04/16/2002 03:40 PM Senate STA

                SJR 13-CONST. AM: PERMANENT FUND                                                                            
                                                                                                                              
JOE BALASH, staff to Senate State  Affairs, explained the proposed                                                              
committee substitute  (CS) for SJR  13 differed considerably  from                                                              
the  original amendment  proposed  by  the trustees.  Rather  than                                                              
describe  all income  as running  into  the fund  itself and  then                                                              
putting a  limit on how  much may be  appropriated from  the fund,                                                              
all income would be deposited into a separate earnings account.                                                                 
                                                                                                                                
Section 2, subsection  (b), establishes that  appropriations would                                                              
be made from  the earnings reserve account. The  purpose for doing                                                              
that was  to maintain  a strict distinction  between the  earnings                                                              
appropriations  and  the  principal  of  the  fund.  Legal  advice                                                              
indicated the prior language could  be problematic in that it used                                                              
the word  principal and  restricted what  principal could  be used                                                              
for, but  then allowed appropriations  from the fund.  Rather than                                                              
leave  it  an   open  question  to  be  debated   in  court,  they                                                              
established  the  separate  earnings reserve  account  within  the                                                              
fund.                                                                                                                           
                                                                                                                                
A second change occurs on page 2,  lines 2 through 4. The original                                                              
proposal relied on  a five-year market value for  the fund. The CS                                                              
adds a lag year so that when a governor  is beginning to formulate                                                              
the budget in late November or early  December, there will be hard                                                              
numbers as  to how much  of the permanent  fund will  be available                                                              
for dividends  and other uses. The  affect would be to  reduce the                                                              
amount  that would  be available  under  the formula,  but if  the                                                              
assumptions  of the  trustees  were correct,  8.25  percent on  an                                                              
annual basis  would result  in about  4.5 percent being  available                                                              
for appropriation each year.                                                                                                    
                                                                                                                                
Section  3 is a  transition section.  There was  a legal  question                                                              
about whether  the earnings  in the  statutorily created  earnings                                                              
reserve  account within  the  fund would  be  protected under  the                                                              
language  proposed by  the  trustees. Rather  than  waiting for  a                                                              
court challenge,  they propose that  the transition  section would                                                              
transfer the  amount in the  statutorily created  earnings reserve                                                              
into  the   constitutionally  created  earnings   reserve  thereby                                                              
protecting it and limiting its availability to the state.                                                                       
                                                                                                                                
CHAIRMAN THERRIAULT  asked for further discussion on  the lag year                                                              
because  Senator Halford  was somewhat  concerned  about the  five                                                              
percent.  However, when  it all  works  together it  reduces to  a                                                              
little less than five percent.                                                                                                  
                                                                                                                                
MR. BALASH  explained that the  amount depends on  the assumptions                                                              
made on whether the earnings amount  would be 8 or 8.25 percent. A                                                              
reasonable estimate for a five-year  moving average as proposed by                                                              
the trustees  would  result in 4.7  to 4.8  percent available  for                                                              
appropriation. Depending on the actual  returns, adding a lag year                                                              
would result  in 4.5  percent to 4.7  percent being available  for                                                              
appropriation. The higher the growth  in each subsequent year, the                                                              
wider the gap  would be over the  course of the five  years, which                                                              
would reduce the effective payout rate.                                                                                         
                                                                                                                                
CHAIRMAN THERRIAULT  said the transition  section says  that money                                                              
is placed in a category that makes  just the five percent averaged                                                              
draw available. It's not available with a simple majority vote.                                                                 
                                                                                                                                
JIM  KELLY, Director  of  Communications  for the  Permanent  Fund                                                              
Corporation,  said  the  board  hadn't   had  the  opportunity  to                                                              
evaluate  the proposed  CS so  he  couldn't speak  for the  entire                                                              
board. However,  the intent  to maintain  the prohibition  against                                                              
spending principal as  described by Mr. Balash is  also the intent                                                              
of the  board and it appears  as though the language  accomplishes                                                              
that  intent.  No  problem  was immediately  apparent,  but  if  a                                                              
question  arose they  could discuss  it in the  next committee  of                                                              
referral.                                                                                                                       
                                                                                                                                
There were no questions and no additional testimony.                                                                            
                                                                                                                                
CHAIRMAN  THERRIAULT stated  the bill  would go  to the  Judiciary                                                              
Committee next and  as a member of that committee,  he intended to                                                              
continue to work with the trustees.                                                                                             
                                                                                                                                
The  Version R,  Cook  committee substitute  (CS)  was before  the                                                              
committee.  There were  no amendments  offered and  there was  one                                                              
$1,500.00 fiscal note. He asked for the will of the committee.                                                                  
                                                                                                                                
SENATOR DAVIS  made a  motion to move  CSSJR 13(STA)  and attached                                                              
fiscal  note   from  committee  with  individual   recommendations                                                              
(Version R). There being no objection, it was so ordered.