Legislature(2017 - 2018)BUTROVICH 205
02/16/2017 03:30 PM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| SB26 | |
| Discussion: Angela Rodell, Executive Director, Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| += | SB 26 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 21-PERMANENT FUND: INCOME; POMV; DIVIDENDS
3:31:34 PM
CHAIR DUNLEAVY announced the consideration of SB 21.
3:31:57 PM
SENATOR BERT STEDMAN, Alaska State Legislature, Juneau, Alaska,
sponsor of SB 21, stated that the bill is before the committee
for the second time and provided an overview as follows:
In essence what this bill does, rather than address a
packet solution for the budget deficit is to take a
look at the permanent fund or big-earning engine of
roughly $55 billion and take a look at that as far as
how much it could produce in payouts that would
include dividends or other sources of expenditures,
and what percent we can pull out of that and how could
we manage that asset to protect if for future
generations of Alaskans.
We were fortunate enough to be here when we had the
massive wealth oil-bubble run through the state;
unlike some of our grandfathers or grandparents who
missed it just due to the age cycle or future
generations of Alaskans that aren't even born yet,
that they can see, especially the future generations,
can see that we secured a vast amount of the wealth
bubble for their benefit also, that we don't use it
over the next dozen year or less on ourselves.
3:33:43 PM
SENATOR STEDMAN specified what SB 21 does as follows:
This bill what it does it would limit the withdrawal
annually to 4.5 percent of the market value and
there's an averaging over the last five years that
takes place, so you don't take just the last year's
ending balance, but you back up six years and take the
first five of that, so it makes it very predictable
for the budgetary folks to know exactly what revenue
they would have.
A 4.5 percent withdrawal on average over time the
market should and returns should suffice and there
will be other presenters with better backgrounds that
can address that to the committee to ensure that we
don't diminish the purchasing power and or spend down
the fund. Of that 4.5 percent, 2.25 percent would be,
or one half of it would go to dividends automatically,
to the citizens, and that would grow over time. The
other 2.25 percent of the 4.5 percent, the other 2.25
percent or one half, could be added to the dividends
if we are so fortunate as to have robust economies and
an easy time balancing the budget, it could also go
back to the permanent fund, or could be used, which
would happen over the next several years go to the
general fund of the state to help us when we have
financial difficulties like we have today. So that
would ensure that the public gets 50 percent of it in
a dividend, the other 50 percent every year would come
before the Legislature and the elected body would
decide to add it to the dividends, send it back to the
permanent fund, or take it to core services like
education or health and human services or what have
you.
3:35:53 PM
SENATOR STEDMAN summarized as follows:
In a nutshell, that's what this bill does; again, it's
not a one-bill solution to our deficit issue, but it's
a protective mechanism to ensure that we have a very
valuable asset for future generations to be able to
rely on also, that we don't basically, we the
Legislature, including myself, all 60 of us, all good
intended elected officials, collectively we can be
dangerous, don't start taking chunks out, the
billions, and hurt the last 40 years of wealth
accumulation.
CHAIR DUNLEAVY remarked that during the past several years there
have been people trying to sell that using the permanent fund
would be immune from market fluctuations versus the volatile oil
markets. He asked Senator Stedman to confirm that the permanent
fund is not immune from fluctuations.
3:38:20 PM
SENATOR STEDMAN answered correct. He pointed out that SB 21 uses
five years of market values to smooth out volatility. He noted
that he worked with the City of Sitka 30 years ago in changing
their all-bond portfolio to a percentage of market value that
took a five-year average. He noted that unlike SB 21 with a 4.5-
percent payout, Sitka chose a 6-percent payout. He admitted that
Sitka's 6-percent payout has shown to be too high and their
fund's purchasing power has decreased. He emphasized that the
financial markets are not linear and noted that the economy has
experienced 3-economic shocks over the past 30 years; however, a
withdrawal based on averages from 4 to 6 years smooths out
fluctuations and makes things more predictable.
3:42:22 PM
CHAIR DUNLEAVY asked Senator Stedman to dispel the notion that
withdrawing funds from the permanent fund will take care of the
state's fiscal issue.
SENATOR STEDMAN concurred with Chair Dunleavy. He noted that SB
21 is a bill for statutory change rather than constitutional
change. He admitted that the Legislature could still get around
the bill's 4.5 percent withdrawal by spending the earnings
reserve which is not protected by the constitution. He disclosed
that approximately $14 billion is available for the Legislature,
"To get its hands on." He pointed out that if SB 21 was adopted
in the constitution as an amendment, the Legislature would never
be able to take more than the 4.5 percent in any given year
without the permission of the citizens.
He addressed scenarios on the Legislature sharing the 4.5
percent withdrawal with Alaskans as follows:
That 4.5 percent, if we gave them no dividend out of
it and took it all to the general fund we could
probably make it work and get out of this hole; I
think that's politically not attainable and I
personally would not support it. I think if we have a
sharing relationship with the dividends, with the
people, with the state, there's a balance clearly. If
we take it all to the general fund, the whole 4.5
percent, we are going to pretty much fix our problem,
make it pretty easy to get out of; but, if we take
none of it and it all goes to the dividends, we can't
get out of this hole, I don't see any mathematical way
we can do it. So somewhere there's a balance and that
in lies the 50 percent split and I think hopefully
gets the public's support behind it.
CHAIR DUNLEAVY reiterated that the permanent fund will not be a
constant flat stream and will not take care of the state's
fiscal problems. He pointed out that the state's fiscal problem
is so great that $1.2 billion to $1.5 billion draws would be
nowhere near the $2.8 to $3 billion deficit.
3:45:27 PM
SENATOR STEDMAN answered correct. He set forth that a withdrawal
from the permanent fund would act as a base, but other solutions
such as budget reductions and revenue enhancements will be
required to fix the budget deficit. He said the state's hole is
structural and the quicker the Legislature can dissolve the
structural deficit and get back to balanced budgets the better
off all of us are.
SENATOR WILSON noted that Senator Stedman's presentation showed
the permanent fund's balance growing. He asked Senator Stedman
to explain how he came up with the numbers that showed the fund
growing.
SENATOR STEDMAN explained as follows:
If the average rate of return is higher than 4.5
percent, it will get larger; if it's higher than 4.5
percent plus the rate of inflation, say the rate of
inflation is 2 percent, just as a number, and you made
over 6.5 percent, your real purchasing power will
start to increase. There will be times I can assure
you that the purchasing power will decline in the
short run just due to market reductions.
3:48:11 PM
SENATOR WILSON asked to confirm that the additional earnings
would go into the earnings reserve account.
SENATOR STEDMAN specified that the bill does not eliminate the
earnings reserve and detailed as follows:
The earnings reserve are trading profits and
potentially the unrealized gains. The corpus is what's
protected by the constitution, roughly $40 billion. So
we can, we the Legislature, if we adopt this in
statute, we still can get around the 4.5 percent and
spend the earnings reserve; it would take a
constitutional change to block that and limit us just
to 4.5 percent and that discussion would come later. I
personally support that, but it has to take the will
of the people. So you could adopt this statute, pay
out 4.5 percent and then have an election of
spendthrifts and they decide to come in and say, "We
don't like 4.5 percent, we want $4 billion or $5
billion because we want to do this project or we want
to build roads or more ferries," or whatever they are
going to build and go in and take it out of the
earnings reserve. There still needs to be some
prudence on sticking with the 4.5 percent to make sure
that that does not happen. If and when we take it to a
constitutional amendment, the earnings reserve then
would eliminated, it would have no, from what I can
see, no value.
SENATOR STEDMAN disclosed that SB 21 does not change the Alaska
Permanent Fund Corporation's structure and detailed as follows:
We are not turning the permanent fund on its head and
changing its time horizon or its liquidity needs and
things of that nature; it pretty much keeps the status
quo and it puts them out, kind of silos them off on
the side where we clearly would have in front of us a
deficit issue. We can't just look over to the
permanent fund and grab billions out and not make the
hard decisions because we have some tough ones as we
all know to make and they are not going to be fun.
3:50:55 PM
CHAIR DUNLEAVY asked if SB 21 sets an amount for inflation
proofing, not passive inflation proofing.
SENATOR STEDMAN answered that SB 21 does not and detailed as
follows:
What sets the trigger or the mechanism to allow it to
inflation proof itself is the payout rate, and the
asset allocation and performance of the fund itself.
So given roughly the current allocation and historic
performance of all of those asset classes helps derive
the payout rate and there's no magic number. I thought
4.5 percent just from my past professional experience
is reasonable and attainable, some folks might think
it should be 4.75 percent or 5.0 percent and the next
guy might think it should be 4.25 percent; I think
that should be left up to the discussion and
recommendations from the permanent fund and maybe the
Department of Revenue and debated in the finance
committees or whatever, I just picked that number from
professional experience of what I thought would work.
He addressed a scenario where the fund's rate of return was 5
percent over 10 years with a 4.5-percent withdrawal as follows:
We would be going backwards with purchasing power if
inflation is 2.0 percent, 2.5 percent, historically it
has been 2.5 percent the last century; but you have to
have an asset allocation mix that is in balance with
your payout. So if you ratchet the payout up,
sometimes you could push your performance requirements
of your portfolio managers to a point where your risk
level gets a little bit too high, in my opinion, and
that works with this or a retirement fund or your own
personal stuff also.
3:53:01 PM
CHAIR DUNLEAVY asked if SB 21 would automatically pay a
permanent fund dividend (PFD) or if paying a dividend would be
optional for the Legislature to appropriate.
SENATOR STEDMAN replied that the dividend would be 2.25 percent
of the market value. He noted that there has been a discussion
and debate as to whether the PFD is an appropriation, but the
bill does not address that. He emphasized that the dividend
payout would be a minimum of 2.25 percent. He said there is
almost a compact agreement with citizens on the split.
CHAIR DUNLEAVY asked Senator Stedman to address Section 3, line
13, which says, "The Legislature may appropriate." He asked what
would happen if the word "may" was changed to "shall."
SENATOR STEDMAN replied that Chair Dunleavy's question would be
a good question for the attorneys. He said he understood the
difference between "may" and "shall," and would be comfortable
with either one of the words.
CHAIR DUNLEAVY replied that the words are very different.
SENATOR STEDMAN responded that he knows the words are very
different and detailed as follows:
If I can put on my "elected official hat," it's 2.25
percent. I personally would not care speaking to my
constituents if it said "may" or "shall," it would be
2.25 percent and the check should be written and we
should deal with our fiscal issues however we need to
deal with them.
3:55:01 PM
CHAIR DUNLEAVY remarked that you would never hear from Alaskans
when the dividend was calculated by market outcomes, but they
have become suspicious and untrusting when the dividend was
vetoed last year. He said the suspicion by Alaskans is the
reason why he brought up the concepts of "mays" and "shalls." He
pointed out that legislation and appropriations could still be
vetoed, but constitutionalization gives Alaskans a little more
feeling that they and future generations are being treated as
partners.
3:57:55 PM
CHAIR DUNLEAVY thanked Senator Stedman and held SB 21 in
committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB26 Supporting Document - DOR POMV Test Document (02.06.17).pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB26 Supporting Document - APFPA Modeling Presentation 2.16.17.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 21 & SB 26 Backup - Questions from 2.2.2017 - Inflation Proofing of the PF Corpus.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 21 & SB 26 Back Up - Questions for SSTA for SB 21, SB 26, & SJR 1.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 21 & SB 26 - Letters of Opposition.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 26 Backup - DOR Response Letter to Senate State Affairs Committee - 2.16.17.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 26 |