Legislature(2017 - 2018)BUTROVICH 205

02/16/2017 03:30 PM STATE AFFAIRS

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Audio Topic
03:30:44 PM Start
03:31:34 PM SB21
03:59:06 PM SB26
04:31:10 PM Discussion: Angela Rodell, Executive Director, Alaska Permanent Fund Corporation
05:04:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 21 PERMANENT FUND: INCOME; POMV; DIVIDENDS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+= SB 26 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
            SENATE STATE AFFAIRS STANDING COMMITTEE                                                                           
                       February 16, 2017                                                                                        
                           3:30 p.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Mike Dunleavy, Chair                                                                                                    
Senator David Wilson                                                                                                            
Senator Cathy Giessel                                                                                                           
Senator John Coghill                                                                                                            
Senator Dennis Egan                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 21                                                                                                              
"An Act relating to appropriations  from the income of the Alaska                                                               
permanent  fund; relating  to the  calculation of  permanent fund                                                               
dividends; and providing for an effective date."                                                                                
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
SENATE BILL NO. 26                                                                                                              
"An Act  relating to the  Alaska Permanent Fund  Corporation, the                                                               
earnings of the  Alaska permanent fund, and  the earnings reserve                                                               
account; relating  to the mental  health trust fund;  relating to                                                               
deposits into the  dividend fund; relating to  the calculation of                                                               
permanent fund dividends; relating  to unrestricted state revenue                                                               
available  for  appropriation;  and providing  for  an  effective                                                               
date."                                                                                                                          
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
DISCUSSION: Angela  Rodell~ Executive Director~  Alaska Permanent                                                               
Fund Corporation.                                                                                                               
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 21                                                                                                                   
SHORT TITLE: PERMANENT FUND: INCOME; POMV; DIVIDENDS                                                                            
SPONSOR(s): SENATOR(s) STEDMAN                                                                                                  
                                                                                                                                
01/18/17       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/18/17       (S)       STA, FIN                                                                                               
02/02/17       (S)       STA AT 3:30 PM BUTROVICH 205                                                                           
02/02/17       (S)       Heard & Held                                                                                           
02/02/17       (S)       MINUTE(STA)                                                                                            
02/16/17       (S)       STA AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
BILL: SB 26                                                                                                                   
SHORT TITLE: PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS                                                                           
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
01/18/17       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/18/17       (S)       STA, FIN                                                                                               
02/07/17       (S)       STA AT 3:30 PM BUTROVICH 205                                                                           
02/07/17       (S)       Heard & Held                                                                                           
02/07/17       (S)       MINUTE(STA)                                                                                            
02/16/17       (S)       STA AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
SENATOR BERT STEDMAN                                                                                                            
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Sponsor of SB 21, provided an overview.                                                                   
                                                                                                                                
RANDALL HOFFBECK, Commissioner                                                                                                  
Alaska Department of Revenue                                                                                                    
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Reviewed SB 26.                                                                                           
                                                                                                                                
ANGELA RODELL, Executive Director                                                                                               
Alaska Permanent Fund Corporation                                                                                               
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Answered question regarding the possible                                                                  
impact on the permanent fund from SB 21 and SB 26.                                                                              
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:30:44 PM                                                                                                                    
CHAIR  MIKE DUNLEAVY  called the  Senate  State Affairs  Standing                                                             
Committee meeting  to order at 3:30  p.m. Present at the  call to                                                               
order  were Senators  Wilson, Giessel,  Coghill, Egan,  and Chair                                                               
Dunleavy.                                                                                                                       
                                                                                                                                
                                                                                                                                
         SB 21-PERMANENT FUND: INCOME; POMV; DIVIDENDS                                                                      
                                                                                                                                
3:31:34 PM                                                                                                                    
CHAIR DUNLEAVY announced the consideration of SB 21.                                                                            
                                                                                                                                
3:31:57 PM                                                                                                                    
SENATOR BERT STEDMAN, Alaska State Legislature, Juneau, Alaska,                                                                 
sponsor of SB 21, stated that the bill is before the committee                                                                  
for the second time and provided an overview as follows:                                                                        
                                                                                                                                
     In essence what  this bill does, rather  than address a                                                                    
     packet solution  for the  budget deficit  is to  take a                                                                    
     look  at the  permanent fund  or big-earning  engine of                                                                    
     roughly $55 billion  and take a look at that  as far as                                                                    
     how  much  it  could  produce  in  payouts  that  would                                                                    
     include  dividends or  other  sources of  expenditures,                                                                    
     and what percent we can pull  out of that and how could                                                                    
     we  manage   that  asset  to  protect   if  for  future                                                                    
     generations of Alaskans.                                                                                                   
                                                                                                                                
     We were  fortunate enough  to be here  when we  had the                                                                    
     massive  wealth  oil-bubble   run  through  the  state;                                                                    
     unlike  some of  our grandfathers  or grandparents  who                                                                    
     missed  it  just  due  to   the  age  cycle  or  future                                                                    
     generations  of Alaskans  that  aren't  even born  yet,                                                                    
     that they  can see, especially the  future generations,                                                                    
     can see  that we  secured a vast  amount of  the wealth                                                                    
     bubble for  their benefit  also, that  we don't  use it                                                                    
     over the next dozen year or less on ourselves.                                                                             
                                                                                                                                
3:33:43 PM                                                                                                                    
SENATOR STEDMAN specified what SB 21 does as follows:                                                                           
                                                                                                                                
     This bill  what it does  it would limit  the withdrawal                                                                    
     annually  to  4.5  percent  of  the  market  value  and                                                                    
     there's  an averaging  over the  last  five years  that                                                                    
     takes place,  so you  don't take  just the  last year's                                                                    
     ending balance, but you back  up six years and take the                                                                    
     first five  of that,  so it  makes it  very predictable                                                                    
     for the  budgetary folks to  know exactly  what revenue                                                                    
     they would have.                                                                                                           
                                                                                                                                
     A  4.5  percent withdrawal  on  average  over time  the                                                                    
     market  should and  returns  should  suffice and  there                                                                    
     will be  other presenters with better  backgrounds that                                                                    
     can address  that to  the committee  to ensure  that we                                                                    
     don't diminish  the purchasing power and  or spend down                                                                    
     the fund. Of  that 4.5 percent, 2.25  percent would be,                                                                    
     or one half of it  would go to dividends automatically,                                                                    
     to the  citizens, and  that would  grow over  time. The                                                                    
     other 2.25 percent  of the 4.5 percent,  the other 2.25                                                                    
     percent or  one half, could  be added to  the dividends                                                                    
     if we are so fortunate  as to have robust economies and                                                                    
     an easy  time balancing  the budget,  it could  also go                                                                    
     back to  the permanent  fund, or  could be  used, which                                                                    
     would  happen over  the next  several years  go to  the                                                                    
     general  fund of  the state  to  help us  when we  have                                                                    
     financial  difficulties like  we  have  today. So  that                                                                    
     would ensure that  the public gets 50 percent  of it in                                                                    
     a dividend, the other 50  percent every year would come                                                                    
     before  the  Legislature  and the  elected  body  would                                                                    
     decide to add it to the  dividends, send it back to the                                                                    
     permanent  fund,  or  take it  to  core  services  like                                                                    
     education  or health  and human  services or  what have                                                                    
     you.                                                                                                                       
                                                                                                                                
3:35:53 PM                                                                                                                    
SENATOR STEDMAN summarized as follows:                                                                                          
                                                                                                                                
     In a nutshell, that's what  this bill does; again, it's                                                                    
     not a one-bill solution to  our deficit issue, but it's                                                                    
     a protective  mechanism to ensure  that we have  a very                                                                    
     valuable  asset for  future generations  to be  able to                                                                    
     rely  on   also,  that  we  don't   basically,  we  the                                                                    
     Legislature, including  myself, all 60 of  us, all good                                                                    
     intended  elected  officials,  collectively we  can  be                                                                    
     dangerous,   don't  start   taking   chunks  out,   the                                                                    
     billions,  and  hurt  the  last   40  years  of  wealth                                                                    
     accumulation.                                                                                                              
                                                                                                                                
CHAIR DUNLEAVY remarked that during  the past several years there                                                               
have been  people trying  to sell that  using the  permanent fund                                                               
would be immune from market  fluctuations versus the volatile oil                                                               
markets. He asked  Senator Stedman to confirm  that the permanent                                                               
fund is not immune from fluctuations.                                                                                           
                                                                                                                                
3:38:20 PM                                                                                                                    
SENATOR STEDMAN answered correct. He  pointed out that SB 21 uses                                                               
five years  of market values  to smooth out volatility.  He noted                                                               
that he  worked with the City  of Sitka 30 years  ago in changing                                                               
their all-bond  portfolio to  a percentage  of market  value that                                                               
took a five-year average. He noted  that unlike SB 21 with a 4.5-                                                               
percent payout, Sitka chose a  6-percent payout. He admitted that                                                               
Sitka's  6-percent payout  has shown  to  be too  high and  their                                                               
fund's  purchasing power  has decreased.  He emphasized  that the                                                               
financial markets are  not linear and noted that  the economy has                                                               
experienced 3-economic shocks over the  past 30 years; however, a                                                               
withdrawal  based on  averages  from  4 to  6  years smooths  out                                                               
fluctuations and makes things more predictable.                                                                                 
                                                                                                                                
3:42:22 PM                                                                                                                    
CHAIR DUNLEAVY  asked Senator Stedman  to dispel the  notion that                                                               
withdrawing funds from  the permanent fund will take  care of the                                                               
state's fiscal issue.                                                                                                           
                                                                                                                                
SENATOR STEDMAN concurred  with Chair Dunleavy. He  noted that SB                                                               
21  is a  bill for  statutory change  rather than  constitutional                                                               
change. He admitted  that the Legislature could  still get around                                                               
the  bill's  4.5  percent withdrawal  by  spending  the  earnings                                                               
reserve which is not protected  by the constitution. He disclosed                                                               
that approximately $14 billion is  available for the Legislature,                                                               
"To get its hands  on." He pointed out that if  SB 21 was adopted                                                               
in the constitution as an  amendment, the Legislature would never                                                               
be  able to  take more  than the  4.5 percent  in any  given year                                                               
without the permission of the citizens.                                                                                         
                                                                                                                                
He  addressed  scenarios  on  the  Legislature  sharing  the  4.5                                                               
percent withdrawal with Alaskans as follows:                                                                                    
                                                                                                                                
     That 4.5  percent, if we  gave them no dividend  out of                                                                    
     it  and  took it  all  to  the  general fund  we  could                                                                    
     probably  make it  work and  get  out of  this hole;  I                                                                    
     think   that's  politically   not   attainable  and   I                                                                    
     personally would not  support it. I think if  we have a                                                                    
     sharing  relationship  with  the  dividends,  with  the                                                                    
     people, with  the state, there's a  balance clearly. If                                                                    
     we  take it  all to  the  general fund,  the whole  4.5                                                                    
     percent, we are  going to pretty much  fix our problem,                                                                    
     make it  pretty easy  to get  out of;  but, if  we take                                                                    
     none of it  and it all goes to the  dividends, we can't                                                                    
     get out of this hole,  I don't see any mathematical way                                                                    
     we can do  it. So somewhere there's a  balance and that                                                                    
     in  lies the  50 percent  split and  I think  hopefully                                                                    
     gets the public's support behind it.                                                                                       
                                                                                                                                
CHAIR DUNLEAVY reiterated  that the permanent fund will  not be a                                                               
constant  flat stream  and  will  not take  care  of the  state's                                                               
fiscal problems. He  pointed out that the  state's fiscal problem                                                               
is so  great that  $1.2 billion  to $1.5  billion draws  would be                                                               
nowhere near the $2.8 to $3 billion deficit.                                                                                    
                                                                                                                                
3:45:27 PM                                                                                                                    
SENATOR STEDMAN answered correct. He  set forth that a withdrawal                                                               
from the permanent fund would act  as a base, but other solutions                                                               
such  as  budget  reductions and  revenue  enhancements  will  be                                                               
required to fix  the budget deficit. He said the  state's hole is                                                               
structural  and  the quicker  the  Legislature  can dissolve  the                                                               
structural deficit  and get back  to balanced budgets  the better                                                               
off all of us are.                                                                                                              
                                                                                                                                
SENATOR WILSON  noted that Senator Stedman's  presentation showed                                                               
the permanent  fund's balance growing.  He asked  Senator Stedman                                                               
to explain how  he came up with the numbers  that showed the fund                                                               
growing.                                                                                                                        
                                                                                                                                
SENATOR STEDMAN explained as follows:                                                                                           
                                                                                                                                
     If  the  average rate  of  return  is higher  than  4.5                                                                    
     percent, it  will get larger;  if it's higher  than 4.5                                                                    
     percent plus  the rate  of inflation,  say the  rate of                                                                    
     inflation is 2 percent, just  as a number, and you made                                                                    
     over  6.5  percent,  your real  purchasing  power  will                                                                    
     start to  increase. There  will be  times I  can assure                                                                    
     you  that  the purchasing  power  will  decline in  the                                                                    
     short run just due to market reductions.                                                                                   
                                                                                                                                
3:48:11 PM                                                                                                                    
SENATOR  WILSON asked  to confirm  that  the additional  earnings                                                               
would go into the earnings reserve account.                                                                                     
                                                                                                                                
SENATOR STEDMAN  specified that the  bill does not  eliminate the                                                               
earnings reserve and detailed as follows:                                                                                       
                                                                                                                                
     The   earnings   reserve   are  trading   profits   and                                                                    
     potentially the unrealized gains.  The corpus is what's                                                                    
     protected by the constitution,  roughly $40 billion. So                                                                    
     we  can,  we  the  Legislature, if  we  adopt  this  in                                                                    
     statute, we  still can get  around the 4.5  percent and                                                                    
     spend   the  earnings   reserve;   it   would  take   a                                                                    
     constitutional change  to block that and  limit us just                                                                    
     to 4.5 percent and that  discussion would come later. I                                                                    
     personally support  that, but it  has to take  the will                                                                    
     of the  people. So  you could  adopt this  statute, pay                                                                    
     out  4.5   percent  and  then   have  an   election  of                                                                    
     spendthrifts and  they decide to  come in and  say, "We                                                                    
     don't  like  4.5 percent,  we  want  $4 billion  or  $5                                                                    
     billion because we  want to do this project  or we want                                                                    
     to build roads  or more ferries," or  whatever they are                                                                    
     going  to build  and  go  in and  take  it  out of  the                                                                    
     earnings  reserve.   There  still  needs  to   be  some                                                                    
     prudence on sticking with the  4.5 percent to make sure                                                                    
     that that does not happen. If  and when we take it to a                                                                    
     constitutional  amendment,  the earnings  reserve  then                                                                    
     would eliminated,  it would  have no,  from what  I can                                                                    
     see, no value.                                                                                                             
                                                                                                                                
SENATOR STEDMAN disclosed that SB 21 does not change the Alaska                                                                 
Permanent Fund Corporation's structure and detailed as follows:                                                                 
                                                                                                                                
     We are not  turning the permanent fund on  its head and                                                                    
     changing its  time horizon or  its liquidity  needs and                                                                    
     things of that nature; it  pretty much keeps the status                                                                    
     quo and  it puts them  out, kind  of silos them  off on                                                                    
     the side where  we clearly would have in front  of us a                                                                    
     deficit  issue.   We  can't  just  look   over  to  the                                                                    
     permanent fund and  grab billions out and  not make the                                                                    
     hard decisions  because we have  some tough ones  as we                                                                    
     all know to make and they are not going to be fun.                                                                         
                                                                                                                                
3:50:55 PM                                                                                                                    
CHAIR DUNLEAVY asked if SB 21 sets an amount for inflation                                                                      
proofing, not passive inflation proofing.                                                                                       
                                                                                                                                
SENATOR STEDMAN answered that SB 21 does not and detailed as                                                                    
follows:                                                                                                                        
                                                                                                                                
     What sets the  trigger or the mechanism to  allow it to                                                                    
     inflation  proof itself  is the  payout  rate, and  the                                                                    
     asset allocation  and performance  of the  fund itself.                                                                    
     So given  roughly the  current allocation  and historic                                                                    
     performance of all of those  asset classes helps derive                                                                    
     the payout rate and there's  no magic number. I thought                                                                    
     4.5 percent  just from my past  professional experience                                                                    
     is reasonable  and attainable,  some folks  might think                                                                    
     it should be  4.75 percent or 5.0 percent  and the next                                                                    
     guy  might think  it should  be 4.25  percent; I  think                                                                    
     that  should   be  left  up   to  the   discussion  and                                                                    
     recommendations from  the permanent fund and  maybe the                                                                    
     Department  of  Revenue  and  debated  in  the  finance                                                                    
     committees or whatever, I just  picked that number from                                                                    
     professional experience of what I thought would work.                                                                      
                                                                                                                                
He addressed  a scenario where  the fund's  rate of return  was 5                                                               
percent over 10 years with a 4.5-percent withdrawal as follows:                                                                 
                                                                                                                                
     We would  be going  backwards with purchasing  power if                                                                    
     inflation is 2.0 percent,  2.5 percent, historically it                                                                    
     has been 2.5 percent the  last century; but you have to                                                                    
     have an  asset allocation mix  that is in  balance with                                                                    
     your  payout.   So  if  you  ratchet   the  payout  up,                                                                    
     sometimes you could  push your performance requirements                                                                    
     of your portfolio  managers to a point  where your risk                                                                    
     level gets  a little bit  too high, in my  opinion, and                                                                    
     that works with  this or a retirement fund  or your own                                                                    
     personal stuff also.                                                                                                       
                                                                                                                                
3:53:01 PM                                                                                                                    
CHAIR  DUNLEAVY  asked  if  SB   21  would  automatically  pay  a                                                               
permanent fund  dividend (PFD) or  if paying a dividend  would be                                                               
optional for the Legislature to appropriate.                                                                                    
                                                                                                                                
SENATOR STEDMAN replied  that the dividend would  be 2.25 percent                                                               
of the  market value. He noted  that there has been  a discussion                                                               
and debate  as to whether  the PFD  is an appropriation,  but the                                                               
bill  does not  address  that. He  emphasized  that the  dividend                                                               
payout  would be  a minimum  of 2.25  percent. He  said there  is                                                               
almost a compact agreement with citizens on the split.                                                                          
                                                                                                                                
CHAIR DUNLEAVY asked  Senator Stedman to address  Section 3, line                                                               
13, which says, "The Legislature  may appropriate." He asked what                                                               
would happen if the word "may" was changed to "shall."                                                                          
                                                                                                                                
SENATOR STEDMAN  replied that Chair Dunleavy's  question would be                                                               
a  good question  for the  attorneys. He  said he  understood the                                                               
difference between  "may" and "shall,"  and would  be comfortable                                                               
with either one of the words.                                                                                                   
                                                                                                                                
CHAIR DUNLEAVY replied that the words are very different.                                                                       
                                                                                                                                
SENATOR  STEDMAN  responded that  he  knows  the words  are  very                                                               
different and detailed as follows:                                                                                              
                                                                                                                                
     If I  can put on  my "elected official hat,"  it's 2.25                                                                    
     percent.  I personally  would not  care speaking  to my                                                                    
     constituents if it  said "may" or "shall,"  it would be                                                                    
     2.25 percent  and the  check should  be written  and we                                                                    
     should deal with  our fiscal issues however  we need to                                                                    
     deal with them.                                                                                                            
                                                                                                                                
3:55:01 PM                                                                                                                    
CHAIR DUNLEAVY remarked  that you would never  hear from Alaskans                                                               
when the  dividend was  calculated by  market outcomes,  but they                                                               
have  become  suspicious and  untrusting  when  the dividend  was                                                               
vetoed  last year.  He  said  the suspicion  by  Alaskans is  the                                                               
reason why he brought up the  concepts of "mays" and "shalls." He                                                               
pointed out  that legislation and  appropriations could  still be                                                               
vetoed, but  constitutionalization gives  Alaskans a  little more                                                               
feeling that  they and  future generations  are being  treated as                                                               
partners.                                                                                                                       
                                                                                                                                
3:57:55 PM                                                                                                                    
CHAIR  DUNLEAVY  thanked  Senator  Stedman  and  held  SB  21  in                                                               
committee.                                                                                                                      
                                                                                                                                
3:58:02 PM                                                                                                                    
At ease.                                                                                                                        
                                                                                                                                
       SB 26-PERMANENT FUND: DEPOSITS; DIVIDEND; EARNINGS                                                                   
                                                                                                                                
3:59:06 PM                                                                                                                    
CHAIR DUNLEAVY called  the committee back to  order and announced                                                               
the consideration of SB 26.                                                                                                     
                                                                                                                                
3:59:27 PM                                                                                                                    
RANDALL  HOFFBECK, Commissioner,  Alaska  Department of  Revenue,                                                               
Juneau,  Alaska,  addressed the  comparison  between  SB 26,  the                                                               
Permanent Fund Protection Act (PFPA), and SB 21 as follows:                                                                     
                                                                                                                                
        · Rule-based:                                                                                                           
             ƒPFPA: yes;                                                                                                       
             ƒSB 21: yes.                                                                                                      
        · Stabilizing-investment income:                                                                                        
             ƒPFPA:    partial,    5-year   averaging    in                                                                    
               percentage of market value (POMV);                                                                               
             ƒSB 21: Partial, 5-year averaging in POMV.                                                                        
        · Stabilizing-total revenue:                                                                                            
             ƒPFPA: partial, addressed in a mid-range of                                                                       
               oil prices;                                                                                                      
             ƒSB 21: no defined plan.                                                                                          
        · Sustainable-protect the dividend:                                                                                     
             ƒPFPA: yes;                                                                                                       
             ƒSB 21: yes.                                                                                                      
       · Sustainable-protect the fund's total and corpus:                                                                       
             ƒPFPA: yes, maintains value of the fund and corpus                                                                
               over the long term;                                                                                              
             ƒSB 21: partial, the total fund value is                                                                          
               maintained but the growth is not protected in the                                                                
               corpus.                                                                                                          
       · Maximize the earnings reserve account (ERA) use:                                                                       
             ƒPFPA: yes, withdrawing less when oil                                                                             
               revenues are high allows higher draws when                                                                       
               oil revenues are low;                                                                                            
             ƒSB 21: partial, withdraws same percent each                                                                      
               year regardless of budget need.                                                                                  
                                                                                                                                
COMMISSIONER HOFFBECK  said the state  is facing a  fiscal crisis                                                               
that requires steps to be taken  that are not comfortable but are                                                               
necessary in order to actually  resolve the fiscal situation that                                                               
the state  is in. He  emphasized that  the permanent fund  is the                                                               
state's largest  tool for solving  the fiscal crisis and  its use                                                               
maximized. He  disclosed that the  Department of Revenue  did the                                                               
modeling on  what the largest-sustainable  draw would be  for the                                                               
permanent fund that would:                                                                                                      
                                                                                                                                
        · Not put the fund's corpus in jeopardy;                                                                                
       · Allow the fund to grow with inflation over time;                                                                       
        · Allow the fund to maintain its real purchasing power;                                                                 
        · Allow as much money as possible to be used for paying                                                                 
          both the dividend and for providing money for funding                                                                 
          government services.                                                                                                  
                                                                                                                                
He set  forth that  the Department of  Revenue determined  that a                                                               
5.25  percent draw  was  aggressive  with probabilistic  modeling                                                               
that takes  into account  anomalies and  down markets  showed the                                                               
percentage  still survived.  He added  that McKinsey  and Company                                                               
reviewed  the  department's  modeling  and  concurred  that  5.25                                                               
percent  was a  realistic goal.  He disclosed  that McKinsey  and                                                               
Company  is  internationally  known   on  Wall  Street  and  with                                                               
sovereign wealth funds all over the world.                                                                                      
                                                                                                                                
4:02:00 PM                                                                                                                    
At ease.                                                                                                                        
                                                                                                                                
4:02:45 PM                                                                                                                    
CHAIR DUNLEAVY called the committee back to order.                                                                              
                                                                                                                                
COMMISSIONER  HOFFBECK explained  that important  components were                                                               
needed to be  met when putting together the  bill's structure. He                                                               
set forth that using the  permanent fund's earnings must be rules                                                               
based to avoid overdrawing the fund  as well as a draw that could                                                               
stabilize revenues  for the  state of Alaska.  He noted  that the                                                               
bill introduced  in the previous  session originally had  a fixed                                                               
draw,  but was  rejected  as  being too  constrained,  so a  POMV                                                               
approach  was adopted  which the  Senate approved  last year.  He                                                               
added  that other  important  components  include protecting  the                                                               
dividend and  the fund's  corpus, and maximizing  the use  of the                                                               
fund  to generate  as much  revenue as  possible for  solving the                                                               
fiscal problem.                                                                                                                 
                                                                                                                                
CHAIR DUNLEAVY  asked Commissioner Hoffbeck to  clarify that when                                                               
he  said "stabilize  revenues" he  meant stabilizing  the revenue                                                               
stream  coming  out  of  the fund,  not  stabilizing  the  entire                                                               
revenue stream.                                                                                                                 
                                                                                                                                
4:04:31 PM                                                                                                                    
COMMISSIONER HOFFBECK  replied that the  PFPA does more  by tying                                                               
to oil-price revenues that acts as  a shutoff valve as oil prices                                                               
recover and the state gets more  revenue from oil rather than the                                                               
permanent  fund.  He  said  PFPA  stabilizes  the  state's  major                                                               
revenue  streams.  He  admitted  that  annual  fluctuations  will                                                               
occur,  but   five-year  averaging  will   take  a  lot   of  the                                                               
fluctuations  out  of  the  equation.  He  concurred  with  Chair                                                               
Dunleavy and Senator Stedman that SB 21  and SB 26 do not get the                                                               
state to the finish line by itself.                                                                                             
                                                                                                                                
CHAIR DUNLEAVY asked what Commissioner  Hoffbeck meant by saying,                                                               
"Stabilizing the permanent fund."                                                                                               
                                                                                                                                
4:06:27 PM                                                                                                                    
COMMISSIONER  HOFFBECK clarified  that he  said, "Protecting  the                                                               
dividend."  He explained  that  the dividend  has  become a  very                                                               
important part  of Alaska's economic base  and the administration                                                               
felt it needed to be protected, but  not at the rate over $2000 a                                                               
year because it took too much and  left the state too far away at                                                               
closing the gap. He continued as follows:                                                                                       
                                                                                                                                
     Essentially  the  size  of  the  dividend  at  $60  oil                                                                    
     equates to  the size of  the deficit and it's  not that                                                                    
     the dividend creates  a deficit, it gives us  kind of a                                                                    
     way to  think in our mind  just how big the  deficit is                                                                    
     with various sizes of dividends.  So if you pay a $2000                                                                    
     dividend, you  have about a $1.3  billion deficit using                                                                    
     the 5.25  percent draw.  If you  pay a  $1000 dividend,                                                                    
     you've  got  about  a  $700  million  deficit  and  the                                                                    
     difficulty in  closing $700 million is  tremendous, but                                                                    
     to  close $1.3  billion becomes  almost insurmountable;                                                                    
     essentially that would require  the entire $750 million                                                                    
     in  cuts  that the  Senate  has  discussed and  a  full                                                                    
     broad-based  tax to  close  that in  order  to pay  the                                                                    
     $2000 dividend.                                                                                                            
                                                                                                                                
4:08:03 PM                                                                                                                    
CHAIR DUNLEAVY  pointed out that the  decades-old calculation for                                                               
the dividend was determined  without interference from government                                                               
whereas the dividend in the  PFPA is determined by the government                                                               
based upon the deficit or how much the state needs.                                                                             
                                                                                                                                
COMMISSIONER  HOFFBECK confirmed  that  the  entire 5.25  percent                                                               
draw  from the  permanent fund  goes  into the  general fund.  He                                                               
explained the formula for the dividend as follows:                                                                              
                                                                                                                                
     Twenty  percent of  the draw,  the  5.25 percent  draw,                                                                    
     goes to pay  the dividend as well as 20  percent of the                                                                    
     non-constitutionally   deposited   mineral   royalties,                                                                    
     those two  together create the dividend;  so it's still                                                                    
     formula  driven,  but  it  goes  directly  through  the                                                                    
     general  fund and  comes out  of the  general fund.  If                                                                    
     that becomes  a sticking point  to getting this  to the                                                                    
     finish  line, we  have no  problem of  just dumping  it                                                                    
     into a dividend fund similar to  how it is done now. We                                                                    
     just felt  that it  was cleaner to  run it  through the                                                                    
     general fund  since it's flowing through  there anyway,                                                                    
     but that is not a critical piece to the plan.                                                                              
                                                                                                                                
4:10:01 PM                                                                                                                    
SENATOR  WILSON  pointed  out that  Commissioner  Hoffbeck  keeps                                                               
saying, "Protecting the  dividend." He asked what  the purpose is                                                               
of protecting the dividend.                                                                                                     
                                                                                                                                
COMMISSIONER  HOFFBECK replied  that that  the PFPA  protects the                                                               
earning reserve  from being  drawn to the  point where  the state                                                               
won't be able to pay the  dividend. He specified that the idea is                                                               
to  protect the  entirety  of the  permanent  fund including  the                                                               
portion that goes to pay the dividend.                                                                                          
                                                                                                                                
SENATOR  WILSON said  he constantly  hears  from a  lot of  bills                                                               
similar to  SB 21  and SB 26  that the permanent  fund has  to be                                                               
protected.  He  asked  if  the   protection  was  needed  because                                                               
government does not have the  discipline to find another solution                                                               
other than to go the route of SB 26.                                                                                            
                                                                                                                                
4:11:47 PM                                                                                                                    
COMMISSIONER  HOFFBECK concurred  with  Senator  Stedman when  he                                                               
talked about "wolves." He commented as follows:                                                                                 
                                                                                                                                
     It's just kind  of the reality of what we  face when we                                                                    
     bump  up against  these decisions.  If you  are sitting                                                                    
     there with  a $500 million  hole that you need  to fill                                                                    
     in  the budget  and  that  means either  you  put in  a                                                                    
     broad-based  tax and  that  fills  the committee  rooms                                                                    
     with angry people, or you  put in $500 million worth of                                                                    
     expenditure cuts  and that fills  the rooms  with angry                                                                    
     people, or  $500 million  you can just  take it  out of                                                                    
     your savings.  There's a  lot of  incentive to  just go                                                                    
     take it  out of  your savings and  that's why  we think                                                                    
     that structure needs  to be there so that if  you go to                                                                    
     take it out of your savings,  you have to answer to the                                                                    
     public why  you didn't  follow the  rules that  you set                                                                    
     up,  it's exactly  what  the  administration is  facing                                                                    
     right now  because of the  governor's veto.  We believe                                                                    
     that the governor  had all of the  rights and authority                                                                    
     to  make the  veto or  he wouldn't  have done  it; that                                                                    
     being said,  the people  stood up  and said  why didn't                                                                    
     you follow  the rules, you've been  following that same                                                                    
     rule for 30-plus  years, why didn't you  follow it this                                                                    
     time.  I  think  by  putting  a  structure  around  any                                                                    
     restructuring of  how we  use the  dividend and  a real                                                                    
     framework, we  put ourselves in  the position  that any                                                                    
     time that we  don't follow the rule, we  have to answer                                                                    
     to the public why didn't we follow it.                                                                                     
                                                                                                                                
4:13:27 PM                                                                                                                    
SENATOR WILSON asked  why the government should get  more than 50                                                               
percent  than the  people get  in terms  of the  payout from  the                                                               
dividend.                                                                                                                       
                                                                                                                                
COMMISSIONER  HOFFBECK  opined that  a  50-50  split is  easy  to                                                               
explain.  He   asserted  that   there  is   nothing  structurally                                                               
significant about  a 50-50 split.  He explained that  the current                                                               
dividend  formula was  the product  of  political compromise  and                                                               
there  was nothing  magical with  the calculation.  He emphasized                                                               
that a  50-50 split  does not  get the  government to  the finish                                                               
line. He remarked that the  administration did not say, "Let's go                                                               
grab some  money from the  citizens of  the state of  Alaska." He                                                               
asserted  that the  PFPA squeezes  as much  out for  the dividend                                                               
while still having  a reasonable expectation to be  able to close                                                               
the rest of the fiscal gap.                                                                                                     
                                                                                                                                
4:15:16 PM                                                                                                                    
CHAIR  DUNLEAVY referenced  an  earlier  discussion with  Senator                                                               
Stedman on constitutionalizing SB 21.  He admitted that no matter                                                               
how much the legislation is  ring-fenced in statute, the governor                                                               
is able to veto or one could change the statute in one session.                                                                 
                                                                                                                                
COMMISSIONER  HOFFBECK replied  that  Chair  Dunleavy's point  is                                                               
well  taken and  agreed that  not only  could the  administration                                                               
veto  it,   but  the  Legislature   could  just  choose   not  to                                                               
appropriate  a dividend  in  any  given year  as  well under  the                                                               
formula. He  said the  assumption is people  are going  to follow                                                               
the rules. He addressed the  concern with constitutionalizing the                                                               
legislation as follows:                                                                                                         
                                                                                                                                
     The  concern with  putting in  the "constitutional"  is                                                                    
     exactly  what  the founders,  the  ones  who wrote  the                                                                    
     constitution  about   this  whole  idea   of  "siloing"                                                                    
     revenues  for  set  expenditures, they  prohibited  the                                                                    
     dedicated   funds   within   the   statutory   language                                                                    
     specifically in  the constitution because they  saw the                                                                    
     issues that  are associated with putting  your money in                                                                    
     silos that  can't be  broken and when  you put  them in                                                                    
     silos  that  can't  be  broken,   now  you  end  up  in                                                                    
     situations  where  often  times you  could  have  money                                                                    
     sitting  here that  you didn't  need that  you need  to                                                                    
     spend over  here, but you  would have no access  to it.                                                                    
     So that's  the real  danger you have  by putting  it in                                                                    
     the constitution  is that  you would tie  it up  to say                                                                    
     this is  exactly where  it's going to  have to  go, you                                                                    
     could be  in a  situation where  you couldn't  pay your                                                                    
     general obligation  debt or  you couldn't  make payroll                                                                    
     or some  other thing and  you would not have  access to                                                                    
     those  funds.  So  it  really ties,  not  so  much  the                                                                    
     administration's hands,  it's the  Legislature's hands,                                                                    
     you're taking away your  own appropriation authority by                                                                    
     putting  it into  the constitution.  The administration                                                                    
     can't spend  what you don't  appropriate, so  it really                                                                    
     is  an   issue  of  some  of   your  flexibility,  your                                                                    
     appropriation  authority  that  would  be  tied  up  by                                                                    
     moving  it  into  the  constitution;  but,  just  as  a                                                                    
     general statement, it's not good  public policy to silo                                                                    
     your revenues and  lock them up where they  can only be                                                                    
     spent   in  a   certain  fashion   and  not   have  the                                                                    
     flexibility to move the money around if you need to.                                                                       
                                                                                                                                
4:18:00 PM                                                                                                                    
CHAIR  DUNLEAVY pointed  out  that the  state  had a  rules-based                                                               
system  for decades  that changed  because it  was statutory.  He                                                               
reiterated that  the PFPA  does not  provide protection,  it just                                                               
changes the way the permanent fund is dealt with.                                                                               
                                                                                                                                
COMMISSIONER  HOFFBECK  clarified  that   the  PFPA  changes  the                                                               
formula and provides  no more or no less protection  that the old                                                               
formula had.                                                                                                                    
                                                                                                                                
CHAIR DUNLEAVY  reiterated that the  PFPA is still  statutory and                                                               
amounts could be  vetoed, and the Legislature could  change it in                                                               
a 90-day session. He commented as follows:                                                                                      
                                                                                                                                
     What  we are  lacking  right now  from my  perspective,                                                                    
     just from the feedback I'm  getting, is a confidence in                                                                    
     the public  that we are  going to  deal with this  in a                                                                    
     manner that they  thoroughly understand and potentially                                                                    
     could accept,  but they are  wading through  the terms,                                                                    
     the terminology,  the nuances,  and some of  this stuff                                                                    
     they are questioning.                                                                                                      
                                                                                                                                
4:19:25 PM                                                                                                                    
COMMISSIONER  HOFFBECK  summarized the  plans  to  draw from  the                                                               
permanent  fund  by addressing  the  current  status quo  option,                                                               
drawing from the permanent-fund-only  option, and the differences                                                               
in using either SB 21 or SB 26 as follows:                                                                                      
                                                                                                                                
   · Status quo will eventually deplete the earnings reserve and                                                                
     there  won't   be  a  dividend   or  money   for  government                                                               
     expenditures.                                                                                                              
   · Permanent-fund-only plan has the same problems as status                                                                   
     quo if  there is  not a  full-fiscal solution.  The earnings                                                               
     reserve  will  eventually be  depleted  and  you won't  have                                                               
     money for government services.                                                                                             
   · Whatever plan is selected needs the rest of the pieces to                                                                  
     solidify either of the plans.                                                                                              
   · Both SB 21 and SB 26 are rules based.                                                                                      
   · Both SB 21 and SB 26 stabilize the investment-income piece                                                                 
     by  using the  five-year-averaging strategy  that will  take                                                               
     the wild swings out of it.                                                                                                 
   · SB 21 does not have the shut-off valve on the percentage of                                                                
     market  value  (POMV) draw  and  potentially  may result  in                                                               
     super-heated  spending  if  oil  production  or  oil  prices                                                               
     rebound.                                                                                                                   
   · Total revenue is addressed more within SB 26, but only mid-                                                                
     range oil  prices is  addressed. Once  oil prices  move past                                                               
     the mid-range, oil-price volatility  could still be present.                                                               
     Other revenues  that are  part of  the total  fiscal package                                                               
     would not be addressed in SB 26, the bill only addresses                                                                   
     the tie between oil and the permanent fund.                                                                                
   · Both plans are statutory.                                                                                                  
   · Both plans protect the dividend.                                                                                           
   · Both plans have a formula-driven approach for the dividend.                                                                
   · Both plans protect the fund by at least growing at the rate                                                                
     of inflation.                                                                                                              
   · Both plans project the fund to have similar balances 24-                                                                   
    years out at approximately $104 billion to $105 billion.                                                                    
   · SB 21 will have more money in the earnings reserve and SB                                                                  
     26 will have more money in the fund's corpus.                                                                              
   · With money in the corpus at a 5.25 percent draw, SB 26 will                                                                
     generate more revenue for funding government services than                                                                 
     the 4.5 percent draw under SB 21.                                                                                          
                                                                                                                                
COMMISSIONER HOFFBECK addressed a  final comparison between SB 21                                                               
and SB 26 that referenced FY2018 as follows:                                                                                    
                                                                                                                                
   · FY2018 unrestricted general fund (UGF): $4.2 billion;                                                                      
   · FY2018 existing UGF revenues: $1.4 billion;                                                                                
   · Planned earnings reserve account draws for UGF:                                                                            
        ƒStatus quo: not available,                                                                                            
        ƒSB 21: $1.2 billion,                                                                                                  
        ƒSB 26: $2.0 billion;                                                                                                  
   · Additional measures required for a full-fiscal plan:                                                                       
        ƒStatus quo: $2.8 billion,                                                                                             
        ƒSB 21: $1.6 billion,                                                                                                  
        ƒSB 26: $0.8 billion.                                                                                                  
                                                                                                                                
4:25:40 PM                                                                                                                    
SENATOR  WILSON  addressed  the  $1.4  billion  in  existing  UGF                                                               
revenues  in FY2018  and asked  Commissioner Hoffbeck  to provide                                                               
additional details.                                                                                                             
                                                                                                                                
COMMISSIONER HOFFBECK  replied that he believes  the $1.4 billion                                                               
includes the revenues that the  governor proposed from the motor-                                                               
fuel tax. He  opined that the motor-fuel tax is  only $40 million                                                               
in the  first year, so  whether the tax  is included or  not does                                                               
not change the discussion.                                                                                                      
                                                                                                                                
COMMISSIONER  HOFFBECK set  forth  that the  $800 million  "hole"                                                               
that  needs to  be  filled under  SB  26 will  be  a heavy  lift;                                                               
however, the administration does not see  a path to fill the $1.6                                                               
billion from  SB 21. He  opined that  an unfunded liability  is a                                                               
larger threat than a  too large of a draw. He said  a draw can be                                                               
turned down, but an unfunded  liability creates the incentive for                                                               
unplanned draws. He asserted that  unplanned draws really put the                                                               
risk and the volatility into the stability of any of the plans.                                                                 
                                                                                                                                
4:27:58 PM                                                                                                                    
SENATOR  WILSON pointed  out  that  Commissioner Hoffbeck  stated                                                               
that he  did not see another  means to "fill the  hole." He asked                                                               
if he thought about "making the  hole smaller" by making the size                                                               
of government  smaller instead  of looking  for revenues  to fill                                                               
the hole.                                                                                                                       
                                                                                                                                
COMMISSIONER  HOFFBECK  answered  yes.   He  explained  that  the                                                               
governor intentionally did not "fill  the hole" when he presented                                                               
his budget because  he thought a discussion  was needed regarding                                                               
how much  is going  to be  revenue and  how much  is going  to be                                                               
expenditure reductions.  He asserted  that "everything is  on the                                                               
table." He  opined that the  $1.6 billion in  additional measures                                                               
required for a full-fiscal plan  from SB 21 would require massive                                                               
expenditure cuts  and massive  taxes. He  admitted that  the $800                                                               
million left  from SB  26 is  going to  be a  pretty big  task in                                                               
itself.                                                                                                                         
                                                                                                                                
CHAIR  DUNLEAVY remarked  that  now  is not  the  time to  engage                                                               
Commissioner  Hoffbeck on  the philosophy  of reductions  and the                                                               
size of government. He opined  that continued government spending                                                               
will be  above the $600  million that is projected  in additional                                                               
measures from SB 26.                                                                                                            
                                                                                                                                
COMMISSIONER HOFFBECK said he had no further comment.                                                                           
                                                                                                                                
4:29:36 PM                                                                                                                    
CHAIR DUNLEAVY thanked  Commissioner Hoffbeck, and held  SB 26 in                                                               
committee.                                                                                                                      
                                                                                                                                
4:29:54 PM                                                                                                                    
At ease.                                                                                                                        
                                                                                                                                
^DISCUSSION: Angela Rodell,  Executive Director, Alaska Permanent                                                               
Fund Corporation                                                                                                                
DISCUSSION: Angela Rodell, Executive Director, Alaska Permanent                                                             
                        Fund Corporation                                                                                    
                                                                                                                                
4:31:10 PM                                                                                                                    
CHAIR DUNLEAVY called  the committee back to order.  He asked Ms.                                                               
Rodell to address the committee.                                                                                                
                                                                                                                                
4:31:27 PM                                                                                                                    
ANGELA   RODELL,  Executive   Director,  Alaska   Permanent  Fund                                                               
Corporation  (APFC), Juneau,  Alaska, explained  that the  APFC's                                                               
one mission is to manage  the Alaska Permanent Fund's assets. She                                                               
emphasized  that APFC  does not:  determine spending,  manage the                                                               
dividend, and manage payouts of any kind.                                                                                       
                                                                                                                                
SENATOR COGHILL said one of  the questions that continually comes                                                               
to  the forefront  is the  use  of the  earnings reserve  account                                                               
because that is  something that APFC must manage.  He pointed out                                                               
that  continued  payouts,  including  the  dividend,  presents  a                                                               
liquidity issue  for the earnings  reserve account. He  asked how                                                               
much was in the earning reserve account.                                                                                        
                                                                                                                                
4:33:19 PM                                                                                                                    
MS.  RODELL  replied that  the  amount  in the  earnings  reserve                                                               
account as of December 31, 2016 was approximately $10.3 billion.                                                                
                                                                                                                                
SENATOR  COGHILL asked  what  impact  a $2  billion  draw on  the                                                               
earnings reserve account would have.                                                                                            
                                                                                                                                
MS.  RODELL  cautioned  that  her answer  will  not  be  straight                                                               
forward because different draws have  been proposed and each draw                                                               
requires  different strategies.  She explained  how the  earnings                                                               
reserve account receives cash as follows:                                                                                       
                                                                                                                                
     We routinely get cash every  day in some format. We are                                                                    
     getting  dividends  off  of   stocks,  we  are  getting                                                                    
     interest payments  off of bonds,  we are  getting rents                                                                    
     from real  estate, we are getting  payments through the                                                                    
     sale of  various assets,  and then  that cash  is being                                                                    
     reinvested  into the  entire  asset  allocation of  the                                                                    
     fund.                                                                                                                      
                                                                                                                                
She detailed how the permanent fund is managed as follows:                                                                      
                                                                                                                                
     The way  that the corporation  has managed the  fund to                                                                    
     date  is that  we buy  pro  rata shares  of each  asset                                                                    
     between  the earnings  reserve and  the  corpus of  the                                                                    
     account, so every asset is owned by both accounts.                                                                         
                                                                                                                                
She addressed  Senator Coghill's question regarding  the earnings                                                               
reserve account's feasibility going forward as follows:                                                                         
                                                                                                                                
     What your  question speaks  to is  whether or  not that                                                                    
     continues to be  feasible going forward if  you are now                                                                    
     using this fund not  as a long-term investment vehicle,                                                                    
     but rather  a budget-stabilization fund and  similar to                                                                    
     the  restrictions   that  have   been  placed   on  the                                                                    
     constitutional budget reserve to  recognize its role as                                                                    
     a  budget  stabilization  fund and  its  need  to  have                                                                    
     principal protection  and liquidity.  We would  want to                                                                    
     look  long and  hard at  what the  balances are  in the                                                                    
     earnings  reserve account  and  whether or  not it  can                                                                    
     continue to be invested in  all of the same assets that                                                                    
     the  corpus is  currently invested  in and  continue to                                                                    
     take  that  strategy,  and   if  the  earnings  reserve                                                                    
     account is being drawn down  to such levels where it no                                                                    
     longer seems  prudent to conduct that  because we first                                                                    
     have a  prudent fiduciary responsibility, we  are going                                                                    
     to  have  to  convert   that  into  a  different  asset                                                                    
     allocation  which  is  going   to  lower  the  expected                                                                    
     returns overall  that you've been  assuming in  many of                                                                    
     these models.  That's just the reality  of managing the                                                                    
     fund and making sure  that we have the cash-deliverable                                                                    
     that  the   Legislature  and  the   administration  are                                                                    
     expecting at the start of the fiscal year.                                                                                 
                                                                                                                                
4:36:41 PM                                                                                                                    
SENATOR COGHILL remarked that using  the earnings reserve account                                                               
to stabilize  the government as  well as  payout a dividend  is a                                                               
different process  from the way  the earnings reserve  account is                                                               
currently  used.  He  asked  if   the  50-50  allocation  process                                                               
proposed in SB 21 would change the way APFC invested.                                                                           
                                                                                                                                
MS.  RODELL answered  no. She  pointed  out that  APFC has  never                                                               
managed to a dividend in the  past. She reiterated that each draw                                                               
percentage  is not  as clean  as everyone  would like  and opined                                                               
that modifications  may have to  be made as  a result of  what is                                                               
actually happening  both to  the fund itself  in terms  of market                                                               
performance, but  also in terms  of what compromises  are reached                                                               
to address the budget issues around it.                                                                                         
                                                                                                                                
4:38:58 PM                                                                                                                    
SENATOR COGHILL remarked  that the committee has to  talk about a                                                               
philosophy  before   legislation  goes  to  the   Senate  Finance                                                               
Committee. He opined  that one approach is to  protect a dividend                                                               
into the  future and  then get  some state  benefit. He  said the                                                               
other approach  is to get  some state  benefit and make  sure the                                                               
dividend is guarded. He stated  that the two approaches differ in                                                               
many ways and would deliver different sets of assumptions.                                                                      
                                                                                                                                
MS. RODELL answered yes. She opined  that APFC has had the luxury                                                               
in managing the  permanent fund and the  earnings reserve account                                                               
together  as  required  in  statute.   She  noted  that  everyone                                                               
understood the volatility  in the market with  a dividend payout.                                                               
She disclosed  that APFC's previous  executive director  told her                                                               
that  he did  not  receive  a single  phone  call about  dividend                                                               
payouts  because  everybody understood  what  was  going on.  She                                                               
opined that  the conversation  is different when  it is  a single                                                               
dividend and budget stabilization payment for the general fund.                                                                 
                                                                                                                                
4:40:22 PM                                                                                                                    
SENATOR  WILSON noted  that Ms.  Rodell referenced  "models" when                                                               
speaking about  changing the  way APFC would  have to  manage the                                                               
earnings account.                                                                                                               
                                                                                                                                
MS. RODELL  explained that she  was talking about pro  rata asset                                                               
allocations between the corpus and  earnings reserve account. She                                                               
noted  that APFC  prepares a  monthly forecast  of statutory  net                                                               
income on  its website. She  specified that if an  adjustment has                                                               
to be  made to the  earnings reserve account's  asset allocation,                                                               
then the monthly  model will have to be adjusted  that results in                                                               
a  different total  return outcome  because $45  billion invested                                                               
one  way and  $10  billion  invested another  way  will create  a                                                               
different outcome.                                                                                                              
                                                                                                                                
SENATOR WILSON  remarked that there has  been a lot of  talks and                                                               
dialogs upon the need to inflation  proof and asked Ms. Rodell to                                                               
explain what inflation proofing does and  does not do in terms of                                                               
the permanent fund.                                                                                                             
                                                                                                                                
4:42:10 PM                                                                                                                    
MS.  RODELL  provided  an  overview  of  inflation  proofing  the                                                               
permanent fund as follows:                                                                                                      
                                                                                                                                
   · Inflation proofing was identified as a priority by the                                                                     
     permanent fund's Board of Trustees in 1982.                                                                                
   · The dividend program was created in statute and APFC was                                                                   
     created to manage the permanent fund in 1982.                                                                              
   · 1982 was a very high inflationary period and there was                                                                     
     recognition that a mechanism was needed to generate income                                                                 
     for future generations.                                                                                                    
   · Legislative list of investments that the permanent fund                                                                    
     could invest in was removed and allowed for the fund's                                                                     
     current diversified asset allocation.                                                                                      
   · Many of the fund's assets are considered inflation-proofing                                                                
     investments; e.g., real estate investments go up over time                                                                 
     and therefore naturally inflation-proof investments.                                                                       
                                                                                                                                
MS. RODELL detailed  that the fund's real  estate investments are                                                               
sourced  to  different  accounts  and explained  the  process  as                                                               
follows:                                                                                                                        
                                                                                                                                
     If we bought an office  building ten years ago for $100                                                                    
     million  with $20  million coming  out of  the earnings                                                                    
     reserve  account  and $80  million  coming  out of  the                                                                    
     corpus and  we go  to sell it  today for  $200 million,                                                                    
     the earnings reserve account is  going to get that $100                                                                    
     million  gain,  plus they  are  going  to get  the  $20                                                                    
     million  that the  earnings reserve  account originally                                                                    
     invested into it and all the  corpus is going to get is                                                                    
     the $80  million of its original  investment. If hotels                                                                    
     now cost  $200 million,  not $100  million and  I don't                                                                    
     have the earnings reserve account  to buy the building,                                                                    
     I've now  lost the investment  power of the  corpus and                                                                    
     that's why  the inflation  proofing is so  important to                                                                    
     protecting the  corpus because this is  about the value                                                                    
     to  future  generations  and   the  benefit  they  will                                                                    
     receive.                                                                                                                   
                                                                                                                                
4:45:47 PM                                                                                                                    
CHAIR DUNLEAVY  asked that Ms. Rodell  address inflation proofing                                                               
for SB 21 and SB 26.                                                                                                            
                                                                                                                                
MS. RODELL specified  that SB 21 repeals the  current statute, so                                                               
there is  no formal  or deliberate mechanism  to move  money into                                                               
the corpus of the account where  it cannot be spent. She detailed                                                               
that SB  26 has  the mechanism  where if  there's four  times the                                                               
earnings reserve  account balance,  excess monies will  move over                                                               
into  the corpus.  She  said  the challenge  is  there  is not  a                                                               
calculation  based  on  lost earnings  power  where  a  mechanism                                                               
recalculates  or recalibrates  what  the actual  loss  is due  to                                                               
inflation to the corpus over  a certain time period. She admitted                                                               
that recognizing money should move  back into the corpus is good,                                                               
but  SB 26  does not  tie  money going  back into  the corpus  to                                                               
inflation or purchase power directly.                                                                                           
                                                                                                                                
SENATOR WILSON asked what the bills do for long-term growth.                                                                    
                                                                                                                                
4:48:18 PM                                                                                                                    
MS. RODELL  replied that she  cannot answer the  question because                                                               
she does not know  what the markets are going to  do and what the                                                               
ultimate draws are going to be.                                                                                                 
                                                                                                                                
SENATOR COGHILL commented as follows:                                                                                           
                                                                                                                                
     The 4.5  percent as  told to us  by Senator  Stedman is                                                                    
     more  of a  passive  inflation in  that the  historical                                                                    
     averages have  been over that  so that would  leave the                                                                    
     money  available, but  it still  goes  to the  earnings                                                                    
     reserve is  what you are  saying. The  earnings reserve                                                                    
     can short change you on  the purchasing capacity at the                                                                    
     corpus level.                                                                                                              
                                                                                                                                
MS.  RODELL  answered  correct  because  money  in  the  earnings                                                               
reserve is available for appropriation at any time.                                                                             
                                                                                                                                
4:49:24 PM                                                                                                                    
SENATOR COGHILL asked if the  money from the earnings reserve has                                                               
only been drawn for the dividend.                                                                                               
                                                                                                                                
MS. RODELL answered correct.                                                                                                    
                                                                                                                                
SENATOR COGHILL commented as follows:                                                                                           
                                                                                                                                
     So I think probably what  I hear Senator Stedman saying                                                                    
     is at this point the  public pressure of changing these                                                                    
     things is  so huge  that if  that became  the structure                                                                    
     that  that would  be a  safeguard to  itself just  like                                                                    
     today changing  our dividend; that's  the philosophical                                                                    
     question, changing  it has a  huge public  interest, no                                                                    
     doubt  about it,  but it  is available  now and  people                                                                    
     need to know that.                                                                                                         
                                                                                                                                
MS.  RODELL  explained  that   inflation  proofing  is  currently                                                               
statutory  and  appropriations  were zeroed-out  for  FY2016  and                                                               
FY2017.  She said  the current  statute at  least recognizes  the                                                               
importance of inflation proofing.                                                                                               
                                                                                                                                
4:50:40 PM                                                                                                                    
CHAIR DUNLEAVY  asked what  would occur  if the  earnings reserve                                                               
account is drawn down and its impact on the corpus.                                                                             
                                                                                                                                
MS.  RODELL  explained that  two  scenarios  would occur  with  a                                                               
zeroed-out earnings reserve account:                                                                                            
                                                                                                                                
   1. Market continues to go up and positive returns continue                                                                   
     where unrealized gains continue to build and realized gains                                                                
     are moved over.                                                                                                            
   2. The earnings reserve acting as a cushion against losses is                                                                
     lost, the corpus would diminish and there would be no                                                                      
     dividend.                                                                                                                  
                                                                                                                                
4:53:25 PM                                                                                                                    
CHAIR DUNLEAVY  asked that  Ms. Rodell  address some  things that                                                               
the committee needs  to ponder in order to  protect the permanent                                                               
fund.  He  opined that  there  are  at  least a  dozen  different                                                               
approaches  to the  permanent  fund, including  the  one that  is                                                               
currently in  existence. He concurred  with Senator  Coghill that                                                               
what's at  play is  deciding how  the fund  grows over  time, how                                                               
much the draw should be, and how to deal with the dividend.                                                                     
                                                                                                                                
He opined  that talk has  not centered  on the dividend.  He said                                                               
one reason  why the dividend  was put into existence  was because                                                               
of the statehood act and the  constitution did not allow folks to                                                               
claim mineral rights underneath  their property. He asserted that                                                               
the dividend  is a  way of sharing  with Alaskans.  He analogized                                                               
that  the dividend  was also  put into  existence to  act as  the                                                               
"chain" for  the dog that guards  the doghouse where a  hand gets                                                               
bit if it is placed in the doghouse.                                                                                            
                                                                                                                                
He disclosed that  he has received close  to 4,000 communications                                                               
from concerned Alaskans and attributed  their concern to the veto                                                               
of  the  dividend  as  well  as  where  the  Legislature  may  go                                                               
regarding the  permanent fund.  He set  forth that  the permanent                                                               
fund has  been allowed to  invest politically-insulated  from the                                                               
Legislature's "wolves." He remarked  that the permanent fund does                                                               
well  when politicians  are kept  as  far away  as possible  from                                                               
making investment decisions.                                                                                                    
                                                                                                                                
4:56:05 PM                                                                                                                    
MS. RODELL  called attention  to APFC  and the  talent of  its 45                                                               
members as  well as its  board of  trustees who are  dedicated to                                                               
managing the fund's money. She  asked that the committee not lose                                                               
sight about the  fund, the dividend, and that there  is an entity                                                               
that relies on the earnings reserve account to fund its budget.                                                                 
                                                                                                                                
4:58:53 PM                                                                                                                    
CHAIR DUNLEAVY commented as follows:                                                                                            
                                                                                                                                
     There  is a  lot  of philosophy  and  politics at  play                                                                    
     here; again,  the concern for  me is I cannot  think of                                                                    
     an endeavor,  an issue, that when  politicians touch it                                                                    
     or worse,  get their  arms around  it, doesn't  muck it                                                                    
     up.  I  know   right  now  there's  a   sense  of  some                                                                    
     desperation  that we  need to  do something  right now,                                                                    
     today, yesterday, or we face  untold horrors as we move                                                                    
     into  the  future. I  for  one  believe that  we  could                                                                    
     probably get  through a year or  two and if we  had to,                                                                    
     craft a  really good  approach that Alaskans,  not just                                                                    
     politicians,  this  is part  of  the  issue here,  this                                                                    
     isn't just a  politician fund, I mean we  could spin it                                                                    
     that way, but I don't  believe it is. Over 4,000 people                                                                    
     have contacted my  office and they don't  believe it is                                                                    
     either, but  I think  we could  craft if  we had  to an                                                                    
     approach  that involves  the support  of Alaskans.  I'm                                                                    
     very concerned that  if we rush this it's  not going to                                                                    
     have, and  Senator Stedman uses  this term and  I think                                                                    
     he's correct, it doesn't imbed  stability if the people                                                                    
     of Alaska  don't support something;  at the  same time,                                                                    
     whatever  we do  needs  to, in  my  opinion, allow  the                                                                    
     Permanent Fund  Corporation to function  as it  has and                                                                    
     has done the good things that it has for us.                                                                               
                                                                                                                                
     So  there's  a  number  of   things  that  need  to  be                                                                    
     discussed and I put forth  the concept and it wasn't my                                                                    
     concept, it just exists as it  is now, that you can use                                                                    
     50  percent  of  the  earnings if  you  so  choose  for                                                                    
     government and  50 percent  that you  can put  into the                                                                    
     dividend, and  I still  believe at  least in  the short                                                                    
     term you  could do that and  get some of the  money you                                                                    
     need for government.                                                                                                       
                                                                                                                                
     We  all agree  today that  no matter  what approach  we                                                                    
     take it's not  a cure-all. I think  we've debunked that                                                                    
     whole idea  that you  just do  this with  the permanent                                                                    
     fund  and it's  like a  poultice,  you just  rub it  on                                                                    
     yourself and you're  all better now, it's  not going to                                                                    
     work that way. There's going  to be some hard decisions                                                                    
     that have  to happen no  matter what approach  we take,                                                                    
     hard decisions  including reductions and it's  hard for                                                                    
     me to even say, but  hard decisions on some other types                                                                    
     of  revenue enhancement  that some  of  us aren't  very                                                                    
     fond of; but,  guidance and wisdom in  crafting this is                                                                    
     going to  be crucial because we  may be back here  in a                                                                    
     year if whatever  we do is not good, if  whatever we do                                                                    
     is  rejected by  the people  of Alaska,  or if  it just                                                                    
     doesn't function.                                                                                                          
                                                                                                                                
     I want to thank the  corporation for what it's done and                                                                    
     I for one would like to  continue to allow you folks to                                                                    
     do  your job  in a  professional  manner and  not in  a                                                                    
     political manner.                                                                                                          
                                                                                                                                
5:02:24 PM                                                                                                                    
CHAIR DUNLEAVY addressed the committee's upcoming agenda and                                                                    
noted that public testimony would be taken up at the next                                                                       
meeting.  He   asked  members  to   give  thought   to  potential                                                               
amendments,  changes   or  questions.  He  set   forth  that  the                                                               
committee has  lots to  think about  because SB 21  and SB  26 is                                                               
legislation  that is  a  dramatic  break in  the  history of  the                                                               
permanent  fund,   the  dividend,   and  the   relationship  with                                                               
Alaskans.                                                                                                                       
                                                                                                                                
5:04:20 PM                                                                                                                    
There being  no further  business to  come before  the committee,                                                               
Chair Dunleavy  adjourned the Senate  State Affairs  Committee at                                                               
5:04 p.m.