adding the Fund's dedicated revenue in FY 05, $252 million,
to the inflation proofing transfer from the earnings reserve
account: $460 million.
Senator B. Stevens clarified the amount of the transfer from the
earnings reserve account to the CBR in FY 05. He pointed out that
the balance of the CBR fund increases from FY 04 to FY 05, but
reduces after FY 05 until FY 12.
Senator Dyson referenced discussions and arguments made that the
Permanent Fund is currently double inflation proofed because the
value of the Fund's assets naturally increase with inflation, and,
in addition, money is transferred from the earnings reserve account
to compensate for inflation. He stated that this legislation would
not address this argument because it continues to inflation proof
the Fund using the current calculation.
Senator B. Stevens replied that under the proposed model the Fund
continues to be inflation proofed at the required amount; however,
by applying dedicated revenue towards the inflation calculation
amount, the actual inflation proofing deposit would be reduced.
Senator B. Stevens next explained the spreadsheet included in the
packet prepared by the Legislative Finance Division titled "Output
- Status Quo vs Model". According to the February 2004 Consumer
Price Index the rate of inflation in the State for 2004 was 2.15
percent. The inflation proofing calculation for the Permanent Fund
for FY 05 assumes an inflation rate of 4.2 percent. Thus, assuming
the FY 05 inflation rate is comparable to the FY 04 rate, the
Permanent Fund will be inflation proofed at approximately double
the rate of inflation. In addition, referring to Senator Dyson's
comments, the value of the Fund's assets naturally increases with
inflation. Therefore, it is arguable that the Permanent Fund is
actually being inflation proofed at three times the rate of
inflation. Under this legislation only the principal of the Fund
would be inflation proofed as required by statute.
Senator Dyson restated the inflation proofing method this
legislation would implement.
Senator Dyson addressed the discrepancies in the subtraction of
percentages in the "Effective Inflation Proofing" section of the
"Output - Status Quo vs Model" spreadsheet.
Mr. Carpenter specified the discrepancies are from a "rounding
error" in the spreadsheet computer program.
Senator Bunde asked, assuming this legislation is implemented, if
the fiscal gap would be zero until FY 12 at which time the CBR
would be fully funded and no longer used to fund fiscal shortfalls.
Senator B. Stevens corrected that no fiscal gap is represented in
the "Output - Status Quo vs Model" spreadsheet until FY 12 because
the CBR would be used to fill any fiscal gap until then. The CBR
would be drained as of FY 12.
Senator Bunde commented that this legislation does not prevent the
CBR from being exhausted, but rather delays the process.
PHELAN STRAUBE, staff to Senator B. Stevens, affirmed that the
model representing this legislation utilizes the assumption that
the average price of oil is $22 per barrel and that no new oil
sources are developed. The model also assumes that no new taxes are
imposed.
Senator B. Stevens furthered that the model assumes that the
State's only means of satisfying the fiscal gap would be the CBR.
The model also presumes an actual growth rate in the budget.
Senator Hoffman noted that in the "Output - Status Quo vs Model"
spreadsheet the status quo projects the market value of the
Permanent Fund in FY 14 at $40.2 billion, whereas the model
projects a market value that is approximately $2.25 billion less.
He asked what the dividends would be under both the status quo and
model projections.
Senator B. Stevens replied that appropriations to the Permanent
Fund would begin to decline in FY 06 under both the status quo and
the model projections. The dividend would continue to grow under
the model, but not as rapidly as under the status quo. Despite
efforts to accurately project realized earnings, actual amounts are
the result of management decisions for the Fund and could not be
precisely forecasted.
Co-Chair Wilken requested a chart detailing the dividend transfers
from the earnings reserve account, as listed on line 26 of the
"Model" spreadsheet.
Senator B. Stevens referred to the "Output - Status Quo vs Model"
spreadsheet, specifically the "Per Capita Dividends" section, in
highlighting the comparison between the dividend transfer in the
status quo and model projections.
Co-Chair Green asked if this legislation would increase scrutiny of
funds available to balance the State budget by reclassifying
funding. She suggested the reclassification would require a three-
quarters majority vote of the legislature to appropriate funds
rather than the current simple majority vote requirement.
Senator B. Stevens affirmed.
Co-Chair Wilken ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 10:59 AM
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