Legislature(2025 - 2026)SENATE FINANCE 532
03/11/2025 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SJR14 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SJR 14 | TELECONFERENCED | |
SENATE JOINT RESOLUTION NO. 14
Proposing amendments to the Constitution of the State
of Alaska relating to the Alaska permanent fund and to
appropriations from the Alaska permanent fund.
9:02:13 AM
LIZ HARPOLD, STAFF, SENATOR DONNY OLSON, reviewed SJR 14.
She explained that the bill proposed a constitutional
amendment to limit the draw on the permanent fund and
consolidate the two-account structure of the fund into one
single account. She recounted that in 2018, SB 26 had
established a percentage of market value (POMV) draw from
the funds earnings reserve account. The POMV provided
financial stability and predictability to the states
financial stream and was the largest source of unrestricted
general fund dollars. She stated that SJR 14 would
constitutionalize the POMV draw to 25 percent. She
explained that consolidating the two accounts would prevent
the possibility of overspending the earnings reserve
account by structurally turning the fund into a single,
endowment style fund.
Ms. Harpold said that the final passage of the resolution
would put the question of adopting the resolution to voters
in the next general election.
Co-Chair Hoffman commented that the resolution required a
two-thirds vote, which signified that it would require 14
votes in the senate and 27 in the house. The vote was a
higher standard than a simple bill since it proposed a
change to the constitution. Once the threshold was
achieved, it was not necessary for the governor to approve
the resolution before it went to a ballot.
9:05:16 AM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, discussed a presentation entitled "Modernizing
the Alaska Permanent Fund: A Single-Fund Endowment for
Predictability & Sustainability - Trustees' Paper Volume
10" (copy on file).
Mr. Mitchell looked at slide 2, "A Legacy of
Intergenerational- Resource Contribution. He cited the
language in the constitution:
Alaska Constitution Article IX, Section 15
Alaska Permanent Fund
At least twenty-five percent of all mineral lease
rentals, royalties, royalty sale proceeds, federal
mineral revenue sharing payments and bonuses received
by the state shall be placed in a permanent fund, the
principal of which shall be used only for those income
producing investments specifically designated by law
as eligible for permanent fund investments. All income
from the permanent fund shall be deposited in the
general fund unless otherwise provided by law.
He explained that the language "at least" signified the
minimum that could be places and noted that past
legislatures had added more. The principal amount derived
from the contributions was a little over $20 billion and
was the basis of the fund and earnings since the creation
of the fund. He said that the next portion was the
principal, which was only used for income-producing
investments, specifically designated by law as eligible for
permanent fund investments. By statute, there were defined
and allowable investments that the corporation invests the
fund in. He pointed out that the language implies income
producing investments and not statutory income producing
investments because there was a difference between
realized and unrealized income. He spoke to the income of
the permanent fund being deposited in the general fund
unless otherwise provided by law, which allowed for all the
earnings to be expended every year. He stressed that only
by the forethought of previous legislatures was money saved
in the permanent fund in addition to the 25 percent of
royalty revenue. He stated that the fund was currently at
$80 billion, with total earnings of over $100 billion. He
noted the success of the public trust that had been reliant
on the state investing wisely in the past, as state
revenues increased, to sustain the state in perpetuity.
9:08:57 AM
Mr. Mitchell continued to address slide 2. He said that
after the creation of the fund there had been such
significant revenue for the state that people had ignored
the fund in such a way that allowed for it to grow. He
relayed that today the fund was the largest U.S. sovereign
wealth fund in the nation that supported most of the
unrestricted general fund revenue for the state.
9:10:04 AM
Senator Merrick asked why the fund was set up as a two-
account structure originally, and whether other large funds
used the two-account structure.
Mr. Mitchell relayed that in the earnings base model, all
the earnings would be designated by the legislature. In the
scenario, earnings were volatile like oil revenues, and
there had to be some mechanism to maintain a balance of
spendable funds. He thought that this had led to the two-
account structure - realized earnings spilled over into an
earnings reserve account and were available for
appropriation on an annual basis. He said that the system
had worked up to now, but the state may have reached a
place where, for the foreseeable future, a recasting of the
framework of the fund was necessary.
9:11:50 AM
Senator Cronk asked for a monetary number that reflected
what the state would see at 25 percent of mineral royalties
each year.
Mr. Mitchell relayed that the amount varied with oil price,
and in the current year it was approximately $400 million.
He noted that the APFC website showed historical deposits.
He mentioned that there had been several years of low
revenue when the statutory 25 percent had not been put into
the fund, followed by a "make-up year" in which the fund
was made whole according to the statutory construct. He
said the amount could fall anywhere from $300 million to
$800 million.
9:12:56 AM
Mr. Mitchell spoke to slide 3, "Current: Two-Account
Structure," which showed a flow chart that illustrated the
complexity of the Permanent Fund Structure:
Contributions
Royalties
Special Appropriations
Inflation Proofing
Principal
Alaska Constitution, Article IX, Section 15
Income Producing Investments
Alaska Permanent Fund Corporation
Management and Investment of the Fund
Single Asset Allocation (pro-rata shares)
Stocks, Bonds, Real Estate, Alternatives
Sale and Distribution of Assets
Statutory Net Income AS 37.13.140
Cash Flow Income
Realized gains/losses
Earnings Reserve Account
Alaska Statutes AS 37.13.145(a)
Realized gains/losses from sale of assets
Pro-Rata share of Investments and net unrealized gains
The Principal provides permanent savings to be used
only for income-producing investments.
Realized earnings are deposited into the Earnings
Reserve Account (ERA) for appropriation by the
Legislature.
POMV draws to support the state's current revenue
needs and transfers to inflation proof the Principal
for an intergenerational benefit are limited to the
balance of the ERA.
Mr. Mitchell explained that the revenues flowed into the
principal account and within that principal were unrealized
and realized gains. The realized gains spilled over into
the earnings reserve account, which could grow or shrink
based on use and the earnings flowing into the account. He
said that manual inflation proofing adjustments were
required to be made into the principal and the discipline
not to overspend. He said that there was potential of
failure if there were insufficient realized earnings to
provide for the POMV transfer. He stated that the
complexity had worked up until now but failed to recognize
the evolution that had occurred within the investment
sphere and that the portfolio had been constructed around
the total return goal, which included realized and
unrealized gains. He related that the board of trustees had
suggested simplifying by removing the temptation to
overspend and the requirement of inflation proofing by
having a regular and reliable source of revenue every year.
9:15:01 AM
Senator Kaufman asked where the money from sales of assets
from the corpus were housed.
Mr. Mitchell thought that the matter of unrealized gains
could be confusing because value increased theoretically,
but the funds were not spendable. He added that all gains
were theoretical until the asset was sold. He used the
example of Tyson's Corner, a mall on the East Coast owned
by the Permanent Fund. He explained that there were
hundreds of millions of dollars in unrealized gains
associated with the investment, but the monies would not be
realized until the asset was sold. If sold the monies would
be reinvested in the fund and not taken out as a realized
investment that would be spent.
Senator Kaufman asked whether the funds would be reinvested
in the corpus or the earnings reserve.
Mr. Mitchell explained that realized gains would be put
into the earnings reserve account and the initial
investment amount would remain in the principal.
Senator Kaufman pondered that the original principal would
remain in the corpus and the realized gains would flow into
the earnings reserve. He asked what constitutional
protections were in place against spending the totality of
the earnings reserve in one legislative session.
Mr. Mitchell replied that there were none.
Co-Chair Hoffman commented that depleting the earnings
reserve would take a simple majority of both the house and
the senate and the signature of the governor.
9:17:24 AM
Senator Kiehl mused that in an escalating market, the
corpus grew, and the earnings reserve grew. He had heard it
said that if markets crash, losses could go back from the
earnings reserve to reduce the principal. He asked for Mr.
Mitchell to discuss how the funds were accounted for.
Mr. Mitchell relayed that currently, unrealized gains were
pro rata allocated between the earnings reserve and the
principal. If there were to be losses, it would be
similarly pro rata allocated and would diminish the amount
of unrealized earnings until it exceeded the amount at
which time the unrealized gains would diminish the value of
the accounts.
Senator Kiehl asked whether those were unrealized gains
into the earnings reserve or within the earnings reserve.
Mr. Mitchell clarified that unrealized gains were allocated
to the earnings reserve. The APFC website included a
component of unrealized gains since there was currently a
net unrealized gains situation at the fund. He said that to
the extend that money was spent out of the earnings reserve
a portion was moved to the principal and unrealized gains
would offset the unrealized losses.
Senator Kiehl thought there was a popular assumption that
there was an absolute firewall between the ERA and the
corpus. He thought the perception of a separation of two
funds, and that value only flowed one way, was not the
case.
Mr. Mitchell agreed. He noted that the unrealized gains
were the categorization of earnings that flowed back and
forth and had evolved overtime. He said that previously
all unrealized gains and losses lived in the ERA, so swings
in value could be seen. There had been an evolution in the
process of accounting for the unrealized gains, but they
still did not mesh well with the current structure.
9:21:05 AM
Senator Kiehl asked what the state would lose by managing
the funds separately.
Mr. Mitchell thought the difference would constitute a
statutory change. He thought that the state would be giving
up the difference between the expectation of a short-term
investment account versus a long-term investment account.
9:21:54 AM
Senator Kiehl surmised that Alaskans were getting less
return on their investment by managing the funds
separately.
Mr. Mitchell agreed.
9:22:11 AM
Senator Kaufman asked whether any other endowments around
the world were managed with the same composition as the
Permanent Fund.
Mr. Mitchell was unaware of a similar fund that had a
mechanism that relied on earnings for distributions. He
thought there was usually a POMV construct, which led to
more reliable and stable outflows.
Senator Kaufman thought the issue looked like older
approaches to retirement plans. He recalled that bonds used
to be popular over the stock market. He said that the idea
that the principal could be protected was attractive abut
was not presently and effective investment model.
Mr. Mitchell thought Senator Kaufman was correct in that
the original allocation provided by the legislature worked
for the time. He pondered that equities in the 1970s
performed austerely. He thought the notion of unrealized
earnings being account for as they accrued, rather than at
the sale of assets, had evolved.
9:25:25 AM
Co-Chair Hoffman considered 2019, when the legislature was
contemplating SB 26. At the time the position of the
legislature had been that the ERA was the "third rail of
government" and could not be touched. He thought the
constitutional amendment was an evolution of how the fund
was managed. He said that it was not a question of the
sanctity of the ERA but was about managing and protecting
the fund.
9:26:50 AM
Mr. Mitchell thought Co-Chair Hoffman was correct. He mused
that to the extent that the resource should exist in
perpetuity, for whatever purpose, the shift to the POMV
draw should be considered.
9:28:27 AM
Senator Kiehl thought Mr. Mitchell had raised a red flag.
He asked him to explain the notion by which the principal
was not the approximately $80 billion, but as $58 billion.
Mr. Mitchell replied in the affirmative.
9:29:00 AM
Mr. Mitchell turned to slide 5, "Comparing Fund
Structures," and addressed the breakdown of components in
the two-account structure depicted on a pie chart. The pie
chart on the left illustrated the current two-account
structure. He noted that under the current structure the
principal was not protected under the constitution. The
chart on the right-hand side showed that $77 billion would
be protected and only the POMV draw would be available for
spending.
Senator Kiehl constructed a hypothetical situation in
which, under the current structure, a new governor could
orchestrate the realization of the entire portfolio and use
$17 billion for whatever they wanted.
Mr. Mitchell answered "yes."
Senator Kiehl thought that the risk was there unless the
structure was changed.
9:31:33 AM
Mr. Mitchell continued to look at slide 5. He thought that
moving away from the earnings-based model could imply the
grater potential for invading principal, but the opposite
was true. He relayed that when the earnings reserve account
got so large that it became a temptation, previous
legislatures had made significant appropriations into the
principal of the to ensure that government did not grow as
the result of the potential excess balance. He said that
currently there were pressures on the spendable side of the
earnings reserve account.
9:33:03 AM
Mr. Mitchell referenced slide 4, " Proposed: Single-Fund
Endowment," which showed a graphical flow chart. He noted
the input of royalty contributions and an outflow based on
POMV, which took away the risk of an excess appropriation
for one generation and ensured that there would be a draw
for future generations. He noted that recently he had heard
LFD Director Alexei Painter mention that based on modeling
there was a 46 percent chance of failure in the POMV
transfer in the current construct. He said that this was an
unacceptable risk when there were other options.
9:33:57 AM
Mr. Mitchell considered slide 6, " Alaska's Largest Revenue
Source," which showed the historical revenue structure of
the state. The right-hand size of the slide showed a graph
dpicting the state's historical Unrestricted General Fund
(UGF) revenues. He stated that the volatility had been
addressed through use of the constitutional budget reserve
(CBR). He recalled that in 2014, and through 2020, the CBR
had been drawn down from $16 billion to under $3 billion.
He said that the introduction of the POMV transfer from the
earnings reserve became a necessity to provide for the
continuation of services. He said that the stability that
it provided for revenue had been a significant benefit and
had made the oil market volatility more manageable.
Mr. Mitchell pointed out the calculation of the POMV draw
on the left-hand side of the slide, which he said was
predictable.
9:36:37 AM
Mr. Mitchell displayed slide 7, " Understanding the Two-
Account Structure," which showed the principal and the
earnings reserve account. He admitted that the APFC was
conservative in its structure. He cited $3.8 billion
committed for the FY26 POMV draw for the general fund. He
noted the $1.0 billion committed for FY25 inflation
proofing. There was $2.9 billion in spendable realized
earnings as of January 21, 2025, and $1.7 billion in
unrealized gains. He shared that the $9.4 billion in the
ERA was misleading because there was $2.9 billion in
spendable realized earnings, which left a $5.5 billion need
with 5 months left in the fiscal year. The was $71.4
billion in the principal account, with $58.6 billion in
permanent deposits of royalties, inflation proofing, and
special appropriations and $12.8 billion in unrealized
gains.
9:38:53 AM
Mr. Mitchell highlighted slide 8, "The Need for Reform,"
which showed a bar graph of the ERA balance at the
beginning of each fiscal year from FY 19 through FY 25. He
observed that there was a balance of $12.9 billion at the
beginning of the fiscal year 2019. He summarized that
spending is limited to the ERA, and the ERA is at risk of
depletion given the annual draws to support government
services and the dividend program, as well as inflation
proofing the principal for intergenerational Alaskan
benefits.
9:40:44 AM
Mr. Mitchell looked at slide 9, "Proposed: Single-Fund
Endowment Model He explained that the proposal championed
by the board would include a constitutionally established
spending limit and would strengthen the funds long-term
stability and purchasing power for generations. The plan
would merge the principal and the ERA into a single fund,
limit annual distributions through a constitutional POMV
rule, and ensure automatic inflation proofing by adhering
to a long-term sustainable withdrawal rate.
9:41:38 AM
Mr. Mitchell addressed slide 10, " Benefits of the Single-
Fund Model,":
Aligned with global best practices, strengthening
Alaska's financial position through sustainable
withdrawals & limited to the Fund's long-term real
return.
Alignment with Prudent Investor Standards
Follows best fiduciary and prudent practices for
endowments and trusts.
Total-Return Investing
Maximizes long-term growth without liquidity
constraints.
Predictable & Sustainable Spending
A maximum draw POMV rule prevents overspending.
Automatic Inflation Proofing
Eliminates the need for manual and ad hoc legislative
adjustments.
A Single-Fund Endowment is permanently inflation-
proofed and ensures the Fund's real value is
maintained over time while supporting its intended
beneficiaries.
The key principles behind this are:
• Growth in the Fund's value keeps pace with or
exceeds inflation.
• A prudent spending rule/limited draw rate ensures
sustainability.
• Returns above the draw rate are reinvested.
9:42:14 AM
Senator Kaufman asked whether the current construct changed
the investment strategy to some degree, or inhibited
decisions.
Mr. Mitchell relayed that there was no statutory framework
for APFC to manage the fund to achieve statutory net income
or ensure a POMV transfer to the state. The APFC investment
staff had target allocations and sold from well performing
asset classes to generate net income. He stated that
despite the volatility there had recently been relatively
strong statutory net income.
9:44:10 AM
Mr. Mitchell advanced to slide 11, "Constitutional
Amendment," which showed that the Board of Trustees for
APFC supported the proposal.
Senator Cronk appreciated the slide because there had been
a great deal of rumor and rhetoric that suggested the
legislature was trying to dip into the corpus and spend
everything. He asked whether the 5 percent number should
be lowered to grow the fund.
Mr. Mitchell thought that was a policy decision to be made
by the legislature. He believed that the data suggested
that 5 percent was a difficult target. He thought if one
were to listen to APFC board meetings and external
advisors, it was reiterated frequently that 5 percent was a
high target. He thought if one wanted to grow the fund a
lower target could be advisable.
Senator Cronk wanted to reiterate that the proposal did not
limit government spending.
9:46:55 AM
Senator Kaufman thought it might be good to discuss the 5
percent POMV in an ascending market and a descending
market.
Mr. Mitchell explained that the smoothing that was apparent
from the averaging of 5 years was intentional. When there
was a series of years with increasing principal values in
the fund, there would be a draw rate that was less than 5
percent. He reflected that taking various averages would
result in varying draws.
9:49:04 AM
Senator Kaufman thought the impact of the draw rate would
be exaggerated because of the sequence of return risks and
the state would be drawing on a depreciated asset.
Mr. Mitchell agreed. He said that diversification within
the portfolio helped to manage the volatility.
9:50:31 AM
Mr. Mitchell looked at slide 12, " Trustees' Paper Volume
10," which referenced recommendations made to the board on
the funds structure. The paper had focused on the
structure of the fund and highlighted some of the issues
being discussed. He explained that Dr. Malan Rietveld was a
sovereign wealth fund expert, and the slide contained a
quote from Dr. Rietveld:
"Within the world of sovereign wealth funds, the
Alaska Permanent Fund is admired and respected for its
long tradition of rules-based policymaking, prudent
investment management, and sound governance.
That said, the paper shows that the current two-
account structure introduces significant risks to the
ability to fund the annual POMV transfer that supports
the state budget and the Permanent Fund Dividend.
The paper outlines reforms that should be pursued with
urgency to ensure that the Fund continues to underpin
the sustainability of Alaska's public finances for
current and future generations."
-Dr. Malan Rietveld Sovereign Wealth Fund Expert
9:51:40 AM
Mr. Mitchell showed slide 13, "Proposed: Single-Fund
Endowment," which showed a flow chart. He reminded that the
primary recommendation of the trustee paper was the shift
to a single-fund endowment with a defined draw rate. There
had been some other statutory recommendations in Trustee
Paper 10, and one of the levers the corporation was already
pulling was consideration as to when inflation proofing was
appropriated. He shared that another lever was a forced
recognition of unrealized gains, which would benefit the
short-term but harm in the long-term. He noted that the
most desirable option had been the constitutional
amendment.
Mr. Mitchell stressed that the importance of the revenue
showing up each year could not be understated.
Co-Chair Hoffman queried the committee.
9:54:21 AM
Senator Cronk reiterated that the proposed resolution was
not a method for the legislature to dip into the state's
seed corn but would limit what could be spent through the
constitution.
Mr. Mitchell thought Senator Cronk's remarks were well
said. He affirmed that the proposal would protect the seed
corn.
Senator Cronk asked whether the legislature would still be
able to access however much of the fund it wanted using the
three-quarter vote.
Mr. Mitchell relayed that the proposal would limit
flexibility. He thought that the hard limits proposed would
ease the temptation to overspend from the fund.
9:56:28 AM
Senator Kaufman considered the zero fiscal note from the
Office of the Governor. He asked whether there would be any
anticipated costs to the APFC because of the bill.
Mr. Mitchell replied that APFC did not anticipate any
additional costs.
9:57:28 AM
Senator Merrick thanked the committee for bringing the
issue forward. She believed that it was the single most
important issue of the current legislative session.
Co-Chair Hoffman thought the members echoed Senator
Merricks remarks.
9:58:14 AM
Senator Kiehl appreciated Senator Merrick's reference to
the resolution being generational in scope. He considered
that in pondering how to set up the new system it would be
helpful to consider possibilities and risks. He wondered
about the right cap on the POMV draw. He considered
consequences of lower and higher draws. He questioned the
human ability for fiscal discipline.
Mr. Mitchell emphasized his belief in rules-based
structures. He cautioned against having ambiguity in a
financial model such as that of the permanent fund. He
pondered the addition of levers to address Senator Kiehls
concerns, but worried about it becoming too complex. He
thought that the issue was a policy issue. He contended
that 5 percent was a good limit.
10:02:17 AM
Senator Kaufman suggested modeling of different time
periods and different draw rates and using history to help
understand the implications of the proposal.
Co-Chair Hoffman asked when the amendment would go before
the voters.
Mr. Mitchell said in the next general election.
Co-Chair Hoffman understood that to be in November 2026. He
pondered that given the magnitude of the proposed
constitutional amendment; it could be helpful to wait to
pass the bill to give more time for public education on the
matter. He thought the matter should be contemplated by
both legislative bodies.
10:04:25 AM
Mr. Mitchell thanked the committee. He thought that change
in the structure was necessary and that the matter was a
generational issue.
Co-Chair Hoffman discussed housekeeping.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SJR 14 031125 APFC_Benefits of Single Fund Endowment.pdf |
SFIN 3/11/2025 9:00:00 AM |
SJR 14 |
| SJR 14 OOG-DOE-030725.pdf |
SFIN 3/11/2025 9:00:00 AM |
SJR 14 |
| SJR 14 Sectional Analysis Version A 03.10.25.pdf |
SFIN 3/11/2025 9:00:00 AM |
SJR 14 |
| SJR 14 Sponsor Statement Version A 03.10.25.pdf |
SFIN 3/11/2025 9:00:00 AM |
SJR 14 |