Legislature(2003 - 2004)
05/02/2004 12:04 PM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE JOINT RESOLUTION NO. 26(FIN)
Proposing amendments to the Constitution of the State of
Alaska relating to and limiting appropriations from the Alaska
permanent fund based on an averaged percent of the fund market
value.
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken noted that CS HJR 26 (FIN), Version 23-LS1006\Z,
which is sponsored by the House of Representatives Rules Committee,
by request of the Legislative Budget & Audit Committee, would
provide the opportunity to amend the State's Constitution in order
to limit annual appropriations from the Alaska Permanent Fund to
five percent of the Fund's average market value.
REPRESENTATIVE MIKE HAWKER, Chair, House of Representatives (House)
Ways and Means Committee, stated that the Alaska Permanent Fund
Corporation (APFC) Board of Trustees originated this proposal,
which is commonly referred to as the "'clean' Percent of Market
Value (POMV) method." He characterized the proposal as "a
management tool" for the operations of the APFC, as it would "best
protect the value of the fund over the long-term future" and would
"provide for a stable and predictable" amount of money to be
available from the Permanent Fund for future Legislative
appropriation. He also acknowledged that "a number of conceptions"
are being discussed through which to accomplish the proposed
objectives.
ROBERT STORER, Executive Director, Alaska Permanent Fund
Corporation, Department of Revenue, reiterated that the APFC Board
of Trustees, after several years of study, developed this proposal
and considers it to be a "superior method" through which to manage
Fund assets.
Mr. Storer explained that the proposal would "memorialize inflation
proofing in the Constitution … by limiting the amount of funds that
can be appropriated from the Permanent Fund to no more than the
real income or no more than five percent of the Permanent Fund in
any given year." He stated that the proposal would also "marry the
management of the Fund with current investment strategies."
Mr. Storer expressed that one benefit derived from this proposal
would be that Legislators would be assured of "an annual payout
from year to year." Continuing, he declared that the proposed
payout methodology would be "more stable than the existing
methodology based on realized income." He cautioned, however, that
were the State to implement the proposed methodology there could be
times when no payout would be available.
Mr. Storer shared that as a result of current "considerable market
appreciation," the Fund has approximately "five billion dollars in
profits separated between realized income and unrealized income,"
and that, due to market conditions, "in just twelve short months
the amount of money that has become available has changed
dramatically." He cautioned, however, that the reverse scenario
could occur depending on financial market volatility. He pointed
out that, while the Fund has, historically, reflected steady
growth, market volatility has not been incorporated in the
extrapolations. He communicated that, were market volatility
included, the proposed methodology would prove to provide a more
stable payout.
Mr. Storer stated that this proposal "would prevent overspending in
the good years" as had previously occurred during the Bull Market
years; specifically in the areas of the State's Retirement Plans,
Endowment Funds, and Foundations. He stated that without
"discipline" in spending, that scenario might re-occur under the
current methodology. He declared that the proposed plan would
maintain the purchasing power of the entire Fund rather than just
the principal.
Senator Bunde asked whether the proposed plan would address the
issue of double inflation proofing which is argued to result from
inflation proofing combined with additional revenue derived
annually from oil royalties.
Mr. Storer responded that the APFC does not support the argument
that the Permanent Fund is being double inflation proofed. In fact,
he continued, he would provide Committee Members with a copy of a
paper [copy not provided] recently developed by the Fund's Director
of Finance that addresses this issue. Continuing, he stated that
"the key reason" the Fund is not considered as being double-
inflation proofed "is that once the appreciation of equities is
converted into realized income, it can be distributed under the
current scenario." He noted that the Royalties issue is a
Constitutional question "as it is embedded" in the State's
Constitution.
Senator Bunde stated that the financial methodologies of funds such
as the Harvard University Trust Fund are often exampled when
proponents discuss the POMV plan. However, he attested, these funds
do not incorporate royalties and instead grow as a result of the
interest generated by the endowment. Therefore, he declared that
comparing the Permanent Fund to such things as Harvard's endowment
fund is a more complicated issue.
Mr. Storer responded that the comparison of the POMV proposal to
plans such as the Harvard University Endowment Fund revolves on the
issue that "the payout is limited to a percentage of the value of
the total fund." Continuing, he declared that while the Permanent
Fund receives additional contributions in the form of royalties,
these other endowment funds annually receive donations from former
students and other sources. These contributions, he attested are
recognized as on-going contributions and are incorporated in the
anticipated growth of the funds.
Senator Bunde observed that were the State to continue to guarantee
inflation proofing of the Fund, continuing discussions regarding
this issue should be encouraged, as he stated, the scenario could
be likened to parents continuing to contribute to a 401K plan while
their children were starving.
Senator Dyson voiced appreciation for the back-up material the APFC
supplied to the Committee; specifically the handout titled "Alaska
Permanent Corporation Percent of Market Volume talking points April
2004" [copy on file]. He referenced a section of that material that
states, "Inflation proofing is inherent and no longer requires an
appropriation. *The Fund is invested for a 5% real rate of return
after inflation. If 5% is withdrawn, the increase in value due to
inflation will remain in the Fund." He asked the location of
language that supports this statement in the bill.
Mr. Storer responded that this language is "probably not"
specifically addressed in the bill. Continuing, he stated that the
Fund's payout target is limited to no more than five-percent "over
time." He also noted that currently the Fund's asset allocation
targets "a five-percent return in excess of inflation" on its
investments, and he stated that this legislation would provide
"guidance" that would assist the PFC " He voiced confidence "that
over time, we will achieve that goal." He noted that HB 298-
DISTRIBUTIONS OF APPROPS FROM PERM FUND is companion legislation to
this bill as it would provide additional statutory guidance, such
as a "a ten-year moving average" as "the benchmark" upon which to
compare Fund returns to inflation. He noted that were this goal
unmet, less money would be available for appropriation.
Representative Hawker understood Senator Dyson's question to be
whether this bill explicitly states that, "the Fund makes its
investments for a five-percent rate of return." Continuing, he
noted that language in Section 2(b), on page two, lines one and two
addresses the amount of money that could be appropriated.
(b) Appropriations from the permanent fund for a fiscal year
may not exceed five percent of the average of the market
values of the fund on June 30 for the first five of the six
fiscal years immediately preceding that fiscal year.
Representative Hawker stated that this language would provide the
Board of Trustees and the Fund's employees and managers a target of
a five percent return after inflation as the necessary investment
benchmark upon which to develop investment models. Therefore, he
opined that this legislation does establish that benchmark rate of
return.
Senator Dyson voiced that the responses to his question are
"somewhat" unsatisfying as he had hoped they would acknowledge that
the amounts reflected in Section 2(b) be adjusted for inflation. He
suggested that the language be changed to a five percent of the
market value in real rather than "inflated dollars."
Representative Hawker responded that adding language to the effect
of allocating up to five percent of after inflation dollars each
year would lead to the boarder discussion of what "is implicit" in
the "pure market value formulation." Continuing, he explained that
the investment model this bill is based upon recognizes that in the
future there might be individual or combined years "with great
market gains" or market declines. He stated that the goal of this
legislation is to adopt "the concept of aggregate value" in that
the Fund's investments would demonstrate that, over time, they
could perform at levels in which their rate of return is in excess
of five percent as opposed to dwelling on whether the gains
resulted from inflation proofing or royalties.
Mr. Storer declared that the Corporation "invests to achieve a five
percent real rate of return" and "strongly" believes this goal is
achievable. He stated that Senator Dyson's suggestion that the
language be more explicit could create more problems as it might
require "time to achieve that goal." He reflected that with the
exception of the most recent years, the Fund's historical real rate
of return, over time, has been in excess of six-percent. Therefore,
he stressed that the period of time over which to achieve the goal
would be an issue.
Senator Dyson commented that even though the bill is strengthened
by language mandating that a payout be based on a five-year
average, he is concerned that the resolution's sponsors "are
reluctant" to specify in the resolution that the payout would be
based on a five-percent real rate of return after inflation.
Mr. Storer declared that the Corporation stands by that fact that
the payout would be based on a five-percent real rate of return
after inflation, as depicted on the Corporation's website. However,
he declared the concern is that adding further language would
confuse the issue regarding long-term verses short-term issues.
Senator Dyson opined that the inclusion of the language, "after
inflation," would serve to garner more support for the resolution.
AT EASE 12:26 PM / 12:27 PM
Senator Dyson asked the sponsors to provide the Committee with
further information regarding their position on this language
issue.
Mr. Storer responded that a "good answer" would be forthcoming.
Senator Bunde commented that while he supports this resolution, he
is worried about citizens' response to the complexity of the issue.
Co-Chair Wilken ordered the bill HELD in Committee.
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