Legislature(2021 - 2022)DAVIS 106
04/13/2021 11:30 AM House WAYS & MEANS
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| Audio | Topic |
|---|---|
| Start | |
| HB165 | |
| HJR1 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 165 | TELECONFERENCED | |
| *+ | HJR 1 | TELECONFERENCED | |
HB 165-APPROP: EARNINGS RESERVE TO PERM FUND
11:35:40 AM
CHAIR SPOHNHOLZ announced that the first order of business would
be HOUSE BILL NO. 165, "An Act making a special appropriation to
the Alaska permanent fund; and providing for an effective date."
11:35:54 AM
REPRESENTATIVE JONATHAN KREISS-TOMKINS, Alaska State
Legislature, prime sponsor, introduced HB 165. He explained
that the proposed legislation was a vehicle for contemplating
the transfer of money [$4.35 billion] from the earnings reserve
account (ERA) to the principal of the Alaska permanent fund to
be protected in perpetuity for future generations of Alaskans
and from legislative spending. He noted that he had introduced
similar legislation last year; further, that this notion had
been implemented in past budget cycles via amendments to the
operating budget, which were bipartisan, bi-caucus, and
bicameral. He stated that as the bull market continued, he
wanted to propose HB 165 as a vehicle for exploring another
transfer from the ERA to the principal - especially given the
legislature's "pent up budget angst" due to the drainage of the
state's savings accounts. Consequently, he believed that the
ERA was at risk more than ever before of being overspent - much
like the other accounts that the legislature had at its
disposure over the last decade. He concluded that the proposed
legislation would be a mitigative measure against overspending.
11:38:11 AM
CHAIR SPOHNHOLZ pointed out that the bill contained only three
sections.
11:38:21 AM
REPRESENTATIVE KREISS-TOMKINS confirmed. He noted that the bill
proposed a transfer of $4.35 billion, which he characterized as
a "Lorem Ipsum," or placeholder, value. He said that either
Legislative Finance Division (LFD) would put forward a number or
he would defer to the will of the committee. He believed that
an appropriate amount was a figure that would leave three times
the 5 percent POMV [percent of market value] draw in the ERA.
11:40:00 AM
REPRESENTATIVE KREISS-TOMKINS provided a sectional analysis of
the bill [included in the committee packet], which read as
follows [original punctuation provided]:
Sec. 1 $4,350,000,000 is appropriated from the
Earnings Reserve Account to the
Sec. 2 The appropriations made in Section 1 do not
lapse.
Sec. 3 There is an immediate effective date.
REPRESENTATIVE KREISS-TOMKINS surmised that almost all
[legislators] shared the goal of protecting and growing the
permanent fund. He believed that the countervailing
consideration was that if there were a market downturn, the
balance in the ERA could diminish quickly leaving the
legislature in a tough situation. However, he pointed out that
even without a transfer of funds, that risk was always present
under the current structure of the fund. He concluded that it
would be a calculation of risk versus benefit for the
legislature to keep in mind.
11:42:40 AM
CHAIR SPOHNHOLZ opened invited testimony.
11:43:02 AM
ANGELA RODELL, Chief Executive Officer, Alaska Permanent Fund
Corporation (APFC), stated that this idea was one that
legislators had done throughout the history of the permanent
fund. She reported that more than one-third of the current
principal was derived from special appropriations, which
indicated their value to the fund. She emphasized that APFC's
Board of Trustees recommended leaving a portion in the ERA to
serve as a buffer in the event of market fluctuations. The
buffer, she said, was ideally three to four times any draw
amount, which the proposed legislation would conform to.
11:44:29 AM
REPRESENTATIVE JOSEPHSON expressed concern about the statement
of "three to four times" [the annual draw], as those were two
"very different" amounts. He believed that APFC had voiced a
preference of four times in previous testimony.
11:44:47 AM
MS. RODELL referenced Trustee Resolution 1804, which recommended
four times - an amount that was reduced to three times in
Trustee Paper 9. She acknowledged that there were differenced
within the trustee's own recommendations; however, she indicated
that she valued a resolution over a paper.
CHAIR SPOHNHOLZ inquired about the date of Trustee Paper 9.
MS. RODELL stated that the paper was issued in December 2019,
whereas the resolution was from 2018.
11:45:43 AM
CHAIR SPOHNHOLZ sought to confirm that the paper reduced the
recommended amount from four times to three.
MS. RODELL confirmed that the resolution was adopted in 2018;
subsequently, the trustees embarked on a paper, which studied
these issues. She reported that in lesson no. 5, "Reforming the
Earnings Reserve Account," the trustees reduced it to three
times.
11:46:19 AM
REPRESENTATIVE PRAX asked whether it made sense to reduce
liquidity given the future outlook of the state.
11:47:04 AM
MS. RODELL said the bill would not reduce liquidity in the fund.
She clarified that the bill would reduce the amount available
for future appropriations.
11:47:20 AM
REPRESENTATIVE PRAX believed that because it would reduce the
amount of cash available to spend, it would reduce liquidity.
He opined that if an individual had lost his/her job, it would
not make sense to move money from a savings account to a CD, as
that person's future income was uncertain. Further, he shared
his belief that the idea of preserving the permanent fund "as an
end in itself" did not make sense. He pointed out that if
Alaska had not received pandemic relief funding from the federal
government, the legislature may have wanted to draw a
considerable amount from the ERA. He added that the same
situation could occur again, in which case, should the proposed
legislation pass, "we would be sitting on $60 or $70 billion
dollars and no ability to spend it." He questioned whether
anyone had considered that.
11:49:14 AM
MS. RODELL noted that firstly, this movement of money would
allow it to continue to be invested similar to the current
principal; therefore, it would be generating future revenues for
the state. She clarified that the transfer would not preclude
some spending in the future. Secondly, she conveyed that this
concept was more akin to a retirement account and the
restrictions placed on spending from that account when the
account holder knows they need to rely on that retirement
account to deliver income for 20-plus years in the future.
Thus, she likened the proposed transfer to putting additional
money into a retirement account.
11:50:41 AM
REPRESENTATIVE STORY asked for the rationale behind changing the
recommended amount.
11:51:12 AM
MS. RODELL explained that the ERA collected all the statutory
income of the fund, therefore, realized gains or losses flow
into that account. She reminded the committee that the
principal did not grow because it didn't keep any of its gains,
so inflation proofing ensured that the principal held onto its
purchasing power. She added that inflation proofing and the
POMV [draw] came out of the ERA, as well as the POMV [draw].
Further, investment, growth, assets, and risk all impacted the
ERA. Thus, the recommended figure was associated with creating
a buffer to allow for obligations to be met under the current
construct.
11:52:48 AM
REPRESENTATIVE JOSEPHSON asked whether he should be concerned
about unrealized earnings. He suggested that if the ERA was
reduced in this fashion, it could change investment decisions or
require liquidation that would not otherwise be necessary.
MS. RODELL stated that there would be a real concern if this
bill had proposed draining the ERA to zero because the buffer
would be gone. She said that's when realized gains become
important because if they turned to unrealized losses it could
result in a negative balance in the ERA.
11:53:58 AM
REPRESENTATIVE JOSEPHSON questioned whether a negative balance
in the ERA was allowable.
MS. RODEELL said that had never occurred. She explained that
accounting and statutes were not aligned on this issue, as a
negative balance was allowed under Governmental Accounting
Standards Board (GASB) Rules, but not under a traditional budget
reserve construct. She added that if that scenario were to
occur, APFC would seek guidance from the Department of Law as to
how to proceed. She expounded that from an investment
perspective, an unrealized net loss could turn positive if the
markets took a favorable turn, which was why a negative balance
was allowed under an accounting construct.
11:55:14 AM
REPRESENTATIVE JOSEPHSON remarked:
When we're looking at this "three or four times" the
draw test, is July 1 the wrong date to look at?
Because I looked at July 1 last year, and it was
either $5.3 or $5.5 billion, and that had been
reduced, in my mind, by that part that was unrealized
and that part that was anticipated for transfer.
REPRESENTATIVE JOSEPHSON asked whether he was thinking about it
incorrectly.
MS. RODELL confirmed that Representative Josephson was thinking
about it correctly. She stated that when the $4 billion
transfer for fiscal year 2020 (FY 20) was put into the budget
bill and adopted, it was "in the waterfall after all other
things had been done." She said it was set at "up to" $4
billion, which had been reduced by the governor's line-item veto
power. Consequently, there was a recognition that the balance
on the start of July 1 might be different from what it was when
the appropriation language was adopted by the legislature.
11:56:39 AM
REPRESENTATIVE EASTMAN asked how the state's credit rating would
be impacted by the proposed legislation should it pass.
11:57:22 AM
MS. RODELL noted that interactions with the credit rating
agencies fell on the Department of Revenue (DOR). Nonetheless,
she indicated that their reaction could be mixed. She
speculated that the agencies would value the fact that money
would be generating revenue for a longer timeframe.
Alternatively, the ability to meet short-term obligations could
be in question. She deferred the question to DOR.
11:58:19 AM
REPRESENTATIVE EASTMAN acknowledged that the bill would comply
with the recommendation of leaving three times the draw amount
in the ERA; however, he asked whether there was "something
special" about this year and whether that recommendation would
be ongoing.
11:59:04 AM
MS. RODELL confirmed that the recommendation was ongoing. She
noted that APFC had not requested this appropriation; therefore,
it was a policy decision to be made by the legislature.
11:59:29 AM
REPRESENTATIVE WOOL inquired about the flow of money to and from
the ERA, as well as from the ERA to the corpus of the permanent
fund. He considered a scenario in which there were several down
years, surmising that ideally, there would be enough money in
the ERA to "survive" the 5 percent POMV draw, which was
approximately $3 billion at present. He noted that three times
that amount would be $9 billion. Thus, if the ERA had a balance
of $9 billion or $12 billion, he questioned whether a stock
market downturn could reduce the balance regardless of POMV
draws.
MS. RODELL stated that a reduction in total size would be seen
in the unrealized gain portion of the ERA. She recalled that on
February 28, [2020], which corresponded to the most recent
financial statement available, there was $9.9 billion in
realized earnings and $3.1 in unrealized gain associated with
ERA investments. She explained that any reduction would have
impacted that $3.1 billion.
REPRESENTATIVE WOOL considered a scenario in which the ERA
balance was significantly exhausted due to down years. At that
point, he asked whether APFC could decide to sell assets to
realize a gain. Additionally, he sought to confirm that the
earnings from that sale would be placed into the ERA.
12:02:34 PM
MS. RODELL confirmed that if an investment action was taken to
realize any unrealized gains, they would move into the ERA.
12:02:48 PM
REPRESENTATIVE WOOL concluded that a sale [of assets] could
"beef up" the ERA if the balance became extremely low.
12:03:04 PM
MS. RODELL answered that the ERA received regular cash income
throughout the year. She reported that roughly $1.2 billion to
$1.5 billion came from stock dividend payments, rentals,
etcetera. The rest of the cash that flowed into the ERA, she
said, was generated off commercial financial investment
decisions, which were not made for any other reason. She shared
her belief that APFC would not want to be put in a position
where they had to make investment decisions for non-commercial
financial reasons.
REPRESENTATIVE WOOL surmised that the recommended balance in the
ERA was either $9 billion or $12 billion, as that would be three
or four times the amount of the 5 percent POMV draw. However,
as money trickled in, that figure could increase. He asked
whether instead of providing for a draw amount, the solution
would be to specify via statute that the ERA shall contain three
times five percent of the value of the permanent fund. He
questioned whether that statutory language would serve the same
purpose without the legislature having to transfer several
billion over subsequent years.
12:05:01 PM
MS. RODELL stated that due to a Supreme Court ruling, any ERA
movement required an active appropriation by the legislature.
12:05:21 PM
CHAIR SPOHNHOLZ recalled that Ms. Rodell had stated that in
Paper 9, [APFC] reduced the proposed buffer from four times the
annual draw to three times the annual draw. Further, as of the
most recent reporting period, she reported that there was
approximately $16 billion in the ERA including unrealized gains
of $3.1 billion. She asked whether the paper specified that the
recommended amount must be amongst realized gains.
12:06:17 PM
MS. RODELL shared her belief that the paper did not specify what
the measurement was against. She understood that it was a
recognition of the entire ERA - not just the realized portion.
CHAIR SPOHNHOLZ sought to confirm that theoretically, if the
legislature were to transfer enough money into the corpus to
allow for three times the annual draw in the ERA including
unrealized gains, that would be consistent with paper 9 and
prudent policy.
12:07:13 PM
MS. RODELL confirmed. She reminded the committee that the ERA
did not have its own a standalone portfolio. Instead, it owned
a proportionate share of every single asset, and the principal
owned a majority of that asset. She explained that when the ERA
was smaller in comparison to the principal, a proportionate
amount of the unrealized gain also moved back over to the
principal. Consequently, fluctuations were visible in the
unrealized gains portion of the ERA due to the phenomenon of
monthly reallocation based on the proportion of the ERA to the
principal. She said when discussing a draw, it was not
unreasonable to consider the balance referred to as "uncommitted
realized" rather than the unrealized gain portion.
12:08:59 PM
CHAIR SPOHNHOLZ sought to clarify whether Ms. Rodell was
suggesting that the unrealized gains should be excluded from the
calculation or included in the calculation.
12:10:55 PM
MS. RODELL clarified that if $4.3 billion was transferred from
the ERA to the principal under the proposed legislation, half of
the $3 billion in unrealized gain would be transferred along
with it. Therefore, after the transfer, the ERA would be
reduced by more than $4.3 billion. She reminded the committee
that of the $16.1 billion in the ERA, $9.9 billion was
uncommitted, $3.1 billion was committed, and $3.1 was unrealized
gain. Thus, if $4.3 billion was transferred from the
uncommitted, a proportion of the unrealized gain would be moved
as well.
CHAIR SPOHNHOLZ sought to verify that the unrealized gain was
associated with the realized gain assets.
MS. RODELL answered yes. Further, she pointed out that
unrealized gain was not cash - it was a figure that had to be
shown on paper due to the financial accounting requirements.
12:12:26 PM
REPRESENTATIVE EASTMAN asked whether passage of the bill would
impact APFC's ability to respond to higher inflation.
12:12:54 PM
MS. RODELL answered no.
12:13:00 PM
REPRESENTATIVE SCHRAGE questioned whether APFC ever changed its
investment strategy in response to a need for liquidity given
that the ERA was subject to any appropriation by the
legislature.
12:13:31 PM
MS. RODELL stated that when the ERA was created, the statutes
specified that it shall be invested like the permanent fund,
which the trustees interpreted as the asset allocation of the
principal. She added that nothing pertaining to APFC's mandate
had changed, nor had they been directed to make a change. She
shared her belief that APFC could manage under the current
statutes.
12:14:19 PM
CHAIR SPOHNHOLZ announced that HB 165 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 165 Sectional Analysis 4.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HB 165 |
| HB 165 Sponsor Statement 4.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HB 165 |
| HJR 1 Background - APFC Resolution POMV 2003-05.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - APFC Resolution POMV 2004-09.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - APFC Resolution POMV 2020-01.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - APFC Trustees’ Paper Volume 9 1.15.2020.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - Institute of the North Position Paper.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Presentation by Institute of North 4.13.2021.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| SSHJR 1 Sponsor Statement 3.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| SSHJR 1 Sectional Analysis 3.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Additional Document - APFC POMV Statement.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |