HJR 26-CONST. AM: PF APROPOS/INFLATION-PROOFING Number 2110 CO-CHAIR WHITAKER announced that the final order of business would be HOUSE JOINT RESOLUTION NO. 26, Proposing amendments to the Constitution of the State of Alaska relating to and limiting appropriations from and inflation-proofing the Alaska permanent fund by establishing a percent of market value spending limit. Number 2118 ARLISS STURGULEWSKI, Trustee, University of Alaska Foundation, congratulated the legislature on having established the House Special Committee on Ways and Means. She told the members that she is very supportive of the constitutional amendment [HJR 26]. There are a number of reasons she believes this is important, she said, but the most important is that it offers stability in year-to-year amounts that are available [for appropriation]. This constitutional amendment would provide some stability in planning, she said. MS. STURGULEWSKI explained that she serves as a trustee on the University of Alaska Foundation which was formed primarily for scholarships for students. She explained that [the University of Alaska Foundation] uses methods similar to that proposed by this constitutional amendment as do large endowment foundations across the country; this method is a very standard approach. MS. STURGULEWSKI told the members that when she was in the legislature she carried the bill which inflation proofed the [Permanent] Fund principal, not the earnings reserves. She said that this constitutional amendment would pull together both. Over time the markets do go up and down and this would assure a steady, real rate of return for the fund and that will protect it. Ms. Sturgulewski summarized her comments by saying that she believes this is an excellent method of protecting the fund, and she will personally commit herself to working to pass this constitutional amendment. Number 2411 MARY GRISWOLD, testified in support of the proposed constitutional amendment [HJR 26]. She read the following testimony into the record: I am an enthusiastic supporter of a 5 POMV payout because it constitutionally inflation-proofs the entire permanent fund. Right now, only the principal is inflation-proofed, and that is done by statute, not through the constitution, and only after the dividend program is funded. The second reason I support 5 POMV is that it sets a spending limit. Under the current distribution methodology, the legislature may appropriate the entire earnings reserve account. Five POMV forces us to resist the temptation to appropriate too much money when the fund is flush, yet makes distributions available in lean years. Number 2550 Third, an annual payout based on market value is compatible with the fund's diversified portfolio that is managed, in conformance to industry standards, for long-term value over short-term gain. The current distribution method, based on income, was appropriate 20 years ago when the fund was invested primarily in bonds. A 5 percent payout is generally recognized by large fund managers as the highest sustainable payout, beyond which the real value of the fund would diminish over time. This straightforward approach protects the value of the fund and provides a limited, predictable, and sustainable revenue stream. The permanent fund trustees combined the fund's principal and income in one pot of money to make 5 POMV work effectively. Segregating the principal interferes with value-management goals by exerting pressure to produce short-term income for dividends or other distributions during periods of poor performance. Segregating the principal also tempts the legislature to provide for a greater than 5 percent payout when the earnings reserve account is flush, as in HJR 1. This is just what POMV is designed to avoid. How the legislature chooses to divide the payout is an important question. The APFC [Alaska Permanent Fund Corporation] takes no position on the use of the payout. Five POMV is a management tool, not a distribution plan. However, the two are intrinsically linked. The use of the payout should not be set in the constitution because this is an appropriation issue better left to the legislative process. However, the statutes relating to permanent fund income and income distribution must be amended to conform to 5 POMV. I urge you to preserve the current dividend formula when you change these statutes. Five POMV is too valuable to the permanent fund to risk voter rejection by threatening their dividend checks. Number 2670 For modeling purposes, we assume an 8 percent total return, 3 percent inflation, and 5 percent real return. Under existing statutes, 50 percent of the income available for distribution, or 4 percent, goes to the dividend program. Inflation proofing then takes 3 percent, leaving 1 percent for the other legislative appropriation, which has never been touched. For this distribution to work under POMV, 80 percent of the 5 percent payout must be allocated to the dividend program to provide the same 4 percent. Inflation-proofing of 3 percent has already been accounted for by establishing a 5 percent payout limit, leaving 20 percent of the payout for other legislative appropriation, which is the same as the 1 percent under the existing distribution statutes. Fifty percent of the money available for distribution after inflation proofing cannot provide the same amount for dividends as 50 percent of the money available for distribution before inflation-proofing. It is time to move forward on a fiscal plan. This constitutional amendment combined with a change to the statutes securing 80 percent of the annual payout for dividends is critical first step. Please promote a comprehensive package the voters will accept. It is a three-way win. The permanent fund gets a better management framework, the legislature gets a predictable revenue stream, and the people keep their dividend formula. [original punctuation provided] Number 2747 REPRESENTATIVE GRUENBERG asked Ms. Griswold whom she represents, and if she would provide the members with a written copy of her testimony. MS. GRISWOLD stated that she is representing only herself. A copy of her written testimony has been provided to the committee. Number 2819 EDWARD MARTIN, SR., testified in opposition to HJR 26. He told the members that he believes [HJR 26] is a poor way to manage the fund. The state legislature has a very large financial management problem and so does the Permanent Fund Corporation Board of Trustees, he said. They have to use the "so-called" prudent man rule. They have invested 99 percent of the fund outside of our borders which has produced about [$6 billion]. The sad part [of this policy] is that the [trustees] are continuing the same policy [of investing outside Alaska] while recommending this legislation which takes more from the people of Alaska and lets government have more to waste. He asked the members to remember that the money has no value to Alaska citizens without its use. He told the members that there will be a heavy political price paid when the citizen rule is applied at the ballot box. This legislation does not benefit the citizens of Alaska, only special interests, and the people are not buying it, he warned. Number 3112 JAMES PRICE, testified in opposition to HJR 26. He told the members he believes that this resolution brings the state one step closer to using the dividend earnings and perhaps the principal to fund the operation of state government. Mr. Price said that he thinks the legislature should find a solution to the deficient problem before changing any provisions of the Permanent Fund. He said he would like to see the dividend program off the table with respect to legislative appropriations. He said he does not believe this legislation will solve the problem, but will perpetuate it. Mr. Price summarized his comments by saying he opposes HJR 26 and the appropriation of any of the earnings for the funding of state government. Number 3309 LAURIE CHURCHILL, testified in opposition HJR 26. She told the members that she does not believe there should be a change in the [Alaska] Constitution without a vote of the people. She said she believes there is a serious spending problem with a bloated budget and it needs to be cut drastically. Ms. Churchill noted that many of the legislators who are serving made campaign promises to their constituents that they would leave the PFD [Permanent Fund dividend] alone. This [resolution] is a violation of the constituents' trust. Number 3429 CO-CHAIR WHITAKER clarified that what is being discussed is a proposed constitutional amendment [HJR 26] which, if passed by the legislature, would require a vote of the people in 2004. Number 3450 PETRIA FALKENBERG, testified in opposition to HJR 26. She told the members that she is opposed to the resolution because most candidates elected in 2002 promised not to touch the Permanent Fund. She asked if the members were listening to the 83 percent of Alaskan voters. Ms. Falkenberg said she believes that the major problem lies with overspending. She said she does not believe the Permanent Fund should be a source of funding to run the government. She said she opposes the legislature's coming through the back door to rob the PFD with bills of this nature. Number 3633 REPRESENTATIVE WILSON explained to those individuals who testified and those who are listening that the members have been advised that it is possible that the PFD could disappear at various times; however, with this resolution in place it would be a more stable and more assured dividend for the people of the state. CO-CHAIR WHITAKER announced that there will be public testimony taken tomorrow, Tuesday, and Wednesday on HJR 9 and HJR 26. [HJR 9 and HJR 26 were held over.]