Legislature(2025 - 2026)GRUENBERG 120
05/05/2025 01:00 PM House JUDICIARY
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| Audio | Topic |
|---|---|
| Start | |
| HJR10 | |
| HB209 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HJR 10 | TELECONFERENCED | |
| *+ | HB 209 | TELECONFERENCED | |
| + | TELECONFERENCED |
HJR 10-CONST AM: PERMANENT FUND; POMV;EARNINGS
1:02:32 PM
CHAIR GRAY announced that the first order of business would be
HOUSE JOINT RESOLUTION NO. 10, Proposing amendments to the
Constitution of the State of Alaska relating to the Alaska
permanent fund and to appropriations from the Alaska permanent
fund.
1:02:57 PM
REPRESENTATIVE CALVIN SCHRAGE, Alaska State Legislature, as
prime sponsor, presented HJR 10. He paraphrased the sponsor
statement [included in the committee packet], which read as
follows [original punctuation provided]:
When the Permanent Fund was created, it was structured
as two accounts: the Principal and the Earnings
Reserve Account (ERA). The Alaska Constitution
prohibits the spending of the Principal without a vote
of the people. However, profits generated by the fund
are deposited into the ERA, which is entirely
available for the Legislature to appropriate and
spend. The current value of the ERA is approximately
$16 billion. Overdraw of the ERA depletes the value of
the entire Permanent Fund and leaves Alaska worse off.
In 2018 the Legislature adopted statutes that allow
appropriation up to an amount that maintains the
growth of the fund. This plan is commonly known as the
"Percent of Market Value" ("POMV") draw. Still, those
statutes do not stop the Legislature from passing
budgets that spend Permanent Fund earnings beyond than
those sustainable limits. This resolution would send a
proposed amendment to Alaska voters to enshrine this
policy in the constitution.
The proposed constitutional amendment would combine
the Permanent Fund Principal and the Permanent Fund
Earnings Reserve Account into a single
constitutionally protected account. Under this
proposed amendment, the Legislature would be allowed
to appropriate each year a maximum of five percent
(5%) of the market value of that new constitutionally
safeguarded account as calculated over the first five
of the preceding six fiscal years. Experts have told
the Legislature that these limits make that spending
rate sustainable.
The Permanent Fund's Board of Trustees have
recommended this change since 2003, and this
constitutional amendment was also urged by the Fiscal
Policy Working Group, a bipartisan and bicameral group
of legislators that issued a report in 2021.
This measure is not and should not deal with the size
of the Permanent Fund Dividend or what specific
percentage of this appropriation is spent on state
services. It neither encourages nor prevents
legislators from pursuing those plans in the future.
This merely prevents the state from overspending our
renewable financial resource which ensures the
permanence of our Permanent Fund.
1:06:12 PM
DEVEN MITCHELL, Executive Director, Alaska Permanent Fund
Corporation (APFC), referred to a PowerPoint, titled "Trustees'
Paper Volume 10 Modernizing the Alaska Permanent Fund: A Single-
Fund Endowment Model." He summarized slide 2, "A Legacy of
Intergenerational Resource Contribution," which read as follows
[original punctuation provided]:
In 1976
Alaskans chose to permanently forgo immediate use of
at least 25% of oil and mineral revenues, saving
instead to create a renewable financial resource for
generations the Alaska Permanent Fund.
Today, the Fund -
• Leads the Nation
The largest U.S. sovereign wealth fund, globally
recognized as a model for converting finite
natural resources into lasting wealth.
• Supports Alaska
Provides over 50% of the state's unrestricted
general fund revenue for dividends and essential
services through the annual Percent of Market
Value (POMV) draw.
MR. MITCHELL said the structural change before the committee has
been advocated for since the Knowles administration in the
1990s, and each iteration of the APFC Board of Trustees since
then. He said the primary reason for considering HJR 10 is to
ensure that the percent of market value (POMV) draw is
transferred each year and eliminate the ability for one
generation to spend more than its fair share.
1:11:57 PM
The committee took an at-ease from 1:11 p.m. to 1:13 p.m.
1:13:17 PM
CHAIR GRAY questioned the major opposition to this proposal and
why it has never been enacted.
MR. MITCHELL said change is hard. He shared his belief that
there's been a legacy of concern about impact to other things,
like the permanent fund dividend (PFD) program, and fear that
the POMV transfer may result in a gradual drain on the Alaska
Permanent Fund ("the fund"). He said there's been a lack of
ability to adequately educate policy makers and allow them to
embrace the idea and its strengths.
1:15:02 PM
MR. MITCHELL explained that the benefits of switching to a
single-fund endowment structure is to ensure the ability for the
state to provide for a dividend and its operating needs, and
avoid a potential overdraw by the legislature or governor. It
would also eliminate the need for inflation proofing, as all
earnings would be retained and reinvested in the single fund.
He referenced the historical performance of the fund in 10-year
lookbacks. The takeaway, he said, is that the target rate of
return is a challenge to hit on a long-term basis, but
achievable at 5 percent.
1:19:58 PM
MR. MITCHELL referred to slide 3, which showed the current two-
account structure, which is far more complex than the proposed
solution and involves more risk. He explained that there is
significant levels of unrealized gains in the fund's portfolio
that cannot be spent under the current construct without selling
an investment that's increased in value or receive revenue from
a stock or bond in the form of interest, which illustrates the
concern about the ability to provide for the POMV transfer on an
ongoing basis. He recalled that the Division of Legislative
Finance ("LFD")) had modeled a scenario that showed insufficient
money in the Earnings Reserve Account (ERA) to provide for the
POMV draw.
1:22:33 PM
REPRESENTATIVE VANCE asked Mr. Mitchell to respond to the
concern that transitioning to a single model would take away the
flexibility to draw from the ERA in a tight year.
MR. MITCHELL said the question encapsulate the current
discussion about overdrawing the fund for one generation's
benefit at the expense of others. He indicated that the
inability to impose fiscal restraint is made harder with more
options, so from a conservative fiscal perspective, the proposal
would eliminate the ability to overspend from this resource.
1:25:25 PM
REPRESENTATIVE VANCE asked whether LFD and APFC had provided an
assessment on the status of the ERA and how it might change in
the coming years, given the state of the economy.
MR. MITCHELL said Callan's market assumptions are extrapolated
to project future balances, but it's difficult to predict. He
acknowledged that HJR 10 would limit the state's flexibility and
force the state to maintain fiscal discipline. However, he
shared his belief that if boundaries are never set, available
resources will always be used.
REPRESENTATIVE KOPP asked about the risk to the state in a
volatile market with a single-fund endowment. He shared his
understanding that under the current structure, the ERA absorbs
the losses, as well as the gains, for the entire fund.
MR. MITCHELL clarified that it used to be that way; however,
during the 2008 financial crisis, it was modified so that gains
losses are pro-rata allocated between the two accounts.
REPRESENTATIVE KOPP asked whether the single-fund endowment
model would better protect the state against a volatile market.
MR. MITCHELL said shifting to a single fund could have marginal
benefits; however, it would not significantly adjust the risk
tolerance. He reiterated that the goal of investment staff is
to maximize total return for the long-term benefit of the state
and worry less about unrealized or realized gains.
1:34:51 PM
REPRESENTATIVE KOPP surmised that the greater fear is
overdrawing the fund. He posited that the single-fund endowment
would allow for more control over risk and increase the state's
safety by prohibiting an overdraw.
MR. MITCHELL agreed that, although not verbatim, that is
generally APFC's sentiment.
1:36:20 PM
MR. MITCHELL resumed the presentation on slide 4, which gave a
comparative look at the fund's value in a two-account structure
and the proposed endowment model as of January 31, 2025. Slide
6 charted the volatility of oil revenue, the dividend payment,
and POMV transfer. It's intended to show the stability of the
POMV draw on revenue and its benefit to the state. Slide 7 show
the story of the ERA and the declining realized earnings from
almost $13 billion in Fiscal Year 2019 (FY 19) to a deficit of
$400 million in FY 25. He summarized slide 9, "Proposed:
Single-Fund Endowment Model," which read as follows [original
punctuation provided]:
Adopting this model, which would include a
Constitutionally established spending limit, would
strengthen the Fund's long-term stability and
purchasing power for future generations.
• Merge the Principal and the ERA into a Single-
Fund.
• Limit annual distributions through a
Constitutional POMV Rule.
• Ensure automatic inflation proofing by adhering
to a long-term sustainable withdrawal rate.
MR. MITCHELL continued to slide 10, "Benefits of the Single-Fund
Endowment Model," which read as follows [original punctuation
provided]:
Aligned with global best practices, strengthening
Alaska's financial position through sustainable
withdrawals & limited to the Fund's long-term real
return.
Alignment with Prudent Investor Standards
Follows best fiduciary and prudent practices for
endowments and trusts.
Total-Return Investing
Maximizes long-term growth without liquidity
constraints.
Predictable & Sustainable Spending
A maximum draw POMV rule prevents overspending.
Automatic Inflation Proofing
Eliminates the need for manual and ad hoc legislative
adjustments.
MR. MITCHELL advanced to slide 11, "Constitutional Amendment,"
which read as follows [original punctuation provided]:
The Board of Trustees has been on record for more than
twenty years supporting the transition to a Single-
Fund endowment to protect its intergenerational
sustainability and ensure that it provides for all
generations.
Board Resolutions 2000-13, 2003-05, 2004-09
• Supporting a constitutional amendment to limit
the annual Fund payout to not more than a 5% POMV
averaged over a period of 5 years.
• Implementing a constitutional POMV spending limit
has the accompanying benefit of assuring
permanent inflation-proofing of the Fund.
MR. MITCHELL summarized the Trustees' Paper Volume 10 on slide
10, which highlighted the benefits of moving to a single account
structure.
1:43:15 PM
CHAIR GRAY expressed some concern that moving to an endowment
model would take away the flexibility that the ERA provides;
however, he expressed opposition to a spending cap. For someone
who wants to maintain flexibility without a spending cap, he
said he supports the bill because he wouldn't want to be in a
situation where there's nothing in the ERA.
1:44:43 PM
CHAIR GRAY opened public testimony on HRJ 10.
1:45:13 PM
BENJAMIN COOK, representing self, gave testimony unrelated to
the bill.
1:46:41 PM
MIKE COONS, representing self, testified in opposition to HJR
10. Commented on his disapproval of the 5 percent draw, and the
75/25 dividend split.
1:49:57 PM
CARRIE HARRIS, representing self, gave testimony unrelated to
the bill.
CHAIR GRAY closed public testimony on HJR 10.
1:53:50 PM
REPRESENTATIVE VANCE asked why Legislative Legal Services
included the language on page 2, lines 1-5, to be included in
the Constitution of the State of Alaska ("the Alaska
Constitution").
REPRESENTATIVE SCHRAGE reasoned that it would allow certain
expenses associated with the management of the fund to be
considered outside that 5 percent because it's related to the
sustainability of the fund.
REPRESENTATIVE VANCE sought to confirm that the [appropriation
to pay for management expenses] would happen before the money is
deposited into the general fund (GF).
REPRESENTATIVE SCHRAGE deferred the line of questioning to
Legislative Legal Services.
1:57:13 PM
CHAIR GRAY said some of the value of the Alaska Constitution is
its broadness. He expressed concern about constitutionalizing
specific numbers that may need to be changed in the future.
REPRESENTATIVE SCHRAGE expressed concern that about the
legislature taking a disproportionate share of the ERA given the
sacrifice of past generations. He acknowledged that HJR 10
would put a specific cap on the draw; however, he opined that a
limit needs to be implemented to prevent today's generation from
overdrawing the fund. He said 5 percent is viewed as being on
the high end of sustainable while still allowing the legislature
the flexibility to draw less.
2:01:12 PM
CHAIR GRAY said he fundamentally disagreed with the notion of
trusting the market more than "ourselves." He asked why the
legislature would take away its decision-making power to be
governed by the market.
2:02:00 PM
REPRESENTATIVE KOPP pointed out that specific numbers were used
in 1976 and opined that [5 percent] is reasonable.
CHAIR GRAY raised the concern about the legislature not being
able to bail itself out in an emergency situation.
REPRESENTATIVE KOPP contended that in an emergency, the Alaska
Constitution would allow the governor to break any spending
rule.
2:05:18 PM
REPRESENTATIVE SCHRAGE agreed that the legislature has
historically shown discipline in building up the Constitutional
Budget Reserve (CBR), but on the flip side, it also spent down
the CBR. He reiterated that a 5 percent cap would allow
flexibility in spending while avoiding the erosion of the fund's
value.
2:07:42 PM
REPRESENTATIVE VANCE asked about the impact of the language on
page 2, lines 2-5.
2:08:27 PM
EMILY NAUMAN, Director, Legislative Legal Services, Legislative
Affairs Agency (LAA), said currently, Article IX, Section 15, of
the Alaska Constitution does not provide for costs associated
with the investments made by APFC to come out of the corpus or
Principal of the fund. HJR 10 makes a policy decision that
would allow the legislature to appropriate from the Principal to
pay those [administrative] costs associated with investments.
REPRESENTATIVE SCHRAGE referred to page 2, line 3, and asked
whether the appropriations for those expenses would fall outside
the 5 percent limit.
MS. NAUMAN answered yes.
2:10:49 PM
REPRESENTATIVE VANCE asked why the legislature would want to pay
these costs from the corpus and not the GF.
REPRESENTATIVE SCHRAGE said either would be appropriate and a
policy call for the legislature to make.
REPRESENTATIVE VANCE sought to confirm that it's keeping with
current practices.
REPRESENTATIVE SCHRAGE answered yes.
2:11:53 PM
REPRESENTATIVE MINA pointed out that HJR 10 had been a unanimous
recommendation from the 2021 Fiscal Policy Working Group in
conjunction with numerous other policy solutions for addressing
the structural deficit. This is not the only lever for
addressing state funding, she added.
2:12:33 PM
REPRESENTATIVE UNDERWOOD asked whether HJR 10 would be
considered a constitutional amendment or a revision.
MS. NAUMAN opined that it would not constitute a revision, which
would require a constitutional convention, because it meets the
four-pronged test for constitutional amendments: the proposal is
simple and easy to understand, complete within itself, relates
to one subject, and substantially affects only one section of
the Alaska constitution.
2:14:51 PM
REPRESENTATIVE UNDERWOOD asked whether the 5 percent draw is a
spending cap, and if so, why not change the constitutional
spending cap instead of the POMV draw.
REPRESENTATIVE SCHRAGE said it's a revenue cap, which he
characterized as one of the best forms of spending cap because
it limits the amount available for appropriation. He said
adjusting the spending cap would not protect the fund from
overdraw, which is the aim of the resolution.
REPRESENTATIVE VANCE asked whether the inclusion of more than 25
percent of all mineral lease rentals, royalties, royalty sale
proceeds, federal mineral revenue sharing payments, and bonuses
received by the State, as well as a portion of renewable
resources, into the Alaska Permanent Fund had been discussed in
the Fiscal Policy Working Group.
REPRESENTATIVE SCHRAGE said not that he recalled.
2:18:31 PM
REPRESENTATIVE VANCE said she would appreciate a fiscal analysis
on the impact of this proposal.
2:20:35 PM
CHAIR GRAY announced that HJR 10 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HJR 10 Version A.pdf |
HJUD 5/5/2025 1:00:00 PM |
HJR 10 |
| HJR 10 - Sectional Analysis.pdf |
HJUD 5/5/2025 1:00:00 PM |
HJR 10 |
| HJR 10 - Fiscal Note Governor.pdf |
HJUD 5/5/2025 1:00:00 PM |
HJR 10 |
| HJR 10 - Presentation.pdf |
HJUD 5/5/2025 1:00:00 PM |
HJR 10 |
| HJR 10 - Invited Testimony.pdf |
HJUD 5/5/2025 1:00:00 PM |
HJR 10 |
| HJR 10- Memo.pdf |
HJUD 5/5/2025 1:00:00 PM |
HJR 10 |
| HB 209 Sponsor Statement.pdf |
HJUD 5/5/2025 1:00:00 PM |
HB 209 |
| HB 209 Version A.pdf |
HJUD 5/5/2025 1:00:00 PM |
HB 209 |
| HB 209 - Sectional Analysis.pdf |
HJUD 5/5/2025 1:00:00 PM |
HB 209 |
| HB 209 - JUD Bill Presentation 4.28.25.pdf |
HJUD 5/5/2025 1:00:00 PM |
HB 209 |
| HB 209 Supporting Document Sum of PFD Payments 1982-2024.pdf |
HJUD 5/5/2025 1:00:00 PM |
HB 209 |
| HJR 10 - Sponsor Statement 5.2.25.pdf |
HJUD 5/5/2025 1:00:00 PM |
HJR 10 |
| HJR 10 Supporting Document APFC presentation UPDATED.pdf |
HJUD 5/5/2025 1:00:00 PM |
HJR 10 |
| HB 209 Supporting Doc Case Brief Zobel.pdf |
HJUD 5/5/2025 1:00:00 PM |
HB 209 |
| HB 209 - JUD Bill Presentation 5.5.25.pdf |
HJUD 5/5/2025 1:00:00 PM |
HB 209 |