Legislature(2015 - 2016)SENATE FINANCE 532
03/31/2016 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB114 || SB128 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 114 | TELECONFERENCED | |
| += | SB 128 | TELECONFERENCED | |
| + | 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
None
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.
SUMMARY
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
calculated.
Ms. Rodell shared that she hoped to address some
misinformation regarding the forecast of the permanent
fund.
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
law.
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
decisions.
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
1982.
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
RECONVENED
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
point.
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
value.
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
occurrence.
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
authority.
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
years.
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
consideration.
SB 128 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
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 |