Legislature(2001 - 2002)
04/26/2001 03:40 PM Senate STA
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS COMMITTEE
April 26, 2001
3:40 p.m.
MEMBERS PRESENT
Senator Gene Therriault, Chair
Senator Randy Phillips, Vice Chair
Senator Drue Pearce
Senator Bettye Davis
MEMBERS ABSENT
Senator Rick Halford
COMMITTEE CALENDAR
SENATE JOINT RESOLUTION NO. 27
Relating to an Alaska National Guard Armory in Juneau.
MOVED SJR 27 OUT OF COMMITTEE
CS FOR HOUSE JOINT RESOLUTION NO. 27(MLV)
Supporting the erection of monuments in Alaska, Russia, and Canada
to commemorate the World War II lend-lease program between the
United States and the Union of Soviet Socialist Republics.
HEARD AND HELD
SENATE JOINT RESOLUTION NO. 13
Proposing amendments to the Constitution of the State of Alaska
relating to inflation- proofing the permanent fund.
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
SJR 27 - No previous action recorded.
HJR 27 - No previous action recorded.
SJR 13 - No previous action recorded.
WITNESS REGISTER
Jessie Kiehl
Staff to Senator Elton
Alaska State Capitol, Room 115
Juneau, AK 99801-1182
POSITION STATEMENT: Introduced SJR 27
Keith Gerkin
Director of Facilities
University of Alaska Southeast (UAS)
11120 Glacier Highway
Juneau, AK 99801
POSITION STATEMENT: Testified on SJR 27
Leona Oberts
Staff to Representative Chenault
Alaska State Capitol, Room 432
Juneau, AK 99801-1182
POSITION STATEMENT: Introduced HJR 27
Clark Gruening
Chairman
Alaska Permanent Fund Board
P.O. Box 25500
Juneau, AK 99802-5500
POSITION STATEMENT: Testified on SJR 13
Jim Kelly
Director of Communication
Alaska Permanent Fund Corporation
P.O. Box 25500
Juneau, AK 99802-5500
POSITION STATEMENT: Testified on SJR 13
ACTION NARRATIVE
TAPE 01-22, SIDE A
Number 001
CHAIRMAN GENE THERRIAULT called the Senate State Affairs Committee
meeting to order at 3:40 p.m. Present were Senators Davis, Phillips
and Chairman Therriault.
The first order of business was SJR 27.
SJR 27-NATIONAL GUARD ARMORY IN JUNEAU
JESSIE KIEHL, staff for Senator Elton, extended the Senator's
regrets for missing the meeting. The resolution expresses the
legislature's support to the federal government for the new
National Guard Armory facility in Juneau. The current armory must
move because it sits on Alaska Mental Health Trust land and they
plan to redevelop the property. The guard proposes working with the
University of Alaska Southeast (UAS) on a joint facility that will
meet many recreational needs for the university and the guard's
needs for a mustering and training facility. It would be cost
efficient to have a joint facility.
The federal reviewing and scoring process for this and other
similar projects begins soon. Although this project stands an
excellent chance for approval, an expression of legislative support
would improve its chances.
CHAIRMAN THERRIAULT said the last paragraph of the sponsor
statement talks about a 1998 legislative appropriation. He asked
whether any federal funds have been received.
MR. KEIHL was not sure whether any federal funds had been received
but there was a state appropriation of about $1.6 million, a
portion of which was spent and another portion allocated upon
initial site design and preparation.
CHAIRMAN THERRIAULT asked when the state appropriation occurred and
whether the 1998 appropriation was from the general fund.
MR. KEIHL said he discussed the $1.6 million appropriation with
Carol Carroll from the Department of Military and Veterans Affairs
and Department of Natural Resources and Niko Bus from the
Department of Natural Resources.
CHAIRMAN THERRIAULT questioned the need for the resolution since
monetary support had already been given: Was it needed before the
federal process could begin? He also wanted to know what type of
expense could be expected, what the blending of funds would be for
a joint project and whether this project would obligate the next
year's capital budget for future appropriations.
MR. KEIHL said a representative of the university was present and
could add to his answer. In response to the first question, he said
the resolution is not a precursor to or essential for the federal
review of the request for a new armory in Juneau. It does however,
provide an expression of the state's interest and support and would
be helpful in ranking the project.
KEITH GERKIN, Director of Facilities for the University of Alaska
Southeast, emphasized their support of the resolution and project.
Both agencies have been looking for solutions to their independent
facility needs. In the last year, they have talked about a joint
project and have completed 35 percent of the design work for a
facility that would be situated on university property. This is an
efficient use of resources because the buildings are very expensive
to build and operate and they will get more building by combining
resources than by building individual facilities. The university's
share to build the facility will be $5.3 million and that amount is
in its statewide capital multiyear plan. Previously there have been
both federal and state general fund appropriations for design work
for the Alaska National Guard's portion. This resolution is an
effort to get the priority for the construction money from the
federal government.
CHAIRMAN THERRIAULT asked if this would then obligate the state to
produce the $5.3 million general fund money.
MR. GERKIN said it would and he thought there was additional match
of federal dollars for the National Guard portion. Someone from
Military and Veteran's Affairs would be in a better position to
talk about the federal monies.
CHAIRMAN THERRIAULT asked what specific facilities the university
was looking at.
MR. GERKIN responded they are lacking indoor intramural or
organized sporting facilities. Recreational facilities are expected
as a part of normal student life and UAS has been trying to fulfill
the need for the last 15 years. The current plan is to expand the
National Guard's drill hall to the size of a gymnasium. There would
be lockers, showers and exercise rooms and a running track that
would be used by both user groups. Several classrooms in the
facility are in the National Guard plan. Student service areas are
planned that would be used to assemble for activities and dances.
In the event of a disaster or National Guard priority, the
university would suspend its use temporarily. Both agencies know it
takes accommodation to share the facility but they believe they
will be getting more than if they build individually so the
inconveniences are workable.
SENATOR PHILLIPS asked whether it would include an ice rink.
MR. GERKIN said it would not. In the early 1980s that was in the
plan but they have scaled back their proposed recreational facility
considerably over the years.
CHAIRMAN THERRIAULT asked for specifics of the cost and source of
funds if the project is 35 percent designed.
MR. GERKIN replied the National Guard had a total design in hand
when they approached the university about a joint facility. The
university and the National Guard made a few modifications to the
design to include specific university needs. Costs associated with
planning for the modifications were shared. The university paid
one-third of the design modifications and that came to about
$55,000.
CHAIRMAN THERRIAULT apologized for not having had the opportunity
to express his questions directly to Senator Elton so the
information would be available for the hearing. Nonetheless, he was
not ready to act on the resolution until he had a full accounting
and clearly understood past appropriations and the potential for
future obligations.
SENATOR DAVIS said she could understand wanting more information
but since this was just a resolution and didn't obligate any money,
she asked why couldn't the information be given later. After all,
the legislative session was about to end.
CHAIRMAN THERRIAULT asked whether this was time sensitive due to
the process going on with the federal government.
MR. KEIHL replied it would need to pass this year to have an impact
on the ranking process.
CHAIRMAN THERRIAULT said he was willing to move it from committee
but he would like to see the accounting before he, Senator Pearce
and Senator Phillips saw it as members of the rules committee.
MR. KEIHL said they would be happy to provide the information.
Senator Pearce joined the meeting and Chairman Therriault gave her
a recap.
CHAIRMAN THERRIAULT asked for amendments. There were none.
He asked for the pleasure of the committee.
SENATOR DAVIS moved SJR 27 and zero fiscal note from committee with
individual recommendations and a request that the information be
provided to the next committee. There were no objections.
HJR 27-WWII ALASKA-USSR LEND-LEASE MONUMENTS
LEONA OBRITZ, staff to Representative Chenault, explained the
resolution supports the erection of bronze cast monuments that will
be placed in Fairbanks first, and then in Russia and Canada to
commemorate the events that occurred during the World War II lend-
lease program.
The Federal Lend-Lease Act was enacted during World War II by
President Franklin Delano Roosevelt to establish collaboration
between the U.S. and the USSR against Germany and its allies. Under
the program, nearly 8,000 aircraft, hauling tons of material and
supplies, were flown nearly 9,000 miles from Great Falls, Montana
across Canada to Alaska and then to the Union of Soviet Socialist
Republics. Many Alaskans worked with Soviet citizens during this
time and it is intended that this project will contribute to the
further understanding of Russian/American relations and provide new
insights into that period of time. The lend-lease program
demonstrated that two nations could compromise their views,
cultural values and principals enough to achieve a common mutually
beneficial goal.
CHAIRMAN THERRIAULT said he found some areas in the resolution
where the wording was problematic. On page 1, line 14, he asked
whether there was any particular reason for naming Ladd Field.
MS. OBRITZ said it was for historical value. That was the name of
the Fairbanks base at that time.
CHAIRMAN THERRIAULT thought it might be more concise to omit
specific base names and simply list the cities.
On page 2, lines 5-7, he disagreed that the United States
compromised its views, values and principals.
MS. OBRITZ was certain Representative Chenault wouldn't object to
omitting reference to compromised views, values and principals.
CHAIRMAN THERRIAULT thought there was time to hold the legislation
until the next meeting so work could be done to change the
language.
SENATOR PEARCE asked where the Alaska Siberia Research Center was
located.
MS. OBRITZ responded it is in Juneau. Mr. Dolitsky is a professor
at the University of Alaska Southeast (UAS) and the research center
office is in downtown Juneau.
She said Senators Murkowski and Stevens are very supportive of the
resolution and about $400,000 should be forthcoming for the
project.
SENATOR PHILLIPS asked if Professor Dolitsky is a World War II
veteran.
MS. OBRITZ said his father is.
SENATOR PHILLIPS asked whether military organizations have written
in support of the project.
MS. OBRITZ thought they had but none of the letters were in the
committee packets.
She said the committee substitute (CS) added President Bush and the
Prime Minister of Canada to the list of those who would receive
copies of the resolution.
CHAIRMAN THERRIAULT said the areas that need language changes are
still in the CS so he asked Ms. Obritz to let Representative
Chenault know they would hear the resolution again at the next
meeting.
SENATOR PEARCE asked if the Alaska-Siberia Research Center is
composed of just one person.
MS. OBRITZ said no, at the back of the packets there should be a
list of members who are supporting the project. For example, former
Representative John Binkley is a member in support of the project,
particularly since his father was a participant. Representative
Foster said he grew up in Fairbanks and both his parents were
involved in the program.
SENATOR PEARCE couldn't see why funds should be funneled through
the research center to build the monuments.
MS. OBRITZ said there was no state funding at this time.
SENATOR PEARCE said she was referring to language on page 2, lines
16-17, that says funds would pass through a non-profit research
center.
CHAIRMAN THERRIAULT asked Ms. Obritz if she understood the question
of why the money is routed that way. He noted his assumption that
the non-profit agency put the proposal together and went directly
to Congress and they are simply asking for an expression of
legislative support.
MS. OBRITZ nodded.
CHAIRMAN THERRIAULT said the resolution would be held in committee
and heard again at the next meeting.
MS. OBRITZ said she would also gather the information on the
military groups.
SJR 13-CONST. AM: PERMANENT FUND
CLARK GRUENING, Alaska Permanent Fund Board of Trustees Chair, gave
the following testimony in support of SJR 13.
For the last five years, the board of trustees has discussed a
notion referred to as a pay out of market value, the endowment
model and what could be done to strengthen inflation proofing. The
current inflation proofing was passed into statute in 1982 and
implemented in 1983.
There is no investment that can be identified as principal in the
Permanent Fund, it's a notional concept and it is a figure that
does not fluctuate with the market. MR. GRUENING said,
It is simply the amount of oil revenues that are mandated
by the constitution plus, what I would call, voluntary
either additional contributions under the formula that
takes it out of our mineral wealth or by the statute
itself that calls for an appropriation and voluntary
additional appropriations. Those voluntary
appropriations, both inflation proofing and additional
appropriations to principal, have totaled a little over
$13 billion.
We are now approaching a time in which the fund may be asked to do
more than it is now so you must be clear on the priorities. The
trustees feel strongly that the fund is permanent and an inflation-
proofing proposal that establishes it in the constitution using the
endowment model that has a payout limit is the most effective way
to inflation-proof the entire fund.
It's a simple concept but it raises many questions about the impact
it may have on statutes. The trustees believe the amendment itself
requires no statutory change. This does not mandate a payout; it is
a payout limit.
CHAIRMAN THERRIAULT said they had received a memo from Tamara Cook,
Director of Legislative Legal & Research Services, with a number of
questions. If they weren't answered during the course of the
presentation they would address them afterwards.
JIM KELLY, Director of Communications for the Alaska Permanent Fund
Corporation gave the following power point presentation.
SJR 13 accomplishes inflation proofing by limiting the annual
payout of fund income to no more than 5 percent of the fund's five-
year average market value. They think it accomplishes three things:
1. It protects the purchasing power of the entire fund.
2. It provides the maximum amount of sustainable income to
benefit the current and future generations.
3. It minimizes fluctuations in annual payouts.
If the legislature approves SJR 13, the general public approves it
in the general election of November 2002 and it goes into effect in
February 2003. Over time, the fund will have retained everything
it needs to be protected against inflation while the rest of the
income would be available for the legislature to use.
The benefits
1. SJR 13 provides constitutional protection, which is different
than the existing inflation proofing and therefore enhanced.
Although the legislature has done very well during the last 18
years, this is better because it's in the constitution and
ensures that it will go on if things change in the future.
2. It maximizes the total amount of fund income which can be paid
out in the future and does so in a way that balances the
fund's benefits fairly between current and future generations.
3. It increases the likelihood that both the fund's principal and
income will continue to grow in perpetuity in both nominal and
real, inflation-adjusted dollars. The purchasing power of the
principal and the money available to spend will go up.
4. The 5 percent limit is actually higher than the amount that is
being paid out now for dividends. If the dividend program
continues as it is now, but with the 5 percent limit, there
would be about $175- $300 million of additional money that
could be spent on a sustainable basis and that would grow over
time as the fund grew.
5. The market value payout is one that institutions similar to
the Permanent Fund use and have used for many years and
conforms more to generally accepted accounting principals
(GAAP) than what is currently used. This is because generally
accepted accounting principals have changed and the statutes
haven't.
6. Legislators will know how much money is available from the
Permanent Fund every January.
The analysis
Principal and inflation-proofing.
Under SJR 13, both the Fund's principal and the earnings reserve
account would be inflation-proofed by constitutional mandate. In
addition, there would be two constitutional limits on Permanent
Fund spending: (1) principal would continue to be unavailable for
appropriation; and (2) appropriations from the earnings reserve
account in the future would be limited to no more than 5 percent of
the fund's average market value for the past five years. This would
provide full inflation-proofing averaged over long periods of time.
Accordingly, statutory inflation-proofing transfers to principal
would no longer be necessary.
Earnings reserve.
This proposal enhances the earnings reserve by allowing inflation-
proofing to accumulate with the constitutional protection against
it being spent by a subsequent legislature. It allows money to
continue to accumulate in the earnings reserve account which would
provide a cushion if there are several poor years in a row. At the
beginning of this year the earnings reserve account had $6.5
billion and it fell to under $4 billion because of the market
decline. In 2003, the fund's five-year average market value is
projected at $28 billion, which would limit the maximum payout that
year to no more than $1.4 billion.
5 percent payout.
The 5 percent limit is chosen for three reasons: (1) 5 percent is
on the high end of sustainable payout rate that still maintains the
fund's real value; (2) 5 percent allows greater distributions over
time than a higher payout; and (3) 5 percent is what the majority
of endowments pay out; e.g., 85 percent of all public endowment
funds pay out 5 percent or less, and the median payout of
endowments, according to a 1999 Greenwich Associates study, is 4.9
percent.
Side B
Five-year averaging.
Under SJR 13, the annual payout may not exceed 5 percent of the
fund's market value averaged over the prior five years, including
the fiscal year just ended. This methodology is chosen to dampen
volatility and is consistent with the existing statutory five-year
averaging provision for computation of the annual dividend.
20-year perspective.
Under SJR 13, if the full 5 percent of the fund's five-year average
market value was paid out, the fund would earn $57 billion of total
investment return over the next 20 years, $28 billion of which
would be earmarked for dividends and $20 billion to inflation-
proofing, leaving $9 billion in residual income available for
appropriation. The ending market value of the fund in 2020 would be
$51 billion.
Dividends.
This proposal does not affect the existing dividend program. It
should be noted, however, that any future public policy decision to
use an additional portion of fund income for any purpose will
affect the dividend, as will market volatility, but under SJR 13,
these impacts would either be equal or diminished compared to the
status quo.
Residual income available for appropriation.
Except in the case of extraordinarily good financial markets, the 5
percent limit set by SJR 13 is above what is required to pay
dividends per current law, leaving a residual amount available for
appropriation. If the entire 5 percent was paid out, the residual
amount is expected to range from $175-$300 million per year in a
median case, growing over time as the Fund grows. Because of the
mechanics of the existing statutory dividend formula, however, if
the dividend is extraordinarily high in any one year, the amount of
the residual could be reduced to zero.
MR. GRUENING said there is a sincere desire to have a full
discussion about the legislation. The concept of a permanent fund
had been around many years before the ninth legislature acted and
they took two years to discuss and review it. He commented,
If the 22nd legislature passed this, this would be the
most significant addition to our constitution since the
permanent fund original amendment. I can't think of
anything that would leave a greater legacy for the people
of Alaska than this; but that's something that they have
to be convinced of.
This not only requires a two-thirds vote of each body, it also
requires a majority vote. The political effort and review that
needs to be expended is perhaps greater than with the original
amendment. Although the concept is simple, it is not an easy
decision even though the impact would be profound and deeply
appreciated by Alaskans.
SENATOR PHILLIPS asked whether there was an expectation that the
legislation would be moved this session and if it passed through
both bodies would the corporation and trustees be in charge of
educating the public.
MR. KELLY said they were selling the idea now and would continue to
sell it as long as it has a chance of passage.
SENATOR PHILLIPS asked whether they would be taking credit for the
plan rather than giving that credit to the legislature.
MR. GRUENING responded it is their plan but the legislature would
have to take a two-thirds ownership in the plan at some point.
SENATOR PHILLIPS pointed out that in 1976 there was a legislative
proposal to form the permanent fund, and this time the concept is
coming from the Alaska Permanent Fund Corporation and Alaska
Permanent Fund Board of Trustees, not the legislature. It should be
clear that it is their idea and the legislature is simply giving
them the opportunity to defend it. "If it goes sour, I don't want
to hear it was my team that did this."
MR. KELLY said they like this proposal, and they have been studying
it intensively for the last five years and discussing it for much
longer than that. Of course there may be unintended and unknown
consequences but the board is unanimously and strongly in support
of the proposal.
CHAIRMAN THERRIAULT said he has had a number of discussions with
both presenters and he wanted to briefly touch on them so they
would be a matter of record.
First, Tamara Cook, the Director of Legislative Legal and Research
Services, noted that in drafting the resolution there were a number
of exceptions to standard drafting procedures with regard to the
title, the contents and the way information is shown.
The title says the resolution is relating to inflation-proofing the
permanent fund and it does not really do that. It does not make
appropriations to the permanent fund. In fact, testimony today was
that statutes that make a yearly appropriation might not be
advisable to continue.
There was some confusion about whether or not a copy of the
memorandum from Ms. Cook was sent to Mr. Gruening or Mr. Kelly.
MR. KELLY said inflation-proofing does not appear in current
statutes. The proposal will provide for the effects of inflation in
a statutory formula. It provides for the effects of inflation by
limiting the payout to 5 percent. Over the next 75 years they
believe the fund will earn 8.25 percent and inflation will average
3l25 percent.
CHAIRMAN THERRIAULT remarked that individuals with a knowledge of
"how this works" know that there is a computation done on a yearly
basis on the consumer price index (CPI) then an appropriation is
made to offset that erosion. He was not sure whether they proposed
that statute stay in place and the computation and appropriation
continue to be made to the principal on a yearly basis or whether
they want to ensure a healthier buffer in the earnings reserve
instead.
MR. GRUENING responded that is a legislative decision. Currently
there is not a 5 percent payout. The only payout that is taking
place is for the dividend. That may change at some point and when
it does, there will be statutes that deal with that change. The
priority in the statutes now is the dividend and inflation-
proofing. The trustees have taken no position on not inflation-
proofing under the statute. As long as no more than 5 percent is
paid out, you are inflation-proofing the entire fund including the
earnings reserve and principal. This proposal could be passed now
and the current statutes could stay unchanged. However, at the
point at which other payouts are designed, if they stay within the
5 percent there is no need to additionally pay it into principal
because you would be reducing the earnings reserve. This is a
warning given when there are plans to appropriate money from the
earnings reserve to principal. There was a House bill that
deposited $250 million. There was a desire by some to deposit more.
The board's analysis is that would have created a situation in
which the dividend would have been affected. The same applies if
this amendment was in place; the board would give their projections
of what would happen as a result of any action including
appropriating a large sum out of the fund to the constitutional
budget reserve. That entire amount is available for appropriation,
not just the realized portion. Once the amendment is in place they
want to be clear that this would no longer be an option. Just 5
percent of the market value would be available. With this in mind,
they haven't taken an official position on that and they aren't
likely to do so. It's a legislative decision.
CHAIRMAN THERRIAULT noted that the trustees have been advised to
stay clear of policy decisions so he understands the reluctance to
take a stand. However, this would trigger a number of consequences
that the legislature would have to deal with.
MR. KELLY responded the legislature wouldn't have to deal with
consequences any more if this was passed than they do today.
Nothing has changed except the amount of money that may be removed
from the fund.
MR. GRUENING said what will really trigger events are external to
the fund. For instance, what will be done if the constitutional
budget reserve is near exhaustion? What will be done to reorder the
priorities to deal with this? This will need to be addressed
regardless of passage of the legislation. The proposal does not
drive this situation - it's already there. Because the trustees
want the permanent fund to be permanent, this proposal should be in
place.
SENATOR PHILLIPS noted they said it would not affect the dividend
but wondered whether there might not be some circumstances where it
would be affected.
MR. KELLY said if there is the 5 percent payout and the dividend
formula is left in place there is one circumstance in which the
dividend would be affected. If there are a number of
extraordinarily good years such as we just experienced, there is a
limit on how high the dividend can grow. However, analysis shows
that, at that point, the dividend would be between $3,000 and
$4,000 per person. If people were getting that size dividend there
probably won't be complaints because there was the 5 percent limit.
SENATOR PHILLIPS pointed out there were lots people that envisioned
$4,000 dividends.
MR. KELLY said this doesn't mean you can't have $4,000 dividends.
This gives the assurance there will be dividends that grow over
time as long as the fund grows.
MR. GRUENING said this goes to the question of inner-generational
equity and generations are addressed in the statutes. The maximum
sustainable yield of a fisheries stock is a workable analogy even
though the investment field is more predictable than the scientific
predictions of fisheries stocks. If you take six percent of the
stock rather than five percent, you can get more fish for awhile.
However, over the long term you'll pay for this in the outer years.
The permanent fund will take care of everyone now and our children
and grandchildren so we're looking at other generations. If we look
beyond our immediate needs to our children and grandchildren this
will look like a good idea. Even if your only support for the fund
is the fact that it gives a dividend, this makes sense. It's not
tied to a fiscal plan but to the idea you can get the maximum
distributions over time by limiting the payout to a reasonable
level.
CHAIRMAN THERRIAULT said,
The question about the 5 percent limiting the size of the
dividend is the product of the fact that if you have a 5
percent maximum payout and you have a separate
calculation that is the 5 year rolling average of the
realized earnings, you might have one that obligates you
or computes more money than you have money to pay.
MR. KELLY said that is correct.
MR. GRUENING agreed but said that is a very rare situation.
MR. KELLY said it is not only rare, it only happens on the top end
not the bottom end.
CHAIRMAN THERRIAULT commented that principal was not included in
the wording on page 1, line 9 & 10 that says, "All income from the
permanent fund shall be deposited in the permanent fund." He noted
they don't want it in the principal.
MR. KELLY said that is correct. They define permanent fund as it is
by statute, which is the principal and the earnings reserve
account.
For 20 years they have said there are two parts to the permanent
fund. There is the principal and there is the income. Principal is
defined as (1) oil revenues, (2) inflation-proofing and (3) special
appropriations. Everything else is earnings reserve account and
available for appropriation.
CHAIRMAN THERRIAULT asked about the possibility of principal
erosion if 5 percent of the value was withdrawn on a yearly basis
and there was a consecutive number of flat or negative years. Page
1, line 8 of the resolution says, "principal of which shall be used
only for those income-producing investments" while another part of
the constitution says you may have a draw of up to 5 percent of the
value. There could be situations in which those two are in conflict
and in drawing up to 5 percent there could be an erosion of the
principal. He was not sure the language on line 8 is strong enough
to prevent the erosion of principal value. Of course, the longer
money is put into the earnings reserve portion of the permanent
fund the less potential there would be for erosion of principal.
Individual Alaskans might look at this as a departure from what
they are accustomed to.
MR. GRUENING responded that they have discussed this question and
it is critical to the promotion of the proposal that they intend to
have no repeal or impairment of the prohibition that exists now.
Principal may not be spent. If there were any way to make this
clearer than it is now then he would be in favor of the change.
They don't want to lose any protection and they haven't changed the
wording. The discussion of whether there is a conflict tends to
come up in groups of attorneys and if enough attorneys work on
writing the amendment there is a great possibility that most people
won't be able to understand what has been written. They would like
to keep it as simple and straightforward as possible but if there
is doubt about their clear intention they would be open to changing
the wording. They did not touch the word principal, it still
exists.
CHAIRMAN THERRIAULT said the percentage that is dedicated by the
constitution, the 25 percent and any deposits made into principal
by the legislature to this point, including inflation-proofing and
any future oil revenues. It would include inflation-proofing if we
kept the statute that did the computation and the deposits but not
inflation-proofing if it was just the retention of earnings.
MR. KELLY said he understands it the way they do. For the record,
there are two limits: the first limit that cannot be breached is
you cannot invade principal; and second, you cannot payout more
than 5 percent of the market value. If there was a conflict between
the two limits, there would be less money to pay out and the
principal would still be protected.
MR. GRUENING said he doesn't believe they have received a copy of
the memo by Tamara Cook. He may have seen a copy in Chairman
Therriault's office but they don't have a copy in their files.
CHAIRMAN THERRIAULT said they would make sure a copy was sent. He
noted there was some tension between legislative counsel, permanent
fund counsel and the drafters.
MR. GRUENING replied it was in a different area.
CHAIRMAN THERRIAULT agreed and added style was also questioned. He
wanted to work toward ensuring that principal would still be
protected even in the unlikely situation there is a conflict
between the allowable 5 percent draw and where that money could
come from. He didn't know whether there was so much discussion in
the House that they deemed it unworkable.
MR. GRUENING said they didn't see the two as in conflict but they
would be happy to look at the memo.
CHAIRMAN THERRIAULT said the memo also pointed out the difficulties
involved for the amendment to "spring into effect in the middle of
a fiscal year" and she [Ms. Cook] suggested adding a July 1, 2003
effective date. "Otherwise, for part of the year the legislature
will be able to appropriate fund income, while at the end of the
same year it will have access to an amount based on market value of
the fund."
MR. KELLY said he had thought of that as well. The voters would
approve this in November and it would go into effect 90 days later,
which would be some time in February. The legislature meets in
January and the constitutional amendment won't be in effect. Until
that moment, everything in the earnings reserve account could be
withdrawn.
CHAIRMAN THERRIAULT said there is a real potential problem with
that. If the earnings reserve, which is the cushion that is
depended upon, is either transferred into principal or transferred
into the constitutional budget reserve before the effective date
for the new language, there would be a very real problem because
there might be no earnings reserve to provide the cushion to keep
from invading principal.
MR. KELLY said the problem is not with the methodology because it
continues to work. The problem is if you choose to do that you will
have put yourself at significant risk. If you did that, you would
have to be content living with the earnings for that year even if
they were negative.
CHAIRMAN THERRIAULT said that's if the language on page 1, line 8
supercedes the language about the 5 percent draw. Otherwise, that
potential conflict between the 5 percent allowable draw and whether
that can invade principal will be heightened because the cushion
might not be there anymore.
MR. GRUENING said that exists now regardless of whether or not the
amendment becomes part of the constitution. It's theoretically
possible but hopefully won't ever occur.
CHAIRMAN THERRIAULT said he would like this proposal to be
considered at the same time as the resolution sponsored by Senator
Ward that deals with the permanent fund. The resolution is
currently in the finance committee and unlikely to move out this
session. He would like to hear from committee members about the
issues and questions that have been raised before they reconsider
the resolution as a committee.
The meeting was adjourned at 5:05 p.m.
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