Legislature(2017 - 2018)SENATE FINANCE 532
04/16/2018 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB151 | |
| HB176 | |
| HB213 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 176 | TELECONFERENCED | |
| += | HB 213 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 151 | TELECONFERENCED | |
CS FOR HOUSE BILL NO. 213(FIN)(efd fld)
"An Act relating to the investment, appropriation, and
administration of the public school trust fund."
3:12:54 PM
REPRESENTATIVE JUSTIN PARISH, SPONSOR, introduced the
legislation. He explained that the bill would help the
public school trust fund to operate at the industry
standard. He lamented that failure to modernize the trust
had resulted in years of lost income.
3:13:45 PM
AT EASE
3:14:25 PM
RECONVENED
3:14:44 PM
Representative Parish looked at a graph title, "CSHB
213(FIN), Public School Trust, Actual vs. POMV 6/30
Balances" (copy on file). The document contained a bar
graph that provided the numbers in thousands. the POMV
assumed a 70/30 equity/fixed income asset allocation from
July 1, 1978 - with a 4.75 percent payout of trailing 5
year market average. He relayed that the bill would allow
the use of equity growth as a form of income, which would
have a higher yielded income. He remarked that the fund was
dedicated to education. He thought that the bill would
allow for more consistency and predictability by using the
POMV draw on the fund and preserving the inflation adjusted
value.
3:16:28 PM
Co-Chair MacKinnon solicited questions from the committee.
She believed that the fund management plan in the bill was
unique.
3:16:54 PM
ROBERT EDWARDSON, STAFF TO REPRESENTATIVE PARISH, discussed
the Sectional Analysis (copy on file):
Section 1. (page 1, line 4): Amends AS 37.10.071(d) to
reflect the repeal of AS 37.14.110(c) in section 5 of
the bill. Current AS 37.14.110(c) maintains the
distinction between principal and income, and the
purpose of this bill is to convert the public school
trust fund to an endowment fund structure that does
not require maintaining the distinction between
principal and income.
Section 2. (page, line 7): AS 37.14.160 is amended to
add section 5 to the duties to direct the commissioner
to determine the average monthly balance for the
public school trust fund based on the monthly average
market value of the fund for the five years preceding
the previous fiscal year.
3:18:52 PM
Mr. Edwardson continued to discuss the Sectional Analysis:
Section 3. (page 2, line 21-26): Adds new section, AS
37.14.165 relating to the use of the public school
trust fund allowing the legislature to appropriate
4.75 percent of the amount determined by the
commissioner under new AS 37.14.160 (enacted by
section 2 of the bill). Appropriations must be for the
purpose of funding support for state public schools or
for reimbursing the costs of administration of the
fund.
Section 4. (page 2, line 27 page 3, line 8): AS
37.14.170 is amended to focus the investment of the
trust fund on increasing returns from capital
appreciation as opposed to increasing net income from
the generation of cash dividends and interest. This
permits the commissioner to invest for long term
capital appreciation by adjusting the asset allocation
of the trust fund to weight it more heavily to
equities as opposed to cash-generating fixed income
securities.
Section 5. (page 3, line 9): AS 37.14.110(c) and AS
37.14.140 are repealed. AS 37.14.110(c) is discussed
above at section 1. Current AS 37.14.140 provides for
expenditure of net income only. This is replaced by AS
37.14.165 (section 3 of the bill), which permits
expenditure of 4.75 percent of the average market
value of the fund.
3:20:13 PM
Senator Micciche asked whether the actual rate of return
had been assumed in the data set on the previously
discussed document.
Representative Parish deferred the question to Mr.
Barnhill.
3:21:19 PM
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
said that the key element of the fund management could be
found in existing state law, AS 37.14.110(c), which
required retention of the deposits to principal and the
capital gains and losses. He provided a brief history of
the fund and its comparison to the Permanent Fund. He said
that the education fund had grown slowly because it had not
been fully exposed to equity markets. He shared that the
chart showed what would have happened if the fund had been
invested from the beginning like an endowment. He said that
the department supported the bill and believed that it was
time to treat the fund more like an endowment so that it
could take on a larger exposure to equities and grow at a
faster rate over long periods of time.
3:24:04 PM
Co-Chair MacKinnon understood that the fund was a dedicated
fund, which was rare. She asked whether there were any
problems with this approach to the fund, based on its
historical use.
Mr. Barnhill believed that there were no legal issues. e
provided He shared that the fund was a pre-statehood
dedicated fund formed in 1915 by the federal government as
a land grant fund for public education. He relayed that in
the mid-1970s, with the anticipation of substantial oil and
gas revenues, the legislature made the decision that the
fund would be more robust if the land were removed and
replaced with a dedication of one-half percent receipts
from the management of state lands.
3:26:51 PM
BRIAN BJORQUIST, ATTORNEY GENERALS OFFICE, ANCHORAGE (via
teleconference), relayed that the department did not
believe that there was a dedicated fund problem with the
legislation.
3:28:07 PM
Co-Chair MacKinnon asked what would happen if the fund lost
money and had to pay out part of its principal.
Mr. Bjorquist replied that the dedicated fund component
meant that the trust and the monies in it were dedicated to
supporting public schools, regardless of the amounts paid
out or what happened with increases or decreases of the
fund. He added that there was no requirement that there be
no invasion of principal, restrictions applied to one
section of land, only 30 percent of the value of the trust.
He said that the bill would modernize the trust management
of the fund. He did not believe that there were any legal
problems with the bill and that it did not violate the
dedicated fund clause.
3:29:55 PM
Co-Chair MacKinnon referred to a letter from the department
from February 6, 2018. She asked whether the department
maintained the position taken in the letter.
Mr. Bjorquist replied in the affirmative.
3:30:11 PM
Senator von Imhof asked whether the model on the graph
assumed a certain return or used historical returns based
on a theoretical mix of assets.
Mr. Barnhill replied that the graph was modeled on a 70
percent equity, 30 percent fixed income asset allocation
represented by the Russel 3000 Index when it began, prior
to the Russel 3000, the S&P 500 Index had been used. He
said the Lehman Aggregate Index, now called the Bloomberg
Barclays Index, had been used for the 30 percent fixed
income asset allocation.
3:31:06 PM
Senator von Imhof asked who would manage the fund in its
new format.
Mr. Barnhill replied that the department would continue to
manage the fund.
3:31:29 PM
Senator von Imhof asked whether there would be any
cooperation with the Alaska Permanent Fund Corporation
(APFC).
Mr. Barnhill responded that the fund would be kept separate
from APFC.
3:31:48 PM
Co-Chair MacKinnon noted that the department was outpacing
APFC in some areas.
Mr. Barnhill stated that the relative performance between
APFC and the Treasury Division vacillated over time.
3:32:23 PM
Senator von Imhof queried the future proforma return
expectation.
Mr. Barnhill relayed that under current practices a 6.6
percent return was expected.
3:33:46 PM
AT EASE
3:35:31 PM
RECONVENED
3:35:34 PM
Co-Chair MacKinnon explained that a chart containing
forward looking assumptions was being distributed to the
committee. [This document is posted under the "documents"
tab for HFIN meeting 2/28/18]
3:35:51 PM
Mr. Barnhill related that the chart had been developed in
the other body in an effort to understand what the
different trailing averages looked like under a 4.75
percent POMV. He noted that the impact on the balance on
the fund in terms of its ability to keep up with inflation
using the current Callan Capital market assumptions. He
said that the modeling was done on the current balance, as
opposed to the principal balance or the inflation adjusted
balance. He said that because the Callan assumptions were
pessimistic over the next 10 years at 6.5 percent, if the
objective was to maintain the inflation adjusted value of
the current balance, that would be difficult under any of
the methodologies. He said that at some point the 10 year
plus bull market would come to an end and the 8 percent
that was hoped for would not be a reality. He lamented that
it would be difficult to maintain the inflation adjusted
value of the current balance under a POMV methodology, a
variety of percentages, over the next 10 years. He believed
that things would improve over a longer horizon of 20 to 30
years. He stated that as an endowment the objective was to
maintain the inflation adjusted value of deposits to
principal. He said that the total balance of the fund is
north of $650 million. The notional value of those is $310
million and had been tracked since 1978. He said that
taking the deposits to principal and adjusting them for
inflation using the consumer price index, the current
approximate inflation adjusted value of the fund was closer
to $513 million. He furthered that if the objective for
managing the endowment was to maintain over all periods of
time the inflation adjusted value of the principal deposit
it did not matter which trailing average was used. At a
4.75 percent distribution, under the current Callan Capital
market assumptions, inflation adjusted value of the
deposits to principal would be successful over the 10-year
horizon and into the future.
3:40:14 PM
Co-Chair MacKinnon said that she had been measuring the
fund by the Power Cost Equalization Fund. She stated that
with that fund, the state had lowered the expected rate of
return and decreased the risk. She understood that under
the bill the asset allocation would be changed, possibly
increasing the risk factor.
Mr. Barnhill felt that the distribution point for the PCE
fund had been fairly aggressive. He said that the bill
contained a modest 4.75 percent distribution point. He
added that the 4.75 to 5 percent distribution range was
standard in managing endowments around the country. He
believed that the department would be successful in
managing the fund going forward while protecting the
inflation adjusted value.
3:40:44 PM
Co-Chair MacKinnon asked whether the 4.75 percent suggested
in the legislation was the effective draw.
Mr. Barnhill said that taking 4.75 percent of the trailing
5-year average would almost always produce a percentage
draw of that year balance of less than 4.75 percent. He
reiterated that the objective was to maintain the inflation
adjusted value over long periods of time. He shared that
the department had requested in the bill that rather than
have a static 4.75 percent, that the words, "not more than
4.75 percent" be included in the language. He explained
that this would correct annually if for whatever reason it
was prudent to spend less than 4.75 percent in a particular
year.
3:41:26 PM
Co-Chair MacKinnon agreed that the department was
attempting to maintain the value. She felt that it had been
hard to determine a calculation on this particular fund
over the past few years working with the department. She
wondered why the legislature would give the department more
flexibility. She wondered how the Office of Management and
Budget Director arrived at the calculation of money
available for education out of the fund over the past
decade. She said that a solid mathematical formula had not
been determined.
Mr. Barnhill did not think that the cash flow should be
volatile. He said that going to a static 4.75 percent of
market value should make the cash flow more predictable and
stable. He offered reasons for why the department would
suggest going below 4.75 percent.
3:46:56 PM
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
discussed the fiscal notes. The first note was from the
Department of Education and Early Development (DEED), K-12
Aid to School Districts. He stated that the true impact of
the bill would be the increase of the amount of trust funds
used. He asserted that the fiscal notes could be confusing
due to the way that the Governor's FY 19 budget was
written. The fiscal note reflected an increase of general
funds of $1 million, and a decrease of Public School Trust
Funds of $1 million, the actual affect of which would be to
make an additional $17 million realizable. He said that if
the bill passed, the fund change that would be built in
would be an increase of $17 million of trust funds and a
decrease of the same amount of undesignated general fund.
The second note was for DEED, Mount Edgecumbe Boarding
School and showed that the school was no affected by the
legislation.
Co-Chair MacKinnon asked if the first note reflected $1.2
billion in total operating cost.
Mr. Painter replied in the affirmative. He explained that
the bill would impact the source of the funding for the K-
12 formula and the easiest way to show that was to show all
of the funding in the Governor's request and then show the
change in the funding. He clarified that not all the
funding would be affected by the bill.
3:49:39 PM
Co-Chair MacKinnon asked whether the fiscal note would be
incorporated in to the budget.
Mr. Painter replied that the fund source would change and
the numbers appropriation of Public School Trust Funds
would increase, thereby decreasing the fund capitalization
of unrestricted general funds by the same amount. It would
not change the amount that would go to the foundation
formula. He reiterated that the note lacked clarity.
3:50:24 PM
Co-Chair MacKinnon thought that there was a chance that
education was being double funded.
Mr. Painter said that the $1.2 billion was included in the
Governor's request. The appropriation requested in the left
column of the note showed the change in the fund source. He
revealed that the fiscal note could not be adopted into the
budget because the budget adopted by the body did not match
the Governor's request on the fund source.
3:51:15 PM
Senator von Imhof asked why a fiscal note that showed the
difference going from the current statutory income from the
fund to a potential new POMV.
Mr. Painter replied that the Governor's budget had built in
a fiscal note similar to the one before the committee into
the base budget that did not reflect current statute or the
legislation before the committee. He shared that the note
reflected a version of a different bill, that used a
different calculation; and unorthodox move by the Governor,
that created an unusual fiscal note.
3:52:07 PM
Co-Chair MacKinnon offered assurances that an appropriate
bill would be crafted by the committee, and would travel
with the bill, should the legislation pass out of
committee.
3:52:30 PM
Co-Chair MacKinnon OPENED public testimony.
Co-Chair MacKinnon CLOSED public testimony.
3:53:14 PM
Co-Chair MacKinnon announced that amendments were due by
5pm the following day. She discussed additional
housekeeping.
CSHB 213(FIN)(efd fld) was HEARD and HELD in committee for
further consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 176 AML Letter.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 176 |
| HB176 Sponsor Statement.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 176 |
| HB176 Flow Chart.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 176 |
| HB176 Letters of Support.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 176 |
| HB176 - Explanation of Changes.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 176 |
| HB 213 Letter to House Finance - Dept. of Revenue.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 213 |
| HB 213 Letter to House Finance - Dept. of Law.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 213 |
| HB 213--Supportive Letter.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 213 |
| HB 213 Support letter.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 213 |
| HB 213 Summary of Changes ver. R 2-8-18.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 213 |
| HB 213 Summary of Changes Ver U to N.A 4-12-2018.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 213 |
| HB 213 Sectional Analysis.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 213 |
| HB 213 Sectional Analysis Ver N.A 4-12-2018.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 213 |
| HB 213 Actual vs. POMV bar chart.pdf |
SFIN 4/16/2018 1:30:00 PM |
HB 213 |