Legislature(2021 - 2022)ADAMS 519
05/12/2021 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB102 | |
| HJR1 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HJR 1 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | HB 102 | TELECONFERENCED | |
HOUSE JOINT RESOLUTION NO. 1
Proposing amendments to the Constitution of the State
of Alaska relating to the Alaska permanent fund and to
appropriations from the Alaska permanent fund.
9:47:52 AM
REPRESENTATIVE JONATHAN KREISS-TOMPKINS, SPONSOR, thanked
the committee for hearing HJR 1. He commented that the
mechanics of the resolution was relatively simple. He
explained that HJR 1 placed the Percent of Market Value
(POMV) in the state constitution and collapsed the
Earnings Reserve Account (ERA) into the Permanent Fund (PF)
principle so that the entire fund was constitutionally
protected from being overspent. The POMV draw would remain
5 percent. He voiced that HJR 1 left all other questions on
the table. He thought that the resolution aspired to
protect the PF from being spent down. He stressed that
everyone would lose if the fund was spent down regardless
of differing priorities. He viewed that the policy embodied
in HJR 1 was a necessary component of any fiscal plan; that
the PF was protected from overspending and preserved for
future generations as the cornerstone of Alaskas fiscal
future. His motivation was to force a fiscal plan and by
hardening the draw it necessitated that the legislature
figured the pieces out. The policy forced the legislature
to figure out the budget problem. He was available for
questions.
Co-Chair Merrick indicated Ms. Rodell was available to
provide comments.
9:51:35 AM
ANGELA RODELL, CHIEF EXECUTIVE OFFICER, ALASKA PERMANENT
FUND CORPORATION (APFC), indicated the trustees had been on
the record since 2000 in support of a constitutional
amendment that would enact a 5 percent POMV spending limit
and protect the entire fund for future generations of
Alaskans by eliminating the distinction between the
principle and earnings. She elaborated that the percent of
market value structure in the resolution allowed the fund
to benefit all generations and limited payouts. It
protected the funds value through constitutional inflation
proofing and eliminated a separate appropriation for
inflation proofing. Finally, it provided a payout that was
compatible with APFCs investment policy and allocation
strategy. She furthered that in 2003 and 2004 the board of
trustees adopted resolutions that advocated for a
constitutional POMV of 5 percent based on a 5-year average.
In 2018, the board of trustees adopted Resolution 1804 that
promoted the same concepts. Additionally, in 2020 the board
reaffirmed the statements made in the prior resolutions.
She believed that HJR 1 affirmed the long-term stability of
the fund.
9:53:40 AM
Representative Rasmussen asked if the 5 percent POMV was
still sustainable if only 25 percent of the
constitutionally mandated royalties were deposited into the
fund and the 25 percent statute was repealed. Ms. Rodell
replied that the royalties were important to the fund but
did not impact the ability to withdraw the 5 percent POMV
amount. She expounded that currently the statutory 25
percent was approximately $90 million and would be
deposited into the fund. It was a very important amount but
a very small amount and would not meaningfully affect the 5
percent POMV.
9:55:20 AM
Representative LeBon asked if the fund was earning
approximately 6.5 percent to 7 percent averaged over a
reasonable timeline and added the royalties whether it
would inflation proof the fund over the long-term. Ms.
Rodell clarified that the 25 percent constitutionally
mandated royalties had been around $300 million to $350
million and vary with the price of oil. The additional 25
percent had to do with oil development after 1979, was a
more limited pool of money, and equated to the roughly $80
million to $90 million. The two generated different
contributions to the fund. She elaborated that royalty was
not inflation proofing and did not cover inflation. Royalty
was a non-renewable resource that the state was attempting
to create inter-generational equity with. Royalty had no
tie to inflation. The inflation proofing came about based
on the current constitutional construct. The principle did
not get any inflation benefit from the increase in market
value that might occur due to inflation because all the
gain went to the ERA once its realized, which was why
inflation proofing was necessary. A POMV structure would
eliminate the need for inflation proofing because the total
fund would benefit from all the gain and in effect
constitutionalize inflation proofing.
9:58:00 AM
Vice-Chair Ortiz asked whether there would be any leeway
for the ERA outside of the 5 percent draw if a 5 percent
draw was in the constitution. Ms. Rodell explained that how
it worked mechanically was the unencumbered balance in the
ERA would be deposited into the corpus and the ERA would be
eliminated. She informed the committee that the legislature
would need to conform statutes to the new constitutional
amendment. There would not be an ERA after a certain date
once it was constitutionalized.
9:59:29 AM
Representative Carpenter referenced the statement that HJR
1 would protect the fund. He asked which portion of the
fund was not currently protected. Ms. Rodell responded that
it depended on how protection was defined. She elucidated
that the principle was not protected from inflation without
an appropriation by the legislature. The ERA was not
protected to ensure intergenerational benefit because the
entire balance was subject to appropriation. She maintained
that from the viewpoint of the trustees, protection meant
that the fund was saved and would keep up with inflation
without the need for active involvement by the legislature
other than appropriating up to 5 percent of the POMV.
Representative Carpenter appreciated the clarification. He
believed that there were two different types of protection;
one is inflationary protection of the principle, and the
other was spending of the ERA. He stated that there was not
a mechanism to spend from the corpus. He asked if he was
correct. Ms. Rodell responded in the affirmative.
Representative Carpenter hypothesized that if inflation was
outpacing the 5 percent draw over several years, then in
those years the corpus would not be inflation-proofed. He
asked whether he was correct. Ms. Rodell responded that the
trustees had an investment policy with a long-term
objective of 5 percent plus the Consumer Price Index (CPI).
Therefore, if there was a period of high inflation of 3
percent then the trustees would want a nominal return of 8
percent. If the investment performance was below 5 percent
then inflation was not quite getting the fund to the same
spot but was not falling as far behind as a scenario with
zero inflation and flat growth. A period of negative
losses meant the fund was falling further and further
behind. She determined that if the fund had negative losses
it would have to perform better than 8 percent. She
reasoned that the smoothing affect was invaluable to the
POMV. She explained that in years of off the chart growth
the fund would produce a benefit over the next 5 years as
the boom years fed into the calculation. However, there
would not be a windfall amount if it was taken all in one
year. She hypothesized that if in FY 22 to FY 24 there was
1 percent or minus 5 percent growth it would get factored
in and the numbers would trickle down. Looking back over a
10 to 15 year period it would be a smooth ride and not
create wild swings. It was the corporation's philosophy to
stay invested to keep pace with the 5 percent POMV.
10:05:30 AM
Representative Carpenter had heard that a percentage of
real earnings already accounted for inflation. He asked if
it would be a more traditional way to inflation proof. Ms.
Rodell responded that it was a possibility. She delineated
that another way other jurisdictions had handled it was to
make the POMV a range of percentage points like 3 percent
to 5 percent and factor in the inflation rate and withdraw
accordingly to leave an inflation adjustment. She stated
that the mechanism was a policy call and from the trustees
standpoint HJR 1 was consistent with what the trustees had
adopted. She thought that the HJR 1 mechanism was very
simple and straightforward.
10:06:56 AM
Co-Chair Merrick apologized to Mr. Laing for not being able
to hear his presentation, as the committee was out of time.
He would be invited back to the committee at a later
hearing.
Co-Chair Merrick reviewed the agenda for the afternoon.
HJR 1 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HJR 1 Institute of the North HFIN Presentation 051221 .pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 02 HJR 1 Sponsor Statement - H FIN 5.3.21.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 05 HJR 1 Sectional Analysis - H FIN 5.3.21.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 06 HJR 1 Background - APFC POMV Statement.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 08 HJR 1 Background - APFC-Resolution-POMV-2020-01.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 07 HJR 1 Background - 2020_APFC_Trustees-Paper-9.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 09 HJR 1 Background - APFC-Resolution-POMV-2004-09.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 10 HJR 1 Background - APFC-Resolution-POMV-2003-05.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |
| 11 HJR 1 Background - Institue-of-the-North-Position-Paper-Web.pdf |
HFIN 5/12/2021 9:00:00 AM |
HJR 1 |