03/06/2024 06:00 PM House WAYS & MEANS

         HJR 9-CONST AM: PERMANENT FUND; POMV;EARNINGS                                                                      
                                                                                                                                
6:53:12 PM                                                                                                                    
                                                                                                                                
CHAIR CARPENTER announced that the  final order of business would                                                               
be  HOUSE JOINT  RESOLUTION NO.  9, Proposing  amendments to  the                                                               
Constitution  of  the State  of  Alaska  relating to  the  Alaska                                                               
permanent fund  and to appropriations  from the  Alaska permanent                                                               
fund.                                                                                                                           
                                                                                                                                
6:53:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GROH,  prime sponsor of  HJR 9, recounted  that in                                                               
the  1970s  when  the  permanent fund  was  created,  the  common                                                               
accounting  rules   and  legal   structures  were  to   have  the                                                               
principal/corpus and the income/earnings,  which is the structure                                                               
set  out  in the  Constitution  of  the  State  of Alaska     the                                                               
principal  and  the  permanent  fund  earnings  reserve  account.                                                               
However, he said, today's understanding  is that a single account                                                               
structure is needed for investments to work successfully.                                                                       
                                                                                                                                
REPRESENTATIVE GROH  explained that HJR  9 would create  a single                                                               
account structure  for the permanent  fund, along  with importing                                                               
the statutory rules under percent  of market value (POMV) draw in                                                               
the constitution  so that a draw  cannot be more than  5 percent.                                                               
This would  fix three  problems that the  trustees of  the Alaska                                                               
Permanent  Fund Corporation  have worried  about for  decades, he                                                               
said.   One, it  would provide  regular and  consistent inflation                                                               
proofing to prevent loss of the  real value of the permanent fund                                                               
over time.   This would  fix the current problem  of intermittent                                                               
inflation proofing.   Two, it  would prevent  potential overdraw.                                                               
This would  fix the  current problem  of the  appropriation limit                                                               
being just  a statutory rule.   Since the  limit of 5  percent of                                                               
market earnings  in a year as  a trailing average is  a statutory                                                               
rule,  the  legislature could  pass  a  statute  in any  year  to                                                               
supersede that limit  and spend all the  permanent fund earnings.                                                               
Three, it  would fix  the potential  problem that  adverse market                                                               
conditions could, in  a given year, lead to  the earnings reserve                                                               
account becoming  insufficient to pay  the POMV draw,  which pays                                                               
for roads, schools, public safety,  and permanent fund dividends.                                                               
He  noted  that  a  new  report  on  the  Alaska  Permanent  Fund                                                               
Corporation's website,  "A Rules Based Permanent  Endowment Model                                                               
for Alaska,"  lays out the  quantitative modeling aspects  of why                                                               
fixing these problems in important.   As well, he added, a single                                                               
account structure with the 5 percent  limit on the draw each year                                                               
being  in  the  constitution  would protect  the  permanent  fund                                                               
dividend over the long run.                                                                                                     
                                                                                                                                
6:59:49 PM                                                                                                                    
                                                                                                                                
CHAIR CARPENTER,  under a  model of  no earnings  reserve account                                                               
and a constitutional allowance for up  to a 5 percent draw, asked                                                               
what the  effect would  be on the  corpus of the  fund if  a draw                                                               
exceeded  the  earnings of  the  fund  with  an account  for  the                                                               
trailing average as well.                                                                                                       
                                                                                                                                
REPRESENTATIVE  GROH replied  that  it  would provide  protection                                                               
over the  long run by  having the  limits and is  the recommended                                                               
way by experts  to prevent having a  long run loss in  value.  By                                                               
this  becoming part  of the  constitution,  the earnings  reserve                                                               
account can be eliminated.  Including  the draw to no more than 5                                                               
percent of  the market  value [creates]  a sustainable  basis and                                                               
keeps the permanent fund growing.                                                                                               
                                                                                                                                
CHAIR CARPENTER  posed a scenario  where the trailing  average is                                                               
less  than the  draw.   He asked  whether in  the short  run that                                                               
would  be spending  from the  corpus to  pay the  annual up  to 5                                                               
percent draw.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GROH responded  that a  single account  structure                                                               
doesn't have a corpus, it has  a total value.  The single account                                                               
structure of total  value and 5 percent draw  builds in inflation                                                               
proofing.    There no  longer  needs  to  be reliance  on  annual                                                               
appropriations  or appropriating  being light  in some  years and                                                               
bigger  in others.    A single  account  structure abolishes  the                                                               
distinction between principal and  earnings/income; it is a total                                                               
market  value of  the  permanent fund  itself  that doesn't  lose                                                               
value over time because of the way that the draws are limited.                                                                  
                                                                                                                                
CHAIR CARPENTER  posed a scenario  of the earnings from  the fund                                                               
over  a five-year  period not  being enough  to account  for a  5                                                               
percent  draw, but  a  5 percent  draw is  continued.   He  asked                                                               
whether this would draw down the principal of the fund.                                                                         
                                                                                                                                
REPRESENTATIVE  GROH  answered that  it  is  protected over  time                                                               
because of the  way the earnings work.  Under  the current model,                                                               
all the earnings  could be blown in one year  because there is no                                                               
legal bar to doing that, which would severely deplete the fund.                                                                 
                                                                                                                                
CHAIR  CARPENTER stated  that the  sponsor is  talking about  the                                                               
earnings, and he is talking about the principal of the fund.                                                                    
                                                                                                                                
REPRESENTATIVE GROH  replied that moving to  this structure would                                                               
abolish the distinction between  principal and earnings; it would                                                               
be a sustainable model for growth over time.                                                                                    
                                                                                                                                
CHAIR  CARPENTER said  the only  way it  would be  sustainable is                                                               
that the earnings are greater than the draw.                                                                                    
                                                                                                                                
REPRESENTATIVE GROH responded  that the logic is the  limit of no                                                               
more than 5 percent and the model shows --                                                                                      
                                                                                                                                
CHAIR  CARPENTER  interjected  that  he  understands  that.    He                                                               
proffered that  if the fund's  earnings aren't enough to  keep up                                                               
with the  draw, then the principal  will decline to pay  for that                                                               
draw, or  a draw  would need  to be  chosen that  is less  than 5                                                               
percent to keep the principal at the same level.                                                                                
                                                                                                                                
REPRESENTATIVE GROH confirmed  that that is correct.   He said it                                                               
doesn't require  spending 5 percent, rather  it requires spending                                                               
no more  than 5  percent, so the  legislature could  always spend                                                               
less  than 5  percent.   The  entire logic  of modern  investment                                                               
theory is that,  over time, limiting the draw to  a certain level                                                               
provides protection.                                                                                                            
                                                                                                                                
CHAIR CARPENTER asked whether currently  there is protection from                                                               
spending the corpus/principal of the fund over time.                                                                            
                                                                                                                                
REPRESENTATIVE GROH answered  that if all the  earnings are spent                                                               
in one year then there aren't  any more earnings to spend at all,                                                               
so the earnings  would have to be  built over time.   This is the                                                               
way over the  long run to grow and maximize  [the fund] over time                                                               
while taking some earnings out on a sustainable basis.                                                                          
                                                                                                                                
CHAIR CARPENTER posed a scenario  of spending all the earnings of                                                               
the current earnings reserve account  and asked whether 5 percent                                                               
or  some portion  of 5  percent from  the principal  of the  fund                                                               
could be drawn to pay under current statute.                                                                                    
                                                                                                                                
REPRESENTATIVE GROH  surmised that in this  scenario spending all                                                               
the  earnings   means  not  putting  any   money  into  inflation                                                               
proofing, which would result in the  value going down.  The model                                                               
in HJR  9, he said, allows  growth over time and  the legislature                                                               
could choose  not to  go up to  the 5 percent.   This  model also                                                               
prevents the  risk of  unsustainable ad hoc  because it  looks to                                                               
have  both a  fund and  sustainable  use of  the fund's  benefits                                                               
without wiping out the fund or having insufficient benefits.                                                                    
                                                                                                                                
CHAIR CARPENTER  asked whether there is  a way to have  an ad hoc                                                               
draw from the principal of the fund under current statute.                                                                      
                                                                                                                                
REPRESENTATIVE GROH replied  that it will shrink  if the earnings                                                               
are overdrawn and there is no  inflation proofing; and if all the                                                               
earnings are  spent and there  is no inflation proofing,  it will                                                               
shrink by itself.  Under HJR 9, inflation proofing is built in.                                                                 
                                                                                                                                
CHAIR CARPENTER  said it  would lose  value because  of inflation                                                               
proofing  but it  wouldn't be  reduced  because of  appropriation                                                               
from the legislature.                                                                                                           
                                                                                                                                
REPRESENTATIVE GROH responded that the appropriations are                                                                       
limited over time  no more than 5 percent  and the legislature                                                                  
could always decide to spend less than that.                                                                                    
                                                                                                                                
7:07:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MCCABE offered his understanding that it would be                                                                
a maximum of 5 percent, so the legislature could do 1 percent.                                                                  
                                                                                                                                
REPRESENTATIVE GROH answered that as matter of law, yes.                                                                        
                                                                                                                                
REPRESENTATIVE MCCABE surmised the legislature could do 0                                                                       
percent.                                                                                                                        
                                                                                                                                
REPRESENTATIVE GROH replied that as matter of law, yes.                                                                         
                                                                                                                                
7:08:34 PM                                                                                                                    
                                                                                                                                
CHAIR CARPENTER announced that HJR 9 was held over.