Legislature(2003 - 2004)
10/28/2003 07:00 PM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE JUDICIARY STANDING COMMITTEE
Kenai City Hall
October 28, 2003
7:00 p.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Scott Ogan, Vice Chair
Senator Johnny Ellis (via teleconference)
Senator Hollis French (via teleconference)
MEMBERS ABSENT
Senator Gene Therriault
OTHER LEGISLATORS PRESENT
Representative Mike Chenault
Representative Kelly Wolf
COMMITTEE CALENDAR
SENATE JOINT RESOLUTION NO. 18
Proposing amendments to the Constitution of the State of Alaska
relating to limiting appropriations from and inflation-proofing
the Alaska permanent fund by establishing a percent of market
value spending limit.
HEARD AND HELD
SENATE JOINT RESOLUTION NO. 19
Proposing amendments to the Constitution of the State of Alaska
relating to the Alaska permanent fund.
HEARD AND HELD
PREVIOUS ACTION
SJR 18 - See State Affairs minutes dated 5/1/03 and 5/6/03 and
Judiciary minutes dated 5/15/03 and 6/26/03.
SJR 19 - See State Affairs minutes dated 5/13/03 and Judiciary
minutes dated 5/17/03 and 6/26/03.
WITNESS REGISTER
Mr. Bob Bartholomew
Chief Operating Officer
Alaska Permanent Fund Corporation
PO Box 25500
Juneau, AK 99802-5500
POSITION STATEMENT: Explained the Alaska Permanent Fund
Corporation Board of Trustees' percent of market value proposal
Mr. Preston Williams
Kenai, AK 99611
POSITION STATEMENT: Expressed concern that no fixed percentage
amount is required for the dividend payout
Mr. C.A. Short
Nikiski, AK
POSITION STATEMENT: No position at this time
Ms. Ruby Kime
Ninilchik, AK
POSITION STATEMENT: Disagrees that Alaska has a fiscal crisis
and believes the problem is overspending
Mr. James Price
Nikiski, AK 99635
POSITION STATEMENT: Suggested allowing voters to vote on a
constitutional spending limit and the POMV proposal
Mr. Jack Dean
Sterling, AK 99672
POSITION STATEMENT: Opposed to any changes to the permanent
fund program
Ms. Vicki Pate
Nikiski, AK 99635
POSITION STATEMENT: Opposed to the POMV proposal and suggested
allowing voters to vote on both SJR 19 and the POMV proposal
Mr. Malcolm McBride
Kenai, AK 99611
POSITION STATEMENT: Prefers SJR 19 to SJR 18
Mr. Fred Sturman
Soldotna, AK 99669
POSITION STATEMENT: Opposed to SJR 18
ACTION NARRATIVE
TAPE 03-56, SIDE A
SJR 18-CONST. AM: PF APPROPS/INFLATION-PROOFING
SJR 19-CONST. AM: PERMANENT FUND INCOME
CHAIR RALPH SEEKINS called the Senate Judiciary Standing
Committee meeting to order at 7:00 p.m. Senators Ogan and
Seekins were present. Chair Seekins noted that Senator
Therriault was out of state and Senators French and Ellis were
participating via teleconference. He asked Representatives
Chenault and Wolf to join the committee at the table. He
informed members that Senator Lincoln introduced SJR 19 and she
was invited to participate. He then asked Mr. Bartholomew to
address the committee and noted that members' packets contain a
copy of Mr. Bartholomew's PowerPoint presentation.
MR. BOB BARTHOLOMEW, Chief Operating Officer of the Alaska
Permanent Fund Corporation (APFC), told members he would provide
an overview of what the permanent fund looks like today and how
the rules governing the permanent fund work, and describe the
proposal recommended by the APFC Board of Trustees.
MR. BARTHOLOMEW told members the current statutory and
constitutional authority of the permanent fund says the fund
should be a means of conserving a portion of the state's revenue
from its resources to benefit all generations of Alaskans. The
APFC believes the current system has worked very well for the
last 27 years, but that some weaknesses need to be improved
upon. He said the proposal before the committee will help do
exactly what the purpose statement purports: to benefit all
generations, both current and future.
MR. BARTHOLOMEW said the permanent fund, as of June 30, 2003,
contained roughly $24 billion. Over the last four years, the
amount has ranged from $22 billion to $26 billion, with a $24
billion average. The fund has had earnings and a distribution
each year.
The $24 billion fund is made up of two components: the principal
and the earnings reserve account. The earnings reserve account
is the portion of the fund that is available to the Legislature
for appropriation. On June 30, 2000, the earnings reserve
account contained $3 billion. That amount was the balance after
dividends were paid and the fund was inflation proofed. On June
30, 2003, the earnings reserve account contained $100 million.
He pointed out the difference shows the volatility of the stock
market over the last few years. He noted in the last few months
the stock market has gone up, so the earnings reserve account is
now worth close to $400 million. The Permanent Fund Board of
Trustees is concerned about the amount of movement in that
account, and believes that changes to stabilize it should be
reviewed.
MR. BARTHOLOMEW said in 1978, 100 percent of the permanent fund
was invested in bonds. The original permanent fund statutes were
written in 1978 and 1980. Since then, the permanent fund has
become a very mature, institutional fund with large assets. Its
current investments include stocks, bonds and real estate. The
original bonds paid interest on a regular basis; that interest
was received monthly, accounted for, and was deposited into the
earnings reserve account. Only 35 percent of the fund was
invested in bonds in 2002, 10 percent was invested in real
estate and the remainder was invested in U.S. and foreign stocks
and fixed income from other countries, The permanent fund grows
differently today. Based on the rules written over 20 years ago,
one investment might be a shopping mall in Washington, D.C. and,
although that property has increased substantially in value over
15 years, that increase will not be reflected in the earnings
reserve account until the building is sold. The trustees
propose that when the assets are increasing in value, a
different formula should be used to determine how much is
available from the permanent fund. The fund has matured and
evolved over 25 years, and the trustees and their advisors
believe the rules governing the fund must mature and evolve
also.
MR. BARTHOLOMEW said the trustees have proposed using a percent
of market value, known as the POMV. The POMV would establish a 5
percent spending limit on the amount that can be taken out of
the permanent fund each year. He said the proposal actually says
"up to 5 percent." That amount was determined after reviewing a
study of over 650 college and university foundations and
endowments throughout the country. Over 84 percent of those
foundations and endowments use some form of a percent of market
value. The percent ten years ago was 50 percent. He said the
trustees came to recognize 5 percent as the appropriate amount
because its policy goal with permanent fund investments is to
earn a total return from all assets of 8 percent. He pointed out
that the permanent fund has earned as much as 12 percent in one
year but also lost money in 2001 and 2002. The 5 and 10 year
averages over the last 20 years show about a 9 percent return.
MR. BARTHOLOMEW repeated the Permanent Fund Board of Trustees is
shooting for an 8 percent return. The current projection for
inflation is 3 percent, so the objective of the proposal is to
retain enough money in the permanent fund to cover the effects
of inflation. Today, that amount is appropriated from the
earnings reserve account by the Legislature each year. Under the
new proposal, 3 percent of the 8 percent return will be used for
inflation proofing, leaving 5 percent. The board of trustees
believes 5 percent is the sustainable amount that can be paid
out from the permanent fund each year. Inflation will vary, but
what tends to happen to the capital markets when inflation is
high is that the total return of investments goes up also. The
Board of Trustees still would expect the bottom line of what the
permanent fund will earn, on average, to be 5 percent, in
addition to inflation, which is why it is recommending the
spending limit be set at 5 percent. The fund will continue to
grow for two reasons: enough earnings will be retained to offset
inflation; and oil money will continue to be deposited each
year.
MR. BARTHOLOMEW said the permanent fund has earned on average
7.8 percent per year during the last 10 years. Inflation has
averaged 2.5 percent, giving an overall average growth of 5.3
percent. The fund has earned over 6 percent over the last 20
years after inflation. The board believes this proposal is an
improvement. It will protect the fund for the future generation
and make sure the benefits reach the current generation. It is
an improvement because today the principal and earnings reserve
are accounted for separately, although the entire fund is
invested in the same way. The board proposes to eliminate the
distinction between the principal account and earnings reserve
account and create one account that is protected by a 5 percent
spending limit. He said the first major policy call for the
Legislature and the public is whether 5 percent should be the
amount of the limit. The second policy call is whether
"principal" should be eliminated from the Alaska Constitution
and replaced with a 5 percent spending limit.
MR. BARTHOLOMEW said, regarding the second policy call, the POMV
method would be more protective of the fund because the current
rules allow the Legislature to appropriate the amount in the
earnings reserve. Therefore, when the earnings reserve contained
$3 billion in 2000, the entire amount could have been
appropriated. The Trustees believes during the good years, more
money should be retained in the fund, not spent. That way, a
distribution will still be available in the "down" years. He
said it would also protect the option of having an annual
payout. The primary use of that payout historically has been for
dividends and inflation proofing. Allowing spending in the near
term would spend into the fund during the "down" years, but the
economy would be negatively affected by no distribution and the
amount spent could be made up over time. In addition, a lot more
would be retained in the permanent fund over time, more than the
amount to cover. The board feels it is important to not only
have a spending limit during the good years, but also not to let
it go to zero in the bad years. The board believes that will
provide better protection for the future because the spending
limit will not allow the Legislature to spend more now, leaving
some for future generations.
MR. BARTHOLOMEW referred to PowerPoint slide 5, which shows how
the permanent fund works and a four-year history of the amounts
made available for the dividend. Those amounts have increased
from $800 million in 1998 to $1.1 billion in 2000. This past
year, $691 million was made available. The projection for two
years from now is $490 million. He said the board would like to
get away from that much fluctuation because it is difficult for
the fund to manage that large of a change in the distribution.
The proposed payout would stay right in the middle. He stated:
When the stock market was booming in 2000, we
shouldn't have paid out as much money as we did. If
the stock market has gone down for three years like it
has, we shouldn't take a big dive where the economy,
whether you're using the money for dividends, whether
you're using some of the money for public services,
you don't want to have a dramatic change from year to
year as part of the plan for - it's hard for the
economy to absorb that change. So, we would recommend
that by basing the payout on the full value of the
fund, the volatility of that payment skews out. It
doesn't go up a lot in the good years, and it doesn't
go down a lot in the bad years. When we look around
the country at the other funds, that's what they need
for their planning purposes. They want their governing
boards, whether it's the board of trustees of the
legislature, to be able to say on a reasonable level,
how much money is available.
And to put it in perspective, I explained how much was
spent out of the fund for dividends over the last four
years and it varies from $1.2 billion three years ago
to two years from now $490 million. Under this
proposal, how much would be available in total from
the permanent fund on an average year is between $1.2
billion and $1.3 billion. That's 5 percent of $24
billion. That number would vary - if it varies by $50
million in any one year, that would be a lot so it's
much more stable than the current formula.
And I think, in closing, the board of trustees does
support SJR 18. There's a similar version of the bill
that has been introduced in the House and that, as
it's written today, it accomplishes what the board
believes is the best way to protect the permanent
fund. The Governor said at his first state of the
budget speech that he was going to evaluate and ask
the board to look at it again. They spent three or
four months reviewing it and the Governor has recently
come out in support of the percent of market value
again as a way to protect the permanent fund.
SENATOR OGAN commented that when most people think of the
permanent fund, they think of their dividend check. They don't
see the check as a product of the earnings of the permanent
fund. He asked what to say to people with the perception that
legislators just want to steal their money to spend more on
government. He said the APFC has an uphill battle ahead trying
to explain its proposal to people. He asked Mr. Bartholomew to
explain how the dividend is paid and how this change will affect
the dividend check.
MR. BARTHOLOMEW said the simplest way to explain that is to
explain how it works today and how it would work under the
proposal. He said today, a statutory formula is used that bases
the amount on the cash earnings, not the total value of the
fund; therefore it would not reflect an increase in the value of
stocks. Every year, the APFC calculates how much money is
available from the permanent fund and each year the Legislature
decides how that money should be spent. The Legislature has put
in statute how it wants to spend it this year. It wants to pay
an amount of the earnings to the dividend and it wants to
account for inflation. The weakness in the formula used to
determine how much is available is that it is volatile. It
chases the market up and down. Each year, the Legislature has
decided whether or not to pay a dividend and it has. Under the
proposal, the decision on how the earnings are used will remain
with the Legislature each year. What will change is how much is
available; that would be calculated by simply saying the
Legislature can only spend up to 5 percent. He stated, regarding
how it will affect the dividend:
There [are] two things I would say. We're not
proposing to change how much goes to the dividend.
That is a decision that has to be made by the
Legislature. But what we think it does do for the
dividend is it assures that there will be money
available each year from the permanent fund. So
currently, if we have another short term sharp drop in
the market, and that sharp drop only has to happen on
thth
June 30 because June 30 is the one day - we look at
the permanent fund one day a year and that is when the
calculation is made for what's available. So, if for
the month of June the stock market took a dive, under
th
the current formula we would get to June 30 and the
formula would say sorry, there's nothing available.
Under the proposal, we would look at the value of the
fund and say 5 percent is available. So, in essence,
it protects the ability to make a payout so it can
improve the chances that there's money available.
Without change, it doesn't affect how much should go
to the dividend; it's limited to no more than 5
percent.
SENATOR OGAN said he believes many people feel they have a
constitutional right to a dividend. It is important they
understand that whether people receive a dividend is at the whim
of the Legislature. He noted the will of the people has
generally been honored with the exception of trying to make a
run on it several years ago when 83 percent of the voters said
no. He said he foresees a huge uphill battle to explain and
answer to that 83 percent. He asked if this proposal will simply
change the amount that is available to spend, but not change the
dividend program.
MR. BARTHOLOMEW said that is correct. This proposal will limit
how much can be taken each year but it also changes the
Constitution to make sure that money is still available in the
bad years.
CHAIR SEEKINS pointed out that he was a member of the APFC Board
of Trustees in the 1990s and during that period of time, the
board encouraged the Legislature to deposit some of the excess
earnings reserve fund into the principal of the permanent fund,
which the Legislature did. He asked if about one-third of the
principal of the fund today is made up of additional funds from
the earnings reserve account that were deposited into the
principal by the Legislature, over and above the amount for
inflation proofing and deposits from the oil fields.
MR. BARTHOLOMEW said that is correct. He added since 1980, under
the current formula used to calculate the amount available, in
addition to the Legislature appropriating money for the
dividend, it also appropriated $7 billion from the earnings
reserve and deposited it into the restricted account.
CHAIR SEEKINS maintained the Legislature acted responsibly to
make sure it did not have a big pot of money to use for "wild
haired projects."
MR. BARTHOLOMEW said when he looks back at the testimony and the
bills that were passed, the Legislature was looking toward a
time in the future when the state would need the money more than
it did at the time. He said when one looks at whether the
Legislature was looking to benefit the current and future
generations, it decided that it wanted to benefit the future
generation more because it had enough money at the time. That is
how the permanent fund got to be worth $24 billion.
CHAIR SEEKINS referred to page 6 of the document, Realized
Income vs. Market Value, that Mr. Bartholomew distributed and
said one thing he learned when he was on the Board of Trustees
is that a trustee could actually play God with the amount of
money that became realized income. When something was sold, it
became realized income and went into the profit formula for
distribution. He asked if he is correct that the Board of
Trustees can instruct the managers regarding what and when to
sell in order to accomplish the realized income.
MR. BARTHOLOMEW said that is correct. He said the chart shows
the volatility of the income versus the size of the fund over
time, and that the income has been much more volatile. There
have been situations in the past where the Board of Trustees
felt the best thing to do for the permanent fund was to sell
certain assets for various reasons. Those sales have a dramatic
effect on the formula. The Board feels that should not be the
case; it does not want to make decisions about what is right for
the fund that then have a dramatic effect on the amount that is
paid out. The Board would rather make the decisions based purely
on what the best investment is and keep the formula for what is
available separate.
CHAIR SEEKINS asked:
Let's say that all of the fund managers, or a large
portion of them, came to the Board of Trustees, or the
internal management did, and said look, we've got a
lot of money in unrealized income out there in the
fund and we think that, you know, that we're going to
have another Black October and the stock market is
gonna crash. We think we should sell now and profit
take now and put our money in a more stable
investment. If they did that, took that profit, under
the current scenario because it's a wise move for
investment on the fund, it goes into the distribution
process. Is that correct?
MR. BARTHOLOMEW said that is correct but a different way to say
that is when the stock market was rallying and it only happened
one time, the permanent fund managers generally should not be
involved in trying to time whether the markets are good or bad.
The permanent fund is invested for the long term. He said in
1996 or 1997, the Trustees looked at the unrealized gains in the
stock portfolio and decided to sell after three or four meetings
so that the current generation would receive some of the
distribution. About $300 million in gains were realized from the
stock portfolio. The Board, however, repurchased that stock in
the next few months. The Board incurred some transaction costs
but it felt they struck the best balance. He said the Board
would have never made that decision under the new proposal. It
would not have had to because part of that asset growth would be
shared with the current generation because they would have
received 5 percent of the total fund. He pointed out that is why
he said the investing strategy has changed but the rules have
not. The Board feels it is prudent to change those rules to make
them match the change in investment strategy.
CHAIR SEEKINS said, according to statute, the trustees serve at
the pleasure of the Governor. They are not confirmed by the
Legislature and can be removed for any purpose at any time as
long as they are notified in writing. He said he personally
believes that is a dangerous situation for a trustee who has
investment responsibility and can tell the managers to sell, as
happened in 1996, to put money into the distribution system to
pump up the permanent fund dividend. He said virtually one
person could control, under the current formula, what becomes
realized earnings, that being the Governor. He said Governor
Murkowski broke the cycle of replacing board members when he
took office. He retained the board members for their term of
office, regardless of their political affiliation. He said he
sees the volatility shown in the chart as politically driven, as
well as market driven. He asked if it would be beneficial to
limit the political volatility of the permanent fund.
MR. BARTHOLOMEW said yes but the Board of Trustees looks at it
from an investment perspective and believes [the POMV] will
limit the investment volatility. He said the political
volatility is an issue that the Board has dealt with. Changing
the formula could reduce the political volatility.
CHAIR SEEKINS commented that the statutory formula could be
changed by the Legislature at any time with a 51 percent vote.
MR. BARTHOLOMEW agreed and said the Constitution requires a vote
of the public. The statutes that describe how to determine the
amount available can be changed by the Legislature.
SENATOR OGAN said to his recollection, the only thing the
Legislature used permanent fund earnings for, with some very
minor exceptions, was to give funds to the Department of Natural
Resources to help get more oil developed.
MR. BARTHOLOMEW repeated the calculation of how much should be
spent on the dividend is set in statute. Once that amount is
calculated, the APFC makes two transfers. A transfer of
approximately $35 million goes to two or three state agencies to
cover adverse effects of the dividend. Certain social service
programs are based on income. The Legislature decided to hold
people harmless. That amount comes out of the dividend
calculation and is paid directly to people who lost some income
because of the dividend. Then, 100 percent of all other spending
out of the permanent fund has been on the dividend program. He
said he believes the historical track record of the Legislature
has been very good. He pointed out the Board is trying to look
ahead five or ten years. The Board believes this proposal is
important because the pressures on the finances and budget of
the state are going to change. The state has used its
constitutional budget reserve (CBR) fund to cover revenue
shortfalls. That fund may be empty in four or five years. When
the pressure comes, the Board is concerned that the funds used
to inflation proof the permanent fund could be at risk. The
board believes that when pressure comes to bear and there is no
other reserve money to cover the budget, the Legislature will
have to decide whether to inflation-proof the permanent fund or
pay for education. The board wants a spending limit and
inflation proofing before the Legislature determines what amount
is to be spent to ensure that the fund is protected. He repeated
this proposal is aimed at that future pressure.
CHAIR SEEKINS said the Senate Judiciary Committee passed a
resolution supporting a constitutional spending limit. That
resolution is now in the Senate Finance Committee. The
legislature would also like to see some sort of restraint on
expanding the budget. He said, regarding the hold harmless
clause, he is surprised that very few people understand that the
dividend knocks some people off of the welfare roles because
their income has increased. The Legislature sends three months
of welfare payments to the federal government so that it will
continue to send the welfare checks to recipients.
MR. BARTHOLOMEW said he believes those guidelines are in statute
and under the purview of the Legislature.
SENATOR ELLIS, testifying via teleconference, asked the number
of participants in the audience.
CHAIR SEEKINS estimated around 50 people.
SENATOR FRENCH, testifying via teleconference, asked if the
return on the investments of the fund was zero percent for five
years in a row, and five percent was paid out to the Legislature
every year, whether the fund's value would decrease by 25
percent.
MR. BARTHOLOMEW said that is correct. He said if this proposal
is adopted by a vote of the public and the investment return was
zero percent for the next five years, the Legislature would have
to decide annually how much it wanted to spend, up to five
percent. If the Legislature spent five percent each year, the
fund would decline.
SENATOR FRENCH said if 5 percent is paid out for inflation
proofing and dividends, the fund would decrease by about 25
percent; therefore, in today's dollars the permanent fund would
contain $18 billion.
TAPE 03-56, SIDE B
CHAIR SEEKINS clarified the language on line 4 on page 2
says the amount may not exceed 5 percent. He said if
Senator French saw that kind of trend and wanted to
continue to spend five percent, he would have a hard time
getting anyone to join him.
MR. BARTHOLOMEW said Senator French was pointing out that
is one of the biggest public policy decisions to be made on
this proposal. The Legislature will have to compare this
proposal to the alternative, which is the status quo. Under
today's method, if, as Senator French described, the
permanent fund earns nothing for the next five years, not
one penny would be paid out of the permanent fund and it
would still amount to $24 billion. He said the Legislature
could still have the POMV proposal, with the caveat of not
removing the word "principal" from the Constitution. That
would create the 5 percent spending limit on the upside so
that the Legislature would not overspend in the good years,
but there would be no benefit in the down years. He
explained:
You would hit the zero mark, you'd have zero
earnings, and there would be no payment from the
permanent fund and if that was the will of the
people, that's how the economy of Alaska would
run. It would go good in the good years and it
would be really bad in the bad years - and the
Board struggled with that. When they first
adopted this proposal four years ago, the word
'principal' was left in the Constitution. They
studied it for two more years and it was the bad
markets that changed their minds. They first
adopted the proposal in the heydays, in the good
years. They wanted a spending limit and that made
sense but they didn't want to deal with the
downside because 'principal' has become known as
a very important thing for people - protecting
the principal of the permanent fund. But they
studied it for two more years, and they also felt
that they looked around the country and how the
big funds operate and having large endowments
that don't pay out any money also has some
negative consequences. They believe that the
benefit of having the opportunity to spend money
in the bad years, so that you didn't go to zero,
outweighed that you could spend into the fund in
the short term. They took a long-term view and
believe two things.
One, as we said, over the last 20 years, we have
reinvested over $7 billion of earnings so we have
not overspent in the good years. We've kept it.
If it goes down the next three, four, five years,
should we dip into the fund that we've saved for
the last 20 years? That's an important policy
call.
CHAIR SEEKINS interjected, "Or, we could cherry pick the fund in
the bad years and still have realized income that's available
for distribution. That's very easy to do." He said if the market
was flat, the investments that have an unrealized gain could be
cherry picked. That, in effect, would take money out of the fund
by converting good investments into realized gains and holding
those that have not been good investments.
MR. BARTHOLOMEW said that is correct. Under today's rules,
selling assets could create income. The Board feels that is not
a good position to be in.
CHAIR SEEKINS thanked Mr. Bartholomew for his presentation and
took public testimony.
MR. PRESTON WILLIAMS, testifying on his own behalf, commented
that he sees some benefit to imposing the 5 percent spending
limit. He expressed concern that no portion of the 5 percent
will be required to be set aside for the payment of dividends,
such as 2 percent. He maintained that he would be more apt to
support the proposal if it contained a fixed percentage for
dividends. He noted, "Again, if you're in zero budgeting and
you're losing money, then it would be zero that would be
invested. I think the people realize if the permanent fund's not
making money, they won't get a dividend." He again expressed
concern that the proposal contains no guidelines to protect the
dividend.
MR. WILLIAMS also noted that the Legislature will no longer be
putting 50 percent [of royalty revenue] into the permanent fund.
It will be depositing 25 percent, so the principal will not be
growing as fast as it has since 1980. He asked how much that
difference will be.
CHAIR SEEKINS said about $40 million.
MR. WILLIAMS said his guess is that 3 percent of the 5 percent
will be used to address budget constraints, along with the extra
$40 million. He said his second concern is that the permanent
fund was originally created as a rainy day account and that a
catastrophic event could occur, such as another earthquake. If
this change is made in the Constitution, the Legislature could
only spend up to 5 percent without another vote of the people.
He cautioned that might not be wise.
MR. C.A. SHORT, a resident of Nikiski, testifying on his own
behalf, said the argument in support of the proposal sounds good
but he would like more time to consider it. He said he would
send the committee a letter with his position.
SENATOR OGAN told members he is probably one of the most
mistrustful people when it comes to giving legislators more
access to the permanent fund. He said the jury is still out in
his mind on this proposal. Although the proposal makes sense,
one has to consider the law of unintended consequences. He said
legislators have had a history of wanting to get their hands on
the excess earnings to fund more government. This proposal does
not change the fact that the dividend will still be at the whim
of the legislature.
MS. RUBY KIME, a resident of Ninilchik testifying on her own
behalf, said the legislators and media have put a message out
that the State of Alaska is short of money. She disagrees. As
of 2001, according to the U.S. Census Bureau, the State of
Alaska spent $14,270.27 per person. The State takes in
$9,756.97, leaving a difference of about $5,000 per person. She
said elected officials never want to discuss that information.
She noted the Census Bureau provides the same statistics for
every state. The State of Alaska spends three times as much per
person than the State of New York. She said the only way to
reign in politicians is to take away their money. She further
submitted that the State had its first budget in 1961. Roads
were cleared, children learned in school, the state had a legal
system. If one extrapolates that budget adjusted for inflation,
$257 spent in 1960 per person per person would equal $1579 in
2003. She said the State is spending 10 times that amount of
money now. She does not trust that the POMV is the way to go
without requiring that the dividend and inflation proofing be
paid. She suggested passing SJR 19 instead of SJR 18, because
SJR 19 contains those requirements.
MS. KIME referred to pages 81 through 83 of a document entitled,
2001 Consolidated Annual Financial Statement, and said it shows
116 programs have cash in the bank. Of the 116 accounts, 39 are
in the general fund. She said the remaining 67 other funds are
never discussed. They all have money and that money should be
used for state operations, it should not be "squirreled" away.
Government is not a for-profit enterprise.
SENATOR OGAN commented, "God help us when Senator Stevens is no
longer in the Senate because we're going to have a serious
recession."
MS. KIME agreed that Senator Stevens brings a lot of money into
the state but those funds always have strings attached. Those
funds also create programs that never end.
CHAIR SEEKINS stated that $5,000 per person equals $3 billion
per year and the state does not have a $3 billion deficit,
partly because federal funds are not accounted for in the state
budget. He said the people of the state are not incurring an
additional $5,000 per person debt. He said the draw on the
[constitutional budget reserve] account last year was a little
more than $300 million. He said the question will always be
where to make the budget cuts.
MR. JAMES PRICE, a resident of Nikiski testifying on his own
behalf, said he believes the POMV plan may work very well for
universities and companies that rely on their investments as a
funding mechanism. That is what he finds most frightening about
a POMV plan for the permanent fund. He believes it will invite
more legislative appropriation. He said he thinks the first year
this plan is put into effect, the Legislature will immediately
appropriate funds directly from the permanent fund. He does not
believe that will ever cease or diminish. He has heard
candidates say during every election campaign they would cut the
budget and have a long-range budget plan. That has not happened
in any meaningful way. He said the POMV plan would be wonderful
if it contained constitutional protection against legislative
spending. He said he has no problem with the current program
because the principal is inflation proofed first. He said the
dividend is currently calculated on a five-year average, which
has removed some of the volatility. He sees the problem as more
pressure on the Legislature from special interests, a result of
legislation last session that allowed campaign contributions to
double and changed the definition of lobbyist so that lobbyists
can contribute to legislators. He said that has created a
meaningful threat to getting any budget reductions or a long-
range budget plan because of more influence by special interest
groups. He said the POMV plan would be the death knell to the
permanent fund and the dividend. He commended Representative
Chenault for sponsoring HJR 3, which would constitutionally
protect the permanent fund from legislative appropriation. He
encouraged the Legislature to let Alaskans vote on both
constitutional protection and the POMV plan.
REPRESENTATIVE CHENAULT pointed out that lobbyists cannot donate
to any legislator outside of their districts.
MR. PRICE said the new definition of lobbyist is someone who
lobbied for 10 hours in one month, a change from 30 hours.
[The committee discussed the changes to the lobbyist law and
noted that Mr. Price was incorrect.]
REPRESENTATIVE CHENAULT said everyone talks about wanting to
protect the permanent fund and he has not made his mind up on
the POMV proposal. He sees some advantages to it simply because
it will prevent the ups and downs and level out the amount of
the dividend. He noted the Legislature decides right now whether
to inflation proof the permanent fund every year. He said his
concern is that at some point in time, if the Legislature does
not look at a spending limit, does not institute any other
revenue source, such as an income tax, the only pot of money
that will be available is the permanent fund dividend money. He
hopes that does not happen but fears it will if government is
not curtailed or another revenue source is not established.
MR. JACK DEAN, a resident of Sterling testifying on his own
behalf, thanked Mr. Bartholomew for his fine presentation. He
said he was alarmed when Mr. Bartholomew said Governor Murkowski
supports the POMV proposal. He said if Governor Murkowski
supports this resolution, there is probably something wrong with
it. He said he prefers to leave the permanent fund alone.
MS. VICKI PATE, a resident of Nikiski testifying on her own
behalf, said in the year 2000, she opened up a Roth IRA in the
S&P stock index fund and quickly lost money. She said her point
is that she believes it is a good thing that the permanent fund
value fluctuates up and down. She said a steady 5 percent would
create a disconnect from the permanent fund: people would no
longer worry about how well the fund is being invested. She
agreed with Mr. Price that both the POMV proposal and SJR 19
should be put before the voters. That would give Alaskans an
actual choice and foster good discussion.
MR. MALCOLM MCBRIDE, a resident of Kenai testifying on his own
behalf, said he believes SJR 19 contains much better provisions
than SJR 18. He recommends that members support SJR 19, not SJR
18. He said if the concern is the volatility of the stock
market, the Board of Trustees might consider returning to less
volatile investments. He said the permanent fund has not been
broken, but if it is going to be fixed, he prefers SJR 19.
MR. FRED STURMAN, a resident of Soldotna testifying on his own
behalf, said in his experience as a stockholder, he has never
seen anyone make a profit until a stock was sold so the 5
percent market value will not be a true representation of the
profits made. He said he is opposed to the POMV proposal. If the
permanent fund is not making any money, he does not think a
dividend should be paid. He said although the Legislature
deposited an additional $7 billion into the permanent fund, that
amount should have been closer to $15 or $20 billion. He said a
lot of money is being wasted in Juneau and that he has
suggestions about budget cuts.
SENATOR OGAN asked Mr. Sturman to forward those suggestions to
his office staff.
MR. STURMAN said about 10 to 15 people spent almost 400 hours
devising a list of budget cuts that they sent to the Governor
and Lt. Governor. He was dismayed by the fact that no one has
acknowledged receipt of that list.
CHAIR SEEKINS said he agrees with Mr. Sturman that a profit
cannot be realized until an investment is sold. He asked Mr.
Sturman if he is willing to let the six members of the Board of
Trustees of the permanent fund decide when to sell an investment
to realize a profit.
MR. STURMAN said that is the only choice available. He added:
I hate to see six men taking care of 26 or 25 or 28
billion bucks. I would rather see six men taking care
of 5 or 6 billion, maybe a group taking care of the
real estate, you know?
CHAIR SEEKINS said portions of that the money are parceled out
to management firms and they report back to the Board of
Trustees. He said he was a member of the Board of Trustees and
knows that the board can decide when to sell to determine
whether a profit is realized. Using the POMV proposal, they
would still have to sell something to pay out that money. He
said his concern is that he wants to remove the political
volatility out of when the board converts something into a
realized gain. He asked Mr. Sturman to get back to him with some
comments on that problem.
REPRESENTATIVE WOLF asked Mr. Sturman to provide him with a copy
of the list of budget cuts also.
MR. STURMAN told members how to get a copy and said the list
also contained suggestions to increase revenue.
CHAIR SEEKINS noted as a car salesman, he knows that one can't
make a profit until a sale is made.
MR. STURMAN said that is why he cannot see how Mr. Bartholomew
can say that the payout could be 5 percent if there is no
profit.
CHAIR SEEKINS said the proposal assumes an 8 percent profit.
MR. BARTHOLOMEW said that is food for thought but said he would
like to use Ms. Pate's situation as an example. He noted that
she invested in an S&P index fund with the hope that her
investment would grow over time. Some of that growth would come
from dividends and some would come from an increase in the value
of the stocks. He said most people normally buy an index fund to
hold. If Ms. Pate just held that investment for 30 years and it
increased in value to $10,000, under the rules of the permanent
fund today, she could not take a penny of that. She might then
be 75 years old and need $200 per month to supplement her
income. However, the rule says she must sell her index fund
before she can take any money from it. Therefore, she keeps
saving it until she's 100.
MR. BARTHOLOMEW said his point is that dividends could be kept
in cash or reinvested and the value of the asset would increase.
The Board is trying to find a formula that allows a benefit from
both. In other words, Ms. Pate would be able to sell a portion
of her index fund to generate cash. Whether that one year the
index fund went up or down should not matter in the long term.
He said the permanent fund managers are always buying and
selling, and have made money overall. However, the Board has a
long-term philosophy of holding assets so it does not want to
have to always sell long-term investments. It might want to sell
the poor performing investments to pay the dividend. He said the
Board is looking for a formula that works not only when
investments are sold. He agreed that if money is not made, it
should not be paid out but that is why the constitutional
amendment limits the amount to 5 percent. He said he truly
believes that if the permanent fund lost money for 5 to 10 years
in a row, legislators who voted to spend 5 percent during those
years would be voted out of office.
TAPE 03-57, SIDE A
CHAIR SEEKINS explained that a good deal of the money in the
permanent fund now came as the result of being invested in the
equity market. He said the Legislature was responsible for
telling the Board of Trustees what the asset allocation of the
permanent fund board could be. He said he was frustrated at
times as a trustee because without any appreciable greater risk,
the fund could have gotten a greater return but the Legislature
has imposed a rather conservative investment philosophy. Over
the years, the Legislature has allowed a larger percentage to be
invested in the equities market. He noted that when the fund was
invested only in government securities, there was virtually no
growth.
MR. STURMAN asked if that will change if the Constitution is
amended.
CHAIR SEEKINS said the Board of Trustees will still be
constrained by the policy set by the Legislature. The bonds must
be of a certain rating.
MR. BARTHOLOMEW said only 55 percent of the permanent fund is
invested in stocks, which is less than most funds. He said the
difference between investing 100 percent in bonds with an
assured cash flow, is that the fund would get a lower return.
SENATOR OGAN noted that he voted against increasing the equity
allocation to 55 percent when the Board of Trustees made that
request to the Legislature.
REPRESENTATIVE WOLF told members he has not made a decision on
the POMV proposal yet and attended the meeting to listen to
others' comments.
REPRESENTATIVE CHENAULT told participants that he takes all
comments seriously and appreciated their attendance.
SENATOR FRENCH also thanked participants.
CHAIR SEEKINS also thanked participants. He said his intent as a
legislator is exactly the same as it was when he was a trustee,
that being to return the greatest amount of profit to Alaskans
through the investments that the permanent fund board makes. He
said it is inherent within that system, through the political
process, that legislators know how [the people] want that income
to be distributed. He said the biggest responsibility of the
trustees is to return the greatest amount of profit and the
responsibility of the Legislature is to make the fiscal
decisions. He said although the Legislature was tempted to use
the earnings from the fund in the past, it acted responsibly but
he expressed concern that the situation will be different in the
future. He then adjourned the meeting at 8:49 p.m.
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