Legislature(2015 - 2016)SENATE FINANCE 532

03/31/2016 09:00 AM Senate FINANCE

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Audio Topic
09:03:42 AM Start
09:04:56 AM SB114 || SB128
10:12:40 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Angela Rodell, Executive Director, Alaska TELECONFERENCED
Permanent Fund Corporation
Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 31, 2016                                                                                            
                         9:03 a.m.                                                                                              
9:03:42 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair MacKinnon called the Senate Finance Committee                                                                          
meeting to order at 9:03 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Peter Micciche, Vice-Chair                                                                                              
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Angela  Rodell, Executive  Director,  Alaska Permanent  Fund                                                                    
Corporation;  Senator Lesil  McGuire; Laura  Achee, Director                                                                    
of Communications and  Administration, Alaska Permanent Fund                                                                    
Corporation; Representative Lora Reinbold.                                                                                      
SB 114    PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS                                                                               
          SB 114 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
SB 128    PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS                                                                                 
          SB 128 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
SENATE BILL NO. 114                                                                                                           
     "An Act  relating to deposits  into the  dividend fund;                                                                    
     and relating to the Alaska permanent fund."                                                                                
SENATE BILL NO. 128                                                                                                           
     "An  Act   relating  to  the  Alaska   permanent  fund;                                                                    
     relating  to  appropriations   to  the  dividend  fund;                                                                    
     relating  to  income  of  the  Alaska  permanent  fund;                                                                    
     relating to  the earnings reserve account;  relating to                                                                    
     the Alaska  permanent fund dividend;  making conforming                                                                    
     amendments; and providing for an effective date."                                                                          
9:04:56 AM                                                                                                                    
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND                                                                        
CORPORATION, presented four sets of slides (copy on file).                                                                      
Co-Chair MacKinnon noted that the two bills would limit or                                                                      
change how the permanent fund dividend (PFD) was                                                                                
Ms. Rodell shared that she hoped to address some                                                                                
misinformation regarding the forecast of the permanent                                                                          
Mr. Rodell looked at slide 1, "Transfers to principal as of                                                                     
June 30, 2015":                                                                                                                 
     Mineral royalties: $15.9 billion                                                                                           
     Transfers from General Fund: $2.7 billion                                                                                  
     Lawsuit settlement proceeds: $169 million                                                                                  
     Inflation proofing transfer: $16.2 billion                                                                                 
     Transfers from Earnings Reserve: $4.2 billion                                                                              
9:08:45 AM                                                                                                                    
Ms. Rodell highlighted slide 2, "The Alaska Constitution":                                                                      
     Article IX, Section 15                                                                                                     
     Alaska Permanent Fund                                                                                                      
     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                                                                    
     [Effective February 21, 1977].                                                                                             
Ms. Rodell  stressed that  the constitutional  amendment was                                                                    
required,  because  the  state  had  a  prohibition  against                                                                    
dedicated funds.  She explained that the  amendment was very                                                                    
straight forward.  She read the  amendment. She  stated that                                                                    
the bills would amend the statutory framework.                                                                                  
Ms. Rodell discussed slide 3, "Statutory findings":                                                                             
     Section 37.13.020.  Findings. The people of  the state,                                                                    
     by   constitutional   amendment,  have   required   the                                                                    
     placement of at  least 25 percent of  all mineral lease                                                                    
     rentals, royalties, royalty  sale proceeds, and federal                                                                    
     mineral revenue  sharing payments and  bonuses received                                                                    
     by  the state  into a  permanent fund.  The legislature                                                                    
     finds with respect to the fund that                                                                                        
          (1) the fund should  provide a means of conserving                                                                    
          a  portion of  the  state's  revenue from  mineral                                                                    
          resources to benefit all generations of Alaskans;                                                                     
          (2) the  fund's goal should be  to maintain safety                                                                    
          of principal while maximizing total return;                                                                           
          (3) the  fund should be  used as a  savings device                                                                    
          managed  to allow  the maximum  use of  disposable                                                                    
          income from  the fund  for purposes  designated by                                                                    
Ms. Rodell addressed slide 4, "Investment Authority":                                                                           
     AS 37.13.120 "Prudent Investor Rule"                                                                                       
          -Exercise   judgment    and   care    of   similar                                                                    
          institutional investors,                                                                                              
          -while considering preservation  of the purchasing                                                                    
          power of the fund over time, and                                                                                      
          -while maximizing  the expected total  return from                                                                    
          both income and the appreciation of capital.                                                                          
9:13:14 AM                                                                                                                    
Ms. Rodell  stressed that there  would be no changes  in the                                                                    
sections. Therefore,  there would continue to  be investment                                                                    
in the fund.                                                                                                                    
Senator Dunleavy  looked at slide 1,  and queried additional                                                                    
legislative  action to  add money  to the  fund. Ms.  Rodell                                                                    
replied that the slide was  the total of all the legislative                                                                    
Co-Chair  MacKinnon  referred to  a  slide  from a  previous                                                                    
meeting,  which  showed  the PFD  amount  distribution,  and                                                                    
asserted  that the  legislature had  contributed nearly  $20                                                                    
billion above the mandatory 25 percent contribution.                                                                            
Senator Dunleavy stated that he had misread his notes.                                                                          
Ms.   Rodell  shared   that  there   was   a  reference   of                                                                    
approximately $20 million.                                                                                                      
Senator  Bishop  stated that  Ms.  Rodell  had answered  his                                                                    
previous  question.  He  wondered   whether  the  board  had                                                                    
conducted an  analysis. Ms. Rodell responded  that the board                                                                    
had  not undertaken  that endeavor,  because the  investment                                                                    
decisions and timing caused a difficult analysis.                                                                               
Senator  Olson  looked at  the  ten-year  period, which  had                                                                    
doubled the fund  doubling in value. Ms.  Rodell stated that                                                                    
there was an important change in that doubled the fund.                                                                         
9:17:18 AM                                                                                                                    
Ms.  Rodell looked  at the  investment  returns, and  shared                                                                    
that there  had been some confusion  regarding the forecast.                                                                    
She explained that, previously,  the permanent fund provided                                                                    
a forecast  at the request  of Department of  Revenue (DOR).                                                                    
She  stressed  that  the  forecast   was  intended  for  the                                                                    
supplemental  budget  and   operating  budget  changes.  She                                                                    
furthered that the forecast also  provided the previous year                                                                    
numbers in order  to calculate the upcoming  PRD payout. The                                                                    
ten year  forecast had  shifted further,  so there  were two                                                                    
different rates.                                                                                                                
Senator Hoffman  queried the  institution year  of inflation                                                                    
proofing.  Ms.  Rodell replied  that  it  was instituted  in                                                                    
Senator  Hoffman  noted that,  since  1982  there was  $16.2                                                                    
billion  deposited  to  the  fund.   He  queried  the  total                                                                    
realized amount  in the reserve  account. Ms.  Rodell agreed                                                                    
to provide that information. She deferred to Ms. Achee.                                                                         
9:20:56 AM                                                                                                                    
LAURA ACHEE, DIRECTOR  OF COMMUNICATIONS AND ADMINISTRATION,                                                                    
ALASKA PERMANENT FUND CORPORATION, introduced herself.                                                                          
Senator  Hoffman  queried  the  amount of  deposits  in  the                                                                    
reserve  since its  inception. Ms.  Achee agreed  to provide                                                                    
that information.                                                                                                               
Co-Chair Kelly  queried the  management statuses  for paying                                                                    
out annuities.  He felt  that 6 percent  was a  high number.                                                                    
Ms. Rodell  stated that the  board of trustees had  a target                                                                    
real  return  of  5  percent.  The 6  percent  had  a  fixed                                                                    
inflation  adjustment.  She shared  that  the  bar was  set,                                                                    
because  of the  long  time horizon  to  weather the  market                                                                    
volatility. She remarked that  the corporation was currently                                                                    
even for the year, with three months remaining.                                                                                 
Co-Chair Kelly noted  that the governor had  hoped move $3.1                                                                    
billion from  the CBR to  the corpus of the  permanent fund,                                                                    
so there would be $55 billion  in the fund. He felt that the                                                                    
CBR would  not be put  in the  earnings reserve pot.  He did                                                                    
not feel  the CBR would be  put in the earnings  reserve. He                                                                    
wondered that would occur. Ms.  Rodell replied that it would                                                                    
make it  difficult to keep the  flat draw about at  the $3.2                                                                    
billion amount.                                                                                                                 
9:28:07 AM                                                                                                                    
Co-Chair Kelly  did not want  there to be conflict  with the                                                                    
governor. He  asserted that the  model must be  POMV, should                                                                    
there be no  draw from the CBR. He felt  that the governor's                                                                    
plan would not work without the POMV withdrawal.                                                                                
Co-Chair  MacKinnon shared  that  there  would be  documents                                                                    
provided with more information.                                                                                                 
Co-Chair Kelly felt  that the document would  answer many of                                                                    
his questions.                                                                                                                  
Vice-Chair  Micciche  noted  that   there  was  a  political                                                                    
difficulty  of   the  CBR   withdrawal.  He   remarked  that                                                                    
conservative management  pushed a POMV. He  worried that the                                                                    
fixed  draw had  too great  a failure  rate. He  queried the                                                                    
opinion  of fixed  draw versus  POMV.  Ms. Rodell  responded                                                                    
that each  had pros and  cons. The  pros for the  fixed draw                                                                    
required  a  plan. The  proposed  bill  recognized that  the                                                                    
amount may  need adjustment. She  stressed that  there would                                                                    
be  $3 billion  on July  1, and  any other  revenues of  the                                                                    
state would  be directed to  the earnings reserve.  She felt                                                                    
that there  was tremendous  value in  the known  amount. She                                                                    
stressed that  there may  be challenges  in the  process for                                                                    
adjusting the  amount. She was uncomfortable  with putting a                                                                    
fixed  number  into statute.  She  felt  that the  statutory                                                                    
restraint made it difficult to adjust the fixed rate.                                                                           
Co-Chair  MacKinnon queried  a position  that the  board may                                                                    
have previous  taken. Ms. Rodell  replied that the  board of                                                                    
trustees  had a  resolution  in place  for a  constitutional                                                                    
amendment for a POMV draw on the fund.                                                                                          
Co-Chair MacKinnon wondered whether  the legislature had the                                                                    
ability  through statutory  changes. Ms.  Rodell replied  in                                                                    
the affirmative.                                                                                                                
Co-Chair MacKinnon  surmised that the policy  decisions were                                                                    
either an  annuity style  or percent.  She stated  that both                                                                    
were  effective models,  and  there would  be  a fixed  draw                                                                    
versus something more volatile. Ms. Rodell agreed.                                                                              
9:35:27 AM                                                                                                                    
Vice-Chair Micciche  felt that  a fixed  draw may  create an                                                                    
artificial security and would  detach from the volatility of                                                                    
a static return. He wanted to  be forced to "live within our                                                                    
means", and not count on the absence of a failure rate.                                                                         
Co-Chair  Kelly   noted  that  there  was   some  discussion                                                                    
regarding a  spending cap,  but he  felt that  spending caps                                                                    
did not  generally work. He  stated that  the constitutional                                                                    
spending cap that  was flawed. He remarked  that there could                                                                    
be a  percent of market  value, and  apply a cap  that would                                                                    
not exceed $3.6 billion in any  year. He felt that there was                                                                    
discipline in place to live within the means.                                                                                   
Co-Chair MacKinnon  stated that  a document  was distributed                                                                    
to the members.                                                                                                                 
9:39:18 AM                                                                                                                    
AT EASE                                                                                                                         
9:40:19 AM                                                                                                                    
9:40:21 AM                                                                                                                    
Co-Chair  MacKinnon  stated  that  the  documents  would  be                                                                    
posted online.                                                                                                                  
Vice-Chair Micciche felt that  Co-Chair Kelly had a valuable                                                                    
Senator  Hoffman stated  that the  constitution was  forcing                                                                    
the  legislature  into  the   discussion.  He  stated  that,                                                                    
regardless  of the  formula, there  would not  be enough  to                                                                    
address  the issues  in the  state. He  remarked that  there                                                                    
were other measures in play,  and stressed that there should                                                                    
be a total package option.                                                                                                      
Senator  Bishop  shared that  the  committee  was funding  a                                                                    
budget with  no capital. He  stressed that the  state should                                                                    
not be dependent on the federal government.                                                                                     
Ms. Rodell offered that the  limitations in place under each                                                                    
bill were limited  to the amounts available  in the earnings                                                                    
reserve account.                                                                                                                
Senator Bishop  noted that the  only difference  between the                                                                    
two plans was that one  guarantees a return on the permanent                                                                    
fund,  and the  other one  did not  guarantee a  return. Ms.                                                                    
Rodell disagreed.  She felt  that one  plan would  require a                                                                    
set dollar amount  be delivered regardless of  the return on                                                                    
the fund; and  the other would take into  account the actual                                                                    
returns,  and set  a limit  based on  the percent  of market                                                                    
Senator Bishop  surmised either plan would  only payout what                                                                    
the  earnings  reserve earns  in  one  year. He  felt  that,                                                                    
hypothetically,  the   earnings  reserve  was   intended  to                                                                    
produce  3.3 percent.  Ms. Rodell  replied that  stated that                                                                    
the ramifications  were unclear,  so it  did not  matter how                                                                    
much  money the  earnings  reserve made  in  that year.  She                                                                    
stated that  there would  be an increase  in the  balance to                                                                    
generate the funds, and hopefully exceed the draw.                                                                              
Senator  Bishop stressed  that the  balance in  the earnings                                                                    
reserve would self-regulate. Ms. Rodell agreed.                                                                                 
Senator Bishop felt that either  plan required a healthy oil                                                                    
and gas, and mining industry.                                                                                                   
9:48:12 AM                                                                                                                    
Co-Chair  MacKinnon  wondered how  the  fixed  rate draw  or                                                                    
percentage would  affect earnings,  or the  asset allocation                                                                    
under the  permanent fund  board's jurisdiction.  Ms. Rodell                                                                    
shared that,  from an investment  return perspective,  it is                                                                    
better  to  lower   the  number  of  draws   to  extend  the                                                                    
investment time. She  shared that DOR was paying  bills on a                                                                    
daily basis, so there was a need for more frequent draws.                                                                       
Co-Chair  MacKinnon  asked  if  it was  better  establish  a                                                                    
memorandum  of  understanding  with  the  administration  to                                                                    
create  the  timing, rather  than  drafted  in statute.  Ms.                                                                    
Rodell replied in the affirmative.                                                                                              
Co-Chair MacKinnon noted that  school districts were allowed                                                                    
two  draws per  year, and  she believed  that the  state was                                                                    
advancing  the money.  She wondered  if there  was interplay                                                                    
there with the  cash management. Ms. Rodell  deferred to the                                                                    
commissioner   of   Department   of  Education   and   Early                                                                    
Development (DEED).                                                                                                             
Co-Chair  MacKinnon  stated  that  DEED drew  three  to  six                                                                    
months of value in interest,  once the money was transferred                                                                    
in the form of the Base Student Allocation (BSA).                                                                               
Ms.  Rodell wondered  if  the corporation  would  move to  a                                                                    
fixed asset in order to  do annuity rather than a percentage                                                                    
payout. Ms. Rodell stated that  there was a focus on income,                                                                    
while maximizing  return. She shared  that there  were asset                                                                    
classes, such  as real estate, that  generated great returns                                                                    
for  the  state.  She  furthered   that  the  asset  classes                                                                    
generated tremendous  monthly income  that was  deposited in                                                                    
the  earnings  reserve  account. She  explained  that  there                                                                    
would be  an examination of  utilizing the asset  classes as                                                                    
effectively as possible.                                                                                                        
9:55:16 AM                                                                                                                    
Co-Chair MacKinnon  noted that  there was  no new  money for                                                                    
Alaska, and  there was a  desire to use available  assets in                                                                    
order to  help mitigate  the loss nearly  80 percent  of the                                                                    
revenue. She  looked at inflation  proofing, which  was paid                                                                    
on an  annual basis in  order to  keep it in  today's dollar                                                                    
value.  She remarked  that the  withdrawal  were either  the                                                                    
annuity draw  or fixed  rate draw.  Ms. Rodell  replied that                                                                    
inflation proofing was  applied in 1982; at a  time when the                                                                    
fund  was solely  invested in  bonds.  It was  an effort  to                                                                    
preserve  the purchasing  power of  the fund.  She explained                                                                    
that, as bonds  mature, cash was received. The  cash may not                                                                    
buy  as  many  bonds  at the  time  of  initial  investment,                                                                    
because  of  inflation  proofing.   She  explained  that  20                                                                    
percent of  the portfolio was  in fixed income, so  it would                                                                    
benefit  from  inflation  proofing. She  remarked  that  the                                                                    
other 80 percent of the  portfolio included inflation in the                                                                    
valuation and capital appreciation of the investments.                                                                          
Co-Chair MacKinnon noted that  Alaskans were concerned about                                                                    
protecting the  corpus of the  permanent fund.  She stressed                                                                    
that the  corpus was protected  under the  constitution. She                                                                    
queried  a   different  way  to  protect   or  allocate  the                                                                    
permanent  fund  under  a   different  model.  She  wondered                                                                    
whether  there  was  a  short-term   mechanism  to  use  the                                                                    
inflation proofing  to benefit Alaskans. Ms.  Rodell replied                                                                    
that  the  calculations  were conducted  under  the  current                                                                    
statute,  and   the  operating   budget  held   the  various                                                                    
appropriations   under   the  calculations   for   inflation                                                                    
proofing or the dividend. She  stated that there was nothing                                                                    
to  prevent the  legislature  from making  any general  fund                                                                    
appropriations back  to the corpus.  She furthered  that the                                                                    
corporation may ask for that appropriation in the future.                                                                       
10:00:21 AM                                                                                                                   
Co-Chair   MacKinnon  wondered   if  the   board  had   made                                                                    
recommendations  to the  legislature  on  the unrealized  or                                                                    
realized   earnings.  She   also  queried   the  calculation                                                                    
process.    Ms.  Rodell  replied that  the  purpose  of  the                                                                    
board's  resolution  in 2004  to  ask  for a  constitutional                                                                    
amendment  was because  the 1976  amendment stated  that the                                                                    
generally  accepted   accounted  rules  only   provided  for                                                                    
realized  income. Therefore  the financial  statement income                                                                    
and the  bond income  could be  easily tied  and reconciled.                                                                    
She remarked that the accounting  community had made changes                                                                    
with  the  increased  complexity   of  investments  and  the                                                                    
financial  community.  She  shared that  generally  accepted                                                                    
accounting principles  required that the net  income include                                                                    
both unrealized  and realized gains in  the calculation. She                                                                    
furthered that there was a  statutory definition, which only                                                                    
recognized realized  gains. She  stressed that  the realized                                                                    
gains were the only moneys available for appropriation.                                                                         
Senator Olson  queried the likelihood  of not being  able to                                                                    
access the  unrealized earnings. Ms. Rodell  replied that in                                                                    
2009 there  was a  loss in statutory  net income,  and money                                                                    
was  moved from  the earnings  reserve account  to make  the                                                                    
corpus  whole.   She  stressed  that   it  was   an  unusual                                                                    
Senator Olson looked  at the fixed draw, and  noted that the                                                                    
commissioner did not  invest at one point.  He remarked that                                                                    
the state lost money because  of that hesitancy. He wondered                                                                    
whether  a  similar situation  would  occur  with the  fixed                                                                    
draw. Ms. Rodell replied that  at the time of the hesitancy,                                                                    
the  CBR had  significantly more  assets. She  remarked that                                                                    
the fixed  draw would go directly  into the GF, and  have GF                                                                    
Senator Olson  wondered whether the  scenario was  likely to                                                                    
occur. Ms. Rodell replied that it was less likely to occur.                                                                     
10:06:56 AM                                                                                                                   
Co-Chair  MacKinnon queried  feedback regarding  the concept                                                                    
of rolling  all investment  under one  "roof" of  the Alaska                                                                    
Permanent Fund  Corporation. She stated that  there were two                                                                    
entities: one under the leadership  of Department of Revenue                                                                    
(DOR),  and the  Permanent  Fund. She  shared  that she  had                                                                    
offered  the idea  of only  one engine.  Ms. Rodell  replied                                                                    
that  she  had  been   in  conversations  with  Commissioner                                                                    
Hoffbeck  regarding that  subject. She  remarked that  funds                                                                    
had been  consolidated as much  as possible. She  noted that                                                                    
there  was a  question  of whether  there were  efficiencies                                                                    
that could benefit the state.                                                                                                   
Co-Chair  MacKinnon  stated  that there  had  been  inserted                                                                    
intent  language, with  another way  to create  efficiencies                                                                    
and managed in a safe way.                                                                                                      
Ms. Rodell  shared that  the total  amount of  statutory net                                                                    
income  that  had  been  moved  into  the  earnings  reserve                                                                    
account was $45.9  billion. She added that  she had provided                                                                    
some history of  the Permanent Fund. She  remarked that many                                                                    
questions posed  in the meeting  had been asked  in previous                                                                    
Co-Chair MacKinnon  wondered whether  the $45.9  billion was                                                                    
paid in  dividends. Ms. Achee  replied that $20  billion was                                                                    
moved  into   principal  from  the  earnings   reserve.  She                                                                    
furthered that  another approximately  $20 billion  had been                                                                    
paid  in  dividends  since 1982.  The  remaining  money  was                                                                    
approximately $7 billion in the earnings reserve.                                                                               
Co-Chair  MacKinnon asserted  that the  legislature did  not                                                                    
spend that money.  Ms. Achee agreed, and  announced that the                                                                    
legislature saved $20 billion.                                                                                                  
SB  114  was  HEARD  and   HELD  in  committee  for  further                                                                    
SB  128  was  HEARD  and   HELD  in  committee  for  further                                                                    
10:12:40 AM                                                                                                                   
The meeting was adjourned at 10:12 a.m.                                                                                         

Document Name Date/Time Subjects
SB 128 - SB 114 APFC SFC Slides 033116.pdf SFIN 3/31/2016 9:00:00 AM
SB 114
SB 128
SB 128 - SB 114 Callan Model of SB 128 without 3 Billion CBR draw.pdf SFIN 3/31/2016 9:00:00 AM
SB 114
SB 128