04/07/2004 09:06 AM Senate FIN

                                                                                                                                
     SENATE BILL NO. 374                                                                                                        
     "An  Act relating to  calculation of the  amount to offset  the                                                            
     effect  of inflation on the principal  of the Alaska  permanent                                                            
     fund,  and to  transfers  of money  from the  earnings  reserve                                                            
     account; and providing for an effective date."                                                                             
                                                                                                                                
                                                                                                                                
This was  the second  hearing for  this bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken  explained  that  after  Permanent  Fund  Dividends                                                            
(PFDs) were paid,  the Alaska Permanent Fund was inflation-proofed,                                                             
and a $250  million balance was maintained  in the Earnings  Reserve                                                            
Account  (ERA),  any  excess  monies would  be  transferred  to  the                                                            
Constitutional Budget Reserve (CBR) fund.                                                                                       
                                                                                                                                
Senator B.  Stevens, the bill's sponsor,  explained to Members  that                                                            
the Permanent Fund Corporation's  financial market activity analysis                                                            
titled "Alaska  Permanent Fund Updated  Financial Projections  2004-                                                            
2014, as  of February 29,  2004" [copy on  file] is the most  recent                                                            
projection.                                                                                                                     
                                                                                                                                
ROB CARPENTER, Fiscal Analyst,  Legislative Finance Division, stated                                                            
that the primary  change reflected  in the February 29, 2004  market                                                            
analysis  is the amount of  realized earnings  that occurred  as the                                                            
result  of  new  asset  allocations.  This  portfolio  re-balancing                                                             
resulted   in  additional   realized  gains   as  depicted   by  the                                                            
substantially  larger  payout  in  fiscal year  2005  in  the FY  05                                                            
column, on page  three, line 30 of the Legislative  Finance Division                                                            
spreadsheet  titled "SB 374  Model" [copy on  file], dated  April 6,                                                            
2004.  The  $2,103,000,000  figure  reflected  on  the  April  sixth                                                            
spreadsheet  is "considerably higher"  than the previous  projection                                                            
of $1,100,000,000  as reflected on the Division's  spreadsheet dated                                                            
March 22, 2004 [copy on  file] which was based on the Permanent Fund                                                            
Corporations'  Financial Projections 2004 - 2014 as  of December 31,                                                            
2004 [copy on  file]. A two-year extension on the  sustainability of                                                            
the CBR would result from this increase.                                                                                        
                                                                                                                                
Senator B.  Stevens affirmed that,  in comparison with the  previous                                                            
financial  model for  this  legislation, this  is  the major  change                                                            
resulting from the Permanent  Fund market analysis input. The impact                                                            
on the CBR balance  is reflected on line 13 of the  spreadsheet. The                                                            
assumption  is that "when the CBR  runs out, the only place  left to                                                            
get money  to balance the  gap in spending  verses revenues  is from                                                            
the ERA,  because under the  current status,  that's the only  place                                                            
left with additional funds."                                                                                                    
                                                                                                                                
Senator  B. Stevens  stated that  the Legislative  Finance  Division                                                            
spreadsheet  titled "Status Quo" [copy  on file] has been  developed                                                            
to reflect the status quo,  and the affects on it after the dividend                                                            
transfer and inflation  proofing obligations are fulfilled.  The end                                                            
result would be that the  CBR funds would terminate in FY 08 and the                                                            
ERA fund would  terminate in FY 13. The proposed legislation  "would                                                            
stretch" the CBR out five more years to FY 13.                                                                                  
                                                                                                                                
Senator Hoffman  noted that another  significant point in  the model                                                            
is that, as reflected  in the FY 14 column, the ending  Market Value                                                            
Balance  of  both  models  would  decrease  by  approximately   $1.2                                                            
billion.                                                                                                                        
                                                                                                                                
Senator  B. Stevens  responded  that  change is  a function  of  the                                                            
realized/unrealized  earnings in the formula, or input,  rather than                                                            
being a function  of the structure.  He further explained  that when                                                            
comparing  the  February  Permanent  Fund  Market  Analysis  to  the                                                            
previous  one,  a large  amount  of  money was  left  in  unrealized                                                            
earnings  rather  than,  as  exercised  at  the  discretion  of  the                                                            
Permanent  Fund  Board of  Trustees,  being  moved to  the  realized                                                            
earnings category.                                                                                                              
                                                                                                                                
Senator Hoffman  noted that, in addition, the life  of the CBR would                                                            
be extended.                                                                                                                    
                                                                                                                                
Senator B. Stevens affirmed.                                                                                                    
                                                                                                                                
Co-Chair Wilken ordered the bill HELD in Committee.