Legislature(2019 - 2020)GRUENBERG 120
04/25/2019 03:00 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HB139 | |
| HB132 | |
| HJR18 | |
| HJR6 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 139 | TELECONFERENCED | |
| *+ | HB 132 | TELECONFERENCED | |
| *+ | HJR 6 | TELECONFERENCED | |
| *+ | HJR 18 | TELECONFERENCED | |
| + | TELECONFERENCED |
HJR 18-CONST AM: PERMANENT FUND; POMV; EARNINGS
4:03:12 PM
CO-CHAIR FIELDS announced that the next order of business would
be HOUSE JOINT RESOLUTION NO. 18, Proposing amendments to the
Constitution of the State of Alaska relating to the Alaska
permanent fund and to appropriations from the Alaska permanent
fund.
4:03:22 PM
CO-CHAIR KREISS-TOMKINS, as prime sponsor HJR 18, paraphrased
the sponsor statement, which read as follows [original
punctuation provided]:
House Joint Resolution 18 (HJR 18) constitutionally
protects the real value of the Alaska Permanent Fund
permanently, for future generations by "hardening"
the POMV structure of SB 26, as passed by the
legislature in 2018.
HJR 18 constitutionally limits appropriations from the
Permanent Fund to 5% of the average of its market
value for the first five of the preceding six fiscal
years. Because POMV-based management of the Permanent
Fund renders the function of the earnings reserve
account obsolete, HJR 18 also merges the earnings
reserve account with the principal; effectively all
the Permanent Fund becomes the principal.
Most important, HJR 18 addresses the urgent and
bipartisan goal of protecting the real value of the
Permanent Fund for future generations. In addition,
HJR 18 provides the Alaska Permanent Fund Corporation
certainty in managing assets, allowing APFC to earn a
best possible return on its investments, for the
benefit of Alaskans.
CO-CHAIR FIELDS asked the reason for Representative Kreiss-
Tomkins concern regarding the legislature drawing down the
state's savings account.
CO-CHAIR KREISS-TOMKINS explained that since he was elected, the
legislature has spent $14 billion out of savings, because doing
so was easier than cutting the operating budget and/or passing
taxes. He maintained that one or the other of those two actions
should have been taken, but neither occurred because it was
easier to spend down savings. He stated that he has been
frustrated by that scenario and believes that putting in place
hard protections is an important and prudent measure. He
offered that the permanent fund is one of the largest sovereign
wealth funds in the world and certainly the largest in the U.S.
He mentioned that the permanent fund is a huge intergenerational
asset and expressed his desire that it be there permanently.
CO-CHAIR FIELDS mentioned that his staff has prepared long-term
projections for the permanent fund under different scenarios and
offered them to the committee members to review.
4:06:50 PM
REPRESENTATIVE SHAW referred to Representative Kreiss-Tomkins's
testimony that $14 billion has been spent from the savings
accounts - the Statutory Budget Reserve (SBR) and the
Constitutional Budget Reserve Fund (CBRF). He mentioned that
Representative Kreiss-Tomkins was involved in the legislative
process that resulted in the spending and asked, "We now have to
be prudent because there is a potential that we could go broke
in that savings account?"
CO-CHAIR KREISS-TOMKINS explained that the $14 billion is an
approximate number; the spending began in 2013; the SBR has
about $1.7 billion remaining; and therefore, the legislature has
effectively spent the savings down. He concluded that it was
that situation which prompted the passage of Senate Bill 26
[during the Thirtieth Alaska State Legislature, 2017-2018,
signed into law 6/27/18].
REPRESENTATIVE VANCE concurred with the need to protect the
corpus of the permanent fund and the importance of it remaining
in perpetuity. She asked whether there is a need for inflation-
proofing in the proposed legislation.
CO-CHAIR KREISS-TOMKINS responded that inflation-proofing is
effectively accounted for in the percent of market value (POMV)
structure provided the draw is sufficiently conservative. He
said that the 5 percent draw proposed in HJR 18 and also
incorporated in Senate Bill 26 beginning in fiscal year 2021 (FY
21), effectively accounts for inflation in looking at the
average market value of the permanent fund in the first five of
the preceding six fiscal years. With a greater percentage draw,
the real value of the fund would be eroded over time by
inflation.
REPRESENTATIVE VANCE asked whether the inflation-proofing is in
statute.
CO-CHAIR KREISS-TOMKINS explained that under the POMV approach
the permanent fund is basically a classical endowment: there is
a big pot of money, and the draw down each year is a certain
percentage of the pot. Currently, Alaska has two pots of money:
one pot is static; the other constantly grows; and money is
transferred from the growing pot to the static pot. He stated
that it is important to account for inflation by shifting money
from the earnings reserve account (ERA) to the corpus on an
annual basis to ensure that the corpus will not lose value over
time. Under his proposed legislation, the structure is
simplified to have one large corpus - all principle - and the
draw already accounts for inflation; in other words, inflation-
proofing is built in.
CO-CHAIR FIELDS added that with an 8 percent or more annual
return and a 5 percent draw, the remaining 3 percent is more
than enough to prevent against inflation.
4:11:23 PM
REPRESENTATIVE VANCE asked, "While this protects the corpus in
the constitution, where is the dividend?"
CO-CHAIR KREISS-TOMKINS responded that there have been
discussions among legislators about whether the [amount of the]
permanent fund dividend (PFD) should be addressed in the
constitution. He added that he personally believes that it
should be and has sponsored a constitutional amendment to do so.
He noted the lack of legislative support for that idea. He
stated that as a baseline, all legislators, regardless of their
views on the PFD, agree on the importance of protecting the fund
itself. Under HJR 18 and the POMV approach to managing the
permanent fund, the amount of the PFD becomes a decision of the
legislature, as it is currently. He mentioned that the 5
percent draw from the fund would be more than enough to pay a
PFD that follows the statutory formula, if the legislators
supported it. Currently, the political is to distribute a
lesser amount.
REPRESENTATIVE VANCE referred to page 1, line 15-16, of HJR 18,
which read in part: "Each fiscal year, the legislature may
appropriate from the permanent fund to the general fund an
amount that is not more than five percent...." She asked
whether this could be interpreted as "may appropriate the POMV."
She added that historically the words "may appropriate" have
been "fighting words." She asked the reasoning behind choosing
this wording for the constitutional amendment.
CO-CHAIR KREISS-TOMKINS restated the question, Why does the
amendment use "may" instead of "shall"? He stated that if oil
exceeds $140 barrel and a large amount of traditional petroleum
revenue is flowing into the state treasury, the legislature may
choose to draw down only 4.25 percent of the market value,
because it doesn't need the full 5 percent; the remaining money
could be left to grow in the fund for future generations. He
suggested that there may be scenarios in which the legislature
decides that spending the full 5 percent is unnecessary.
4:15:14 PM
REPRESENTATIVE LEDOUX asked whether under HJR 18, taking a 5
percent draw rather than a 5.25 percent draw, would subject the
state to greater reductions in services or a lower PFD check
than currently experienced.
CO-CHAIR KREISS-TOMKINS agreed that there would be less money
available with a POMV draw of 5 percent compared with a POMV
draw of 5.25 percent; however, there are many other variables at
play.
REPRESENTATIVE VANCE asked Representative Kreiss-Tomkins to
explain how the ERA is currently used.
CO-CHAIR KREISS-TOMKINS said that currently the ERA consists of
realized and unrealized earnings from the permanent fund; this
is the account use by the legislature to pay dividends and some
public services. He added that the permanent fund is generally
understood to consist of the corpus and the ERA combined.
REPRESENTATIVE VANCE asked for confirmation that the two
accounts are clearly different regarding accessing the funds.
She asked for clarification of the motivation behind combining
the accounts.
CO-CHAIR KREISS-TOMKINS agreed that there is a very important
and profound difference between the funds: the corpus is
protected in the constitution and cannot be accessed for
appropriation, whereas the ERA - which is close to $19 billion -
is available for appropriation by a simple majority vote of the
legislature. He noted that the two-account structure of the
permanent fund is highly unusual relative to other sovereign
wealth funds.
[HJR 18 was held over.]