Legislature(2017 - 2018)GRUENBERG 120
04/10/2018 03:15 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HJR41 | |
| HB409 | |
| SB204 | |
| HJR30 | |
| SB196 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 409 | TELECONFERENCED | |
| + | SB 204 | TELECONFERENCED | |
| + | SB 196 | TELECONFERENCED | |
| + | HJR 30 | TELECONFERENCED | |
| *+ | HJR 41 | TELECONFERENCED | |
| *+ | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HJR 41-CONST AM: PERMANENT FUND; POMV;EARNINGS
3:22:23 PM
CHAIR KREISS-TOMKINS announced that the first order of business
would be HOUSE JOINT RESOLUTION NO. 41, Proposing amendments to
the Constitution of the State of Alaska relating to the Alaska
permanent fund, establishing the earnings reserve account, and
relating to appropriations from the Alaska permanent fund.
3:23:03 PM
REID MAGDANZ, Staff, Representative Jonathan Kreiss-Tomkins,
Alaska State Legislature, advised that this amendment for the
Constitution of the State of Alaska caps the draws on the
Permanent Fund (PF) to a sustainable 4.75 percent of market
value and it prevents ad hoc draws on the earnings reserve
account (ERA), thereby, preventing any draws above that 4.75
percent threshold. The amendment maintains the principal and
the ERA as separate accounts and prevents any spending from the
principal account.
3:23:50 PM
ROBERT ERVINE, Staff, Representative Jennifer Johnston, Alaska
State Legislature, added that HJR 41 represents the consensus
point discussed around the legislature as a whole, and it is the
beginning of a conversation. It appears, he offered, that many
legislators believe ad hoc draws are a bad idea because it
changes the way in which the fund is managed, and the state
needs some type of sustainable draw.
REPRESENTATIVE BIRCH asked whether there is a reason this
resolution cannot take place in statute, noting the hurdle it is
to get anything through the whole constitutional amendment
process. Basically, he said, at this point the $40 billion in
the fund is fully fenced off and is constitutionally protected
via the 1976 public vote for the PF. He further asked whether
there is any reason the legislature could not set up something
similar if it had the same net result, and then work to put it
into statute.
3:25:30 PM
REPRESENTATIVE WOOL referred to Mr. Ervine's statement regarding
a consensus amongst the legislators and asked whether those were
anecdotal water cooler discussions and whether that was "just
your vibe."
MR. ERVINE answered that Representative Wool was correct.
CHAIR KREISS-TOMKINS added that another iteration of this idea
is where a percent goes to the dividends and a percent is
available for appropriation for public services. He noted that
it could be 50/50, or 25/75, or many different versions, "and
just not even going there and just starting with the most basic
notion, which is, What is a sustainable draw of the PF?"
3:26:16 PM
REPRESENTATIVE WOOL referred to the statement that this
legislation would prevent ad hoc draws out of the ERA
constitutionally, but yet there would still be an ERA and a PF
corpus. He asked the reason for not merging it all into one if
there are no ad hoc draws out of the ERA.
MR. MAGDANZ responded that the main effect for not merging the
accounts is that under this amendment, the $40 billion in the
principal that Representative Birch mentioned would remain
untouchable and un-spendable. For example, he said, if the
market suffered a significant downturn immediately after passing
this amendment, that $40 billion would remain protected and
would still be unavailable for spending under any scenario.
3:27:15 PM
REPRESENTATIVE WOOL pointed to the statement that this
legislation would prevent ad hoc draws out of the ERA, and
therefore the ERA would simply be the entity from which the 4.75
percent is drawn. He surmised that one is a checking account
and the other is a savings account, but if there are no draws
from it, it could ostensibly be looked at the same. He then
clarified that when he said, "no draws," he meant other than the
4.75 percent.
MR. MAGDANZ offered a hypothetical wherein for the next eight
years the PF earned zero returns, and if 5 percent a year was
being drawn, the ERA could potentially be drawn down to zero by
maintaining a separate principal and no money would be available
to draw. Whereas, if the 2 funds were combined, it would be
possible to draw 5 percent forever, he offered.
3:28:25 PM
REPRESENTATIVE WOOL said that under that scenario, if the corpus
was separate from the principal and the ERA was used up for
"your draw of 4.75 percent" and the earnings was zero for 8
years, the ERA would go to zero and "we couldn't tap into the
principal. Then you'd be the dilemma of, what do we do now?"
MR. MAGDANZ replied that Representative Wool was correct, the
state would have to find the money to fund its budget from the
different sources.
3:29:10 PM
REPRESENTATIVE KNOPP asked whether that is similar to what the
state has today wherein the ERA is separate from the principal
amount, and the corpus is already protected under the Alaska
State Constitution. Other than the structured draw at 4.75
percent, he said that he does not see a whole lot of difference
in what is being proposed here, other than to protect it under
the Alaska State Constitution. He asked whether he was on track
with his statement.
MR. ERVINE answered that Representative Knopp's statement was
correct.
3:29:56 PM
REPRESENTATIVE KNOPP noted that it had been stated that the ERA
is subject to appropriation, yet Title 34 lays out the
structured draw and inflation-proofing. He remarked that
members of the public have argued that the legislature is
breaking its own laws by not following its laws and he somewhat
agrees in that sense. Mr. Magdanz said that everything in the
ERA is subject to appropriation, and he asked whether that
statement evolved from a legal opinion or authority.
MR. MAGDANZ responded that that statement means, for instance,
this year the legislature could, with 21 votes, choose to take
all of the $16 billion in the ERA, put it in the constitutional
budget reserve (CBR), and choose to spend it all in a single
year. This constitutional amendment would prevent that scenario
from taking place, and "it would say, really, truly, the
legislature can only spend 4.75 percent of market value."
REPRESENTATIVE KNOPP asked that if the legislature was following
its own statutes right now, it wouldn't have that option. He
asked where it read that it is all subject to appropriation
because the legislature does not appear to be following the laws
it created a few years ago.
MR. MAGDANZ responded that the problem is that the legislature
does not have to follow its statutes when it comes to the budget
process.
3:32:41 PM
REPRESENTATIVE BIRCH noted that a couple of different terms have
been used for the PF, and the sponsor statement indicates that
the goal is to prevent un-sustainable spending that threatens
the future value of the fund. He opined that the $40 billion in
the corpus is pretty well fenced off without some sort of
constitutional question for the voters. He said he does
understand the earnings for the 1976 amendment that basically
moved those dollars into the general fund (GF) and asked whether
the corpus is threatened in any manner.
MR. MAGDANZ answered that Representative Birch is correct that
the $40 billion attributed to the principal is currently
untouchable. The question to be had with this amendment is that
the total fund value, including the ERA, is roughly $66 billion.
The difference between those 2 numbers, $26 billion, is not
currently constitutionally protected. This amendment would
protect all $66 billion currently in the PF, he explained.
3:34:23 PM
REPRESENTATIVE WOOL remarked that he has been hearing that the
legislature has not been following the statute, breaking the law
with zero repercussions, and that within the last two years the
statutory formula for the PFD has not been followed. He noted
that the governor vetoed it a few years ago, then the
legislature passed a less than statutory formula, and this year
it appears the legislature is on track to do it again. He asked
whether this is a common occurrence.
MR. ERVINE offered the current pertinent example of the "90-day
limit" wherein the voters of 2006 passed an initiative limiting
the legislature to a 90-day session, and the legislature has
"blown by it 8 of the last 10 years," he opined.
3:35:44 PM
ANGELA RODELL, Chief Executive Officer, Alaska Permanent Fund
Corporation (APFC), Department of Revenue (DOR), responded to
Representative Knopp's question, and advised that the Alaska
State Constitution creating the PF is "very clear" that the
amounts on deposit in the fund will be used for income-producing
investments only, the income of which shall go to the GF, and
the legislature has been given the power of appropriation over
the GF. That, she explained, is the mechanism by which the
legislature has the ability to fully appropriate the ERA because
the ERA became the repository rather than going directly to the
GF. The legislature, through statute, created a sub-fund of the
GF that is the ERA, she further explained.
3:36:48 PM
REPRESENTATIVE KNOPP commented that there is also "another sub-
account of that, we required to put in 50 percent of the
projected dividend payments out of the ERA." In the event that
is the case, he asked why the legislature put that formula in
statute, whether it was "almost recommended language" but not
mandatory as far as the formula for the PFD payouts.
MS. RODELL noted that she was not here at the time of the debate
as to how the PF would be used or how that income would be used.
She offered that it is her understanding, through the materials
she has read, that part of it was to "bifurcate that debate and
leave that debate for days like today, which is why the
constitutional language for the PF is actually very clean and
very simple." This, she explained, was the compromise achieved
through statute and was in place up until 2016. Interestingly,
one of the historical observations she said that she would make
is that the statutory language reads that, "50 percent of the
income available for distribution shall be transferred for the
PFD fund program." Except, she pointed out, there was no
discussion regarding what was to be done with the other 50
percent of the amount available for distribution was to be used
for, and at times that was used for inflation-proofing.
Inflation-proofing is another example of a statute that has not
been fulfilled since 2016, and/or it was appropriated back into
the principal of the fund. There is almost $7 billion of
additional appropriations outside of inflation-proofing and
royalty deposits that comprise the $40 billion of the corpus of
the fund. Therefore, she noted, one might argue that 50 percent
is the amount that was available for state services that
previous legislatures chose not to appropriate, but rather leave
behind the buildup of the balance in the ERA.
3:39:10 PM
REPRESENTATIVE KNOPP opined that he had read a legal memorandum
in the past which discussed the powers of appropriation and that
is how "we got around that." He said that he was pretty sure he
did not support this, but he would support the inflation-
proofing in the Alaska State Constitution. He noted that when
he asked why the legislature was not inflation-proofing this
year, he was advised that the fund made 12 percent, "we think
that's more than enough to offset inflation-proofing." He asked
Ms. Rodell's opinion on that advice.
MS. RODELL answered that she strongly disagrees with that
advice. The principal of the account only gets what the
legislature chooses to appropriate back in, outside of the
mandatory 25 percent. Therefore, she explained, all of those
earnings are available for appropriation, and none of it - "not
one penny of it" - is available to the principal of the account.
In response to Representative Kopp's earlier comment, under
Wielechowski v. State of Alaska, [403 P.3d 1141 (Alaska 2017)],
there was a great deal of discussion as to the powers of
appropriation on the ERA and the requirement of an appropriation
for both a dividend and inflation-proofing, she offered. She
said the decision had been made in 2017 by the Alaska Supreme
Court.
3:40:48 PM
CHAIR KREISS-TOMKINS asked whether in the House of
Representative and Senate's operating budgets, either body is
inflation-proofing this year.
MS. RODELL responded that the budget passed by the House of
Representatives and sent to the Senate includes inflation-
proofing of $942 million for fiscal year (FY)19, it does not
include restoring the inflation proofing amounts totaling $1.4
billion from FY16 through FY18. The Senate Finance Committee is
discussing the current committee substitute (CS) in which
inflation-proofing is not addressed, she said.
CHAIR KREISS-TOMKINS noted that within three of the last four
years, the legislature has not inflation-proofed but this year
there is inflation-proofing within the operating budget that
passed the House of Representatives.
3:41:54 PM
REPRESENTATIVE KNOPP offered that the Senate Finance Committee
moved the budget out of committee today without inflation-
proofing, and that was his concern.
CHAIR KREISS-TOMKINS commented, "Mine as well."
3:42:07 PM
REPRESENTATIVE BIRCH commented, "Mine as well." He noted that
the PF board has long suggested that a percentage of market
value (POMV) might be a reasonable approach to provide a
predictable and sustainable level of revenue to the state for
whatever purpose. There had been some discussion around how to
structure a POMV draw on a reliable basis, on an annual basis,
and asked whether Ms. Rodell had experience in other large
funds. He said he supports the idea of a POMV but worries about
the entanglement of trying to get a constitutional amendment
[passed], and how to get there without going through this
exercise.
MS. RODELL opined that it absolutely can be accomplished through
statute. A number of statutes have been proposed since 2015,
and HB 26 progressed the farthest in the legislative process.
The challenge legislators face on the statutory front is that
statutes were followed completely for 35 years and were not open
for debate. Even though, she offered, legislators had been told
that "this money" was available for appropriation, they could
cut the dividend, they could cut inflation-proofing, that "this
is your power under the constitution," it was done as a matter
of course and there was no questioning about that, she said.
She opined that the concerns being heard about a statutory
solution versus a constitutional solution, is the recognition of
the legislature's power of appropriation and what that means.
It means, she explained, not appropriating for anything that is
subject to appropriation and instituting that sort of political
dynamic into those things that, which in the past were not
viewed as political. From the standpoint of the APFC, it would
appreciate a solution of any kind at this point because this
"sort of ongoing year after year, not knowing, is very
troubling." In the event there was consensus around a statute,
she said that she personally believes legislators would follow
the newly created statute. Having said that, she offered, a
constitutional amendment provides a level of comfort that a
statute "just can't get us there."
3:45:35 PM
REPRESENTATIVE KNOPP reiterated that he believes putting the PFD
or the ERA in the Alaska State Constitution is poor public
policy. He described the Alaska State Constitution as a
framework of guiding principle, not to enshrine everything "that
you think needs to be in there." Although, he said, he does
support a constitutional amendment with regard to inflation
proofing. He noted that SB 26 does provide a structured draw,
he likes that it has a three-year component, and since the
future is unknown, he would like Ms. Rodell's opinion.
MS. RODELL responded that she found HJR 41 interesting because
it is very simple, it is a draw, and how the legislature spends
that draw is entirely still open for debate. The amount being
drawn out of what the state has historically referred to as the
PF, is set at 4.5 percent. The three-year lookback is key to SB
26 being successful because it will provide the necessary
information as to whether it is being overdrawn and if it needs
to be reset, she advised. She acknowledged that the committee
is not speaking to SB 26, but it has a mechanism for inflation-
proofing with a recognition of the need for some inflation-
proofing on the principle of the fund. She referred to the
hypothetical offered by Mr. Magdanz regarding eight years of
zero percent and spent down the ERA, "you still wouldn't touch
the $40 billion." Ms. Rodell argued that that is possibly why
there is a need to have a mechanism to move some of the ERA
periodically over into the principal, some of those earnings to
boost that up. She explained if the goal is to truly try to
keep that limiter in there, then that is how to continue
maintaining its purchasing power. In any event, she explained,
this constitutional amendment makes a simple straight-forward
4.75 percent draw, and it limits it to the amounts in the ERA.
The APFC can support this type of constitutional amendment, she
said.
3:49:05 PM
REPRESENTATIVE WOOL reminded the committee that it recently saw
a version of this bill that had a 5 percent draw and now it is
at 4.75 percent, he asked whether something had taken place
within the last 10 days and what will happen in the next 10
days.
CHAIR KREISS-TOMKINS explained that the version was a work draft
and was not put on the record because there are different
schools of thought as to what constitutes a sustainable draw.
MS. RODELL replied that the board has had a long-standing
resolution in place supporting 5 percent. Obviously, 4.75
percent is more sustainable than 5 percent because less is being
removed, but that percentage amount is a call for the policy
makers, she said.
CHAIR KREISS-TOMKINS added a comment to the question of
sustainability and advised that he and his staff recently spoke
with Greg Erickson, former publisher of the Budget Report, who
is a staunch advocate of a 4 percent draw.
3:50:28 PM
REPRESENTATIVE WOOL noted that the presenters initially said
this was a 4.75 percent sustainable draw. However, he pointed
out, when presented with the hypothetical of 8 years with zero
returns, suddenly the 4.75 percent may not be sustainable so
possibly it should not be placed in the Alaska State
Constitution. He offered that no one expects zero returns for
eight years, yet that is why there is a barrier between the ERA
and the principal.
MS. RODELL answered that it is important to talk about doomsday
scenarios in order to create an awareness that the future is
unknown in terms of investing and markets. In terms of the
stress analyses that APFC ran, it believes that 4.75 percent and
5 percent are reasonably sustainable numbers for draws. She
opined that the three year look back becomes an interesting
question and she suspects that if this happened, there will come
a time when she is sitting in front of the committee discussing
the balance in the ERA, the performance of the investments, and
whether overdraws will potentially occur at some point.
Therefore, she advised, part of what is helpful in this
constitutional amendment is smoothing it out, "out of 5 of the
last 6, so you're really creating a long time period, and the
effective draws then end up being significantly less than the
nominal draw of 4.75 percent or 5 percent."
3:53:16 PM
REPRESENTATIVE WOOL noted that Ms. Rodell commented that the
APFC would like to see some type of structure "like this,"
thereby removing the uncertainty that APFC has faced during the
last few years. He asked whether it is simply the anticipation
of a draw that puts the corporation on edge.
MS. RODELL referred to her testimony a few weeks prior when she
discussed what it means to be prudent investors and advised that
it means following a formal portfolio theory that takes into
account distributions. When the board assembles its asset
allocation and determines how to invest the fund, it should also
take into account the distribution requirement except,
currently, it does not have a distribution requirement, so it is
anything between zero and 100 percent. Therefore, she pointed
out, the board tries to successfully manage through that in
order to deliver maximum returns to the state while also
recognizing that the principal must be protected and "not go all
in on black, as they say." She explained that having this
structure in place will provide the sideboards through which the
board can then make very real determinations as to how much can
be put into illiquid investments like real estate, like private
equity that generates the big returns.
3:55:18 PM
REPRESENTATIVE WOOL noted that Ms. Rodell stated that she
preferred a constitutional formula like this, as opposed to
statutory because statutes can be ignored to some extent. As
far as the structure of the fund itself, (audio difficulties)
constitutional draw of up to 4.75 percent, and he would like to
see "it just one super fund," a true endowment.
CHAIR KREISS-TOMKINS commented that "super funds" are something
else.
REPRESENTATIVE WOOL (audio difficulties) consistent draw of 4.75
percent, what remains in the fund essentially counts as
inflation-proofing. He continued, "And, if you took too much,
then it wasn't inflation-proofing, well then you've taken too
much. And so, you have a set fund with a set draw and that's
it. And, I know the answer but I'm going to ask anyway, would
that be your preference in the hierarchy of options here?"
MS. RODELL answered that that would absolutely be "our
preference."
[HJR 41 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 409 Sponsor Statement 4.10.18.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM |
HB 409 |
| HB409 Sectional Analysis 4.9.18.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM |
HB 409 |
| HB409 ver D 4.6.18.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM |
HB 409 |
| SB204 Sponsor Statement 04.06.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 204 |
| SB204 ver A 04.06.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 204 |
| SB204 Fiscal Note ADM 04.06.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 204 |
| SB204 Letters of Support 1 04.06.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 204 |
| SB204 Letters of Support 2 04.06.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 204 |
| SB196 Sponsor Statement v. O.A 4.2.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 196 |
| SB196 Sectional Analysis v. O.A 4.2.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 196 |
| SB 196 v. O.A 4.2.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 196 |
| SB196 Summary of Changes v.O.A 4.2.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 196 |
| SB196 Fiscal Note OMB 4.2.18.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 196 |
| SB 196 - NFIB Support 4.2.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 196 |
| SB 196 Graph 4.2.2018.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/17/2018 3:15:00 PM |
SB 196 |
| HJR030 Sponsor Statement 2.28.18.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/19/2018 3:15:00 PM |
HJR 30 |
| HJR030 ver D 2.28.18.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/19/2018 3:15:00 PM |
HJR 30 |
| HJR30 Fiscal Note LEG 4.9.18.pdf |
HSTA 4/10/2018 3:15:00 PM HSTA 4/12/2018 3:15:00 PM HSTA 4/19/2018 3:15:00 PM |
HJR 30 |
| HJR41 Sponsor Statement 4.9.18.pdf |
HSTA 4/10/2018 3:15:00 PM |
HJR 41 |
| HJR41 Sectional Analysis 4.9.18.pdf |
HSTA 4/10/2018 3:15:00 PM |
HJR 41 |
| HJR41 ver J 4.9.18.pdf |
HSTA 4/10/2018 3:15:00 PM |
HJR 41 |
| HJR41 Fiscal note-LEG- 04.09.18.pdf |
HSTA 4/10/2018 3:15:00 PM |
HJR 41 |