Legislature(2003 - 2004)

02/09/2004 08:12 AM Senate JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
[The following is a verbatim transcript.]                                                                                       
                                                                                                                                
        SJR 18-CONST. AM: PF APPROPS/INFLATION-PROOFING                                                                     
                                                                                                                                
CHAIR RALPH  SEEKINS: Okay, next  we're going  to move on  to our                                                               
second item,  which is  CSSJR 18[STA].  We're looking  at version                                                               
[H]. A little  bit of history on  this bill - we  have had public                                                               
hearings across the state. We  had public hearings this summer in                                                               
Fairbanks;  we had  public hearings  in Kenai,  in Mat-Su  and in                                                               
Anchorage. Today is  our last opportunity for  public hearings on                                                               
this particular bill and then  for any questions from the members                                                               
that are  present. Do we  have anyone  who would like  to testify                                                               
today on  CSSJR 18? I  see Mr. Storer  is here from  the [Alaska]                                                               
Permanent Fund [Corporation] and I  think the members pretty much                                                               
understand what the proposal is  here. Is there anything that you                                                               
would wish  to add  to what  you guys  have testified  on already                                                               
four times across the state?                                                                                                    
                                                                                                                                
MR.  ROBERT STORER,  EXECUTIVE  DIRECTOR,  ALASKA PERMANENT  FUND                                                               
CORPORATION: Thank  you Mr. Chair.  We're prepared to  answer any                                                               
questions that you may have.                                                                                                    
                                                                                                                                
CHAIR SEEKINS: We'll  hold you to stand by for  any questions. Is                                                               
there anyone  on-line that  would like to  testify on  this bill?                                                               
[No response.] Anyone in the  audience that would like to testify                                                               
on CSSJR  18? [No response.]  Mr. Storer, perhaps you  could take                                                               
the chair  in case we do  have any questions from  members of the                                                               
committee?  Anyone signed  up Mr.  Hove? [No  one signed  up.] At                                                               
this point, we're going to close  public testimony on this CS for                                                               
SJR 18. Public testimony is  closed. Questions from the members -                                                               
any  questions,  comments?  Here's  our opportunity  to  ask  the                                                               
expert  as to  what the  formula  that they  originated from  the                                                               
trustees of the  permanent fund is in this  resolution that we're                                                               
considering today. Senator Therriault?                                                                                          
                                                                                                                                
SENATOR THERRIAULT: Mr.  Storer, I know one of  the concerns that                                                               
has come up  is that with the allowable up  to five percent draw,                                                               
there  could  be  some  erosion   of  the  principal  in  a  down                                                               
investment  market or  climate. I  know  that you  have run  some                                                               
models  historically looking  back to  see [indisc.]  toss around                                                               
some  different  ideas   of  how  we  could   prevent  that  from                                                               
happening. I'm wondering if you could just go over that?                                                                        
                                                                                                                                
MR. STORER: Thank  you, Mr. Chair. I'm Bob  Storer, the Executive                                                               
Director  of  the  Alaska  Permanent  Fund  Corporation.  Senator                                                               
Therriault, I  have handouts from two  views if I could  ask that                                                               
those be distributed?  We take the longer term view  so the first                                                               
thing we looked at was what was  the real rate of return based on                                                               
a 10-year rolling average of the  history of the fund. And if you                                                               
look at  that, you'll  see that  in all time  periods -  I should                                                               
describe  the chart  -  zero and  above is  the  excess return  -                                                               
earnings  of the  fund above  inflation so  zero and  below would                                                               
incorporate inflation.  This is zero  and above is the  real rate                                                               
of return  of the  permanent fund.  And then  we've driven  a red                                                               
line  through the  5  percent  real rate  of  return because,  of                                                               
course, that's our proposed constitutional amendment.                                                                           
                                                                                                                                
You'll see on  a rolling 10-year period, during  all time frames,                                                               
we have been able to achieve a  5 percent real rate of return and                                                               
that includes  the most  recent period  where we  experienced not                                                               
only very  high rates of return  in the bull market  but a 3-year                                                               
bear market as  well. In fact, we earned a  5.3 percent real rate                                                               
of return  for that 10-year  period and you'll see  it's trending                                                               
back  and we've  extrapolated what  we think  we'll earn  through                                                               
this whole fiscal year.                                                                                                         
                                                                                                                                
So that's  one way of  looking at it.  But many people  have said                                                               
well what happens, you've got -  it's on a rolling 5-year rate of                                                               
return, so what  happens if you look at a  5-year rolling rate of                                                               
return perspective and you'll see  I've also provided a graph for                                                               
you  on that  as  well. And  you'll note  that  in virtually  all                                                               
periods we  have earned  an excess  rate of  return of  5 percent                                                               
real, with the  exception of most recent history when  we had the                                                               
3-year  bear  market  and  you'll  see  that  over  those  5-year                                                               
observations most recently, we still  were able to achieve a real                                                               
rate of return,  albeit below 5 percent,  slightly above probably                                                               
about 1 percent, etcetera. Now  it's trending upwards because the                                                               
returns  have  been   so  good  over  that   period.  This  chart                                                               
highlights what  I believe is  the importance of the  POMV, which                                                               
is limiting  or creating the  discipline to not overspend  in the                                                               
good years. If  you look at that chart, by  not overspending, and                                                               
the legislature did  not, they created the  cushion, the reserves                                                               
that actually  would allow us  to meet, or allow  decision makers                                                               
to meet,  the payments in the  down years. So I  think this chart                                                               
illustrates, in my mind, the  importance of the discipline in the                                                               
good years to create a reserve for the down years.                                                                              
                                                                                                                                
CHAIR SEEKINS: Go ahead Senator Therriault.                                                                                     
                                                                                                                                
SENATOR THERRIAULT: Just  so I can make sure I  understand this -                                                               
so the zero line incorporates covering inflation?                                                                               
                                                                                                                                
MR. STORER: Correct.                                                                                                            
                                                                                                                                
CHAIR SEEKINS: Senator French?                                                                                                  
                                                                                                                                
SENATOR HOLLIS FRENCH: Mr. Storer,  I had a conversation with Mr.                                                               
Bartholomew  this summer  and I  explained  my chief  reservation                                                               
about this  proposal and that  is in the  same area that  I think                                                               
Senator  Therriault  was  just  asking  about  and  that  is  the                                                               
inflation proofing. The  quarterly report you guys  mailed out to                                                               
me at  my home late in  the summer, early September,  showed that                                                               
the annualized 5-year return for  the years ending June 30, 2003,                                                               
that is  going back 5 years  from there, the total  fund returned                                                               
3.39 percent. That's the kind of  scenario I guess that most - at                                                               
least I  am concerned about,  that we could  go into a  time that                                                               
we're not making  a lot of money and we're  taking this 5 percent                                                               
out and  you start  to claw  into the fund.  I think  that really                                                               
sort of highlights  one of the difficulties in  the proposal, and                                                               
that is  that if you  really believe you  can take out  5 percent                                                               
regularly,  after inflation  proofing, and  if one  of the  chief                                                               
selling points  of the  model is that  it provides  a predictable                                                               
payout, that  is somewhat  undercut by the  idea that,  well, you                                                               
don't have  to take that 5  percent in bad years.  I think that's                                                               
one of  the faults, if  you will, in the  premise of the  POMV is                                                               
that  you're going  to  have this  predictable  5 percent  payout                                                               
except in bad years  when you don't do that. Once  I think you go                                                               
to telling  folks you're going to  have a 5 percent  payout, it's                                                               
going to  be very, very difficult  to take something less  than 5                                                               
percent. So  I guess my  concern is that  in bad years,  in years                                                               
where you get a 3.39  percent annualized return, you haven't made                                                               
your 5  percent and  you haven't  inflation proofed  either. That                                                               
strikes me as clawing into the principal of the fund.                                                                           
                                                                                                                                
CHAIR SEEKINS:  Let me ask a  couple of questions so  that we can                                                               
take a look at  this when we talk about this.  You know I've been                                                               
a used  car salesman for a  long time. What's the  present market                                                               
value of the fund, roughly?                                                                                                     
                                                                                                                                
MR. STORER: It's in excess of $27 billion right now.                                                                            
                                                                                                                                
CHAIR  SEEKINS:  Okay,  so  we've  got  27  billion.  What's  the                                                               
principal of the fund?                                                                                                          
                                                                                                                                
MR. STORER: That's - I was afraid  you were going to ask me that.                                                               
I've  been  traveling  so  much  but I  think  it's  about  $22.5                                                               
billion.                                                                                                                        
                                                                                                                                
CHAIR SEEKINS:  So with that in  mind, we've got $4.5  billion in                                                               
market  value that  exceeds the  current principal  value of  the                                                               
fund?                                                                                                                           
                                                                                                                                
MR. STORER: Um-hum.                                                                                                             
                                                                                                                                
CHAIR SEEKINS: So we'd have to  have a couple of really bad years                                                               
before we  started eating  into the principal  if we  started now                                                               
with a 5 percent payout - is that correct?                                                                                      
                                                                                                                                
MR. STORER: That is correct.                                                                                                    
                                                                                                                                
CHAIR SEEKINS:  So there's  a cushion  already there  that exists                                                               
because of the  discipline of the legislature in the  past and so                                                               
we should  not confuse market value  as principal - am  I correct                                                               
there Mr. Storer?                                                                                                               
                                                                                                                                
MR. STORER: I  think that's an important issue. I  think you've -                                                               
in  my mind,  I'd  like  to address  a  couple  of things  there.                                                               
Everywhere I've  seen in the United  States over the last  - as a                                                               
result of the  bear market, is everyone  got caught overspending.                                                               
Not  everyone,  but I  can  cite  you  example after  example  of                                                               
overspending in the  good years - they got caught  up in the bull                                                               
market mania.  I believe the  best way -  this is what  I believe                                                               
personally, I believe  it strongly - the best way  to protect the                                                               
principal is to create the discipline  not to overspend. If I add                                                               
some responses  to Senator French's comments,  I've thought about                                                               
that a  lot over  the summer  because I  know it's  important not                                                               
just to you  but to many people, and my  response has always been                                                               
as it relates  to the POMV, and  again I send you  to the 10-year                                                               
period, which  says that in  fact, we  have been able  to achieve                                                               
that goal but we well may not in the future.                                                                                    
                                                                                                                                
The problem exists under the current  system as well and we can't                                                               
forget  that.  So then  it  becomes  each  system  has a  set  of                                                               
decisions or parameters  around it based on the  statutes, or the                                                               
guidelines, or what matters. You  are correct, if decision makers                                                               
wished  in a  low  real rate  of return  period  to distribute  5                                                               
percent, we  say the stability,  the predictability -  it's there                                                               
or it's  not there.  Under the  current system,  and you  know we                                                               
have varying  scenarios, we  had a  real rate  of return  there -                                                               
what happens if we get a  negative real rate of return? Under the                                                               
current system,  depending, you  have the  same problems  but you                                                               
can also  hit that principal  and theoretically go  several years                                                               
without any payment at all. Then  you've got this 22 - 27 billion                                                               
dollar fund  that does nothing  until the market value  goes back                                                               
above. And  so it's a  decision. It's an important  decision. One                                                               
gives you the  flexibility. The other, in a  really bad scenario,                                                               
you wait  or you change  the Constitution to  eliminate principal                                                               
then.  So the  problem doesn't  go away  in either  way. It  just                                                               
manifests itself in a slightly different way.                                                                                   
                                                                                                                                
CHAIR  SEEKINS:  And so,  I  see  - as  you  know  I was  on  the                                                               
Permanent  Fund Board  of Trustees  and I  can see  all kinds  of                                                               
different scenarios where  even the current system  could be used                                                               
to actually spend into the  principal by selling losers and other                                                               
different ways  to be able to  do that to produce  revenue into -                                                               
well  it wouldn't  produce revenue  but we  could actually  spend                                                               
into the principal at this time. Is that correct?                                                                               
                                                                                                                                
MR. STORER:  If you -  on the current, you  can take income  - if                                                               
realized income is  available you can distribute that.  So if you                                                               
had realized  income and  then unrealized  losses, you  could pay                                                               
out and then  the value of the fund would  be below principal, as                                                               
an example.                                                                                                                     
                                                                                                                                
CHAIR SEEKINS: What  do we do with rents and  royalties? Where do                                                               
we classify those?                                                                                                              
                                                                                                                                
MR. STORER: Those are realized income.                                                                                          
                                                                                                                                
CHAIR SEEKINS: So  we could be losing in the  market and not sell                                                               
it because that's unrealized losses.                                                                                            
                                                                                                                                
MR. STORER: That is correct.                                                                                                    
                                                                                                                                
CHAIR SEEKINS:  And be  bringing in rents  and royalties  that we                                                               
call realized  income and that  goes to distribution  even though                                                               
we're losing our shirt in the markets?                                                                                          
                                                                                                                                
MR.  STORER:  Under  the  current   system  that's  correct,  Mr.                                                               
Chairman. And  the other question  in all  of this is,  under the                                                               
current system  is would inflation  proofing continue or  not. It                                                               
always has in the past through the statutory process.                                                                           
                                                                                                                                
CHAIR  SEEKINS: I  always ask  the question  on that  - if  I was                                                               
looking at my  own family, you know, the question  I ask is would                                                               
I inflation  proof it if I  couldn't feed my kids?  Easy decision                                                               
but if I look at this then, if  I understand my math was wrong as                                                               
I  look at  it, $27  billion market  fund -  market value,  $22.5                                                               
[billion] principal  - that's $4.5 billion  between principal and                                                               
market value.  If we were taking  5 percent of that  market value                                                               
now, it would take us three years to get down to principal?                                                                     
                                                                                                                                
MR. STORER: If we didn't earn anything.                                                                                         
                                                                                                                                
CHAIR SEEKINS: If  we didn't earn anything, so  there's a cushion                                                               
that's  there and  I don't  think a  lot of  people in  the state                                                               
understand that  that cushion exists  because they only  think in                                                               
terms of the market value, not the principal value.                                                                             
                                                                                                                                
MR. STORER:  At one time, Mr.  Chair, 25 percent of  the fund was                                                               
either realized income or unrealized  gains, in about 1999, early                                                               
2000.                                                                                                                           
                                                                                                                                
CHAIR SEEKINS: Okay. Senator French?                                                                                            
                                                                                                                                
SENATOR FRENCH: But my understanding  is when you enact the POMV,                                                               
you eradicate  that difference.  As soon as  you enact  POMV, you                                                               
stop thinking about principal and  earnings. You make one big pot                                                               
of money,  and it's going to  be about $27 billion  and from that                                                               
day  forward,  Alaskans  are  going   to  regard  that  as  their                                                               
permanent  fund and  they're not  going to  differentiate between                                                               
what it's  earned and  what it  hasn't earned.  And I  think from                                                               
that  day  forward,  we're  going  to  have  to  give  them  some                                                               
reasonable and, I think, explicit  promise of inflation proofing.                                                               
If  these  models hold  true,  then  for  us to  write  inflation                                                               
proofing in  the Constitution  is no  risk at  all to  the fiscal                                                               
stability of  the state. But,  if I  can finish, I  have concerns                                                               
about whether  this model  is going  to hold  true over  the long                                                               
run.  We haven't  seen a  crushing period  of inflation  for some                                                               
time  now, not  since the  late '70s  and early  '80s. The  first                                                               
president I  ever voted  for was  Jimmy Carter.  Then I  moved to                                                               
Alaska  and  found  out  what  a bad  idea  that  was  from  many                                                               
Alaskans' point of  view. And during that time  period, there was                                                               
terrible,  terrible  inflation and  I  think,  given the  federal                                                               
deficits that are being run up  here in this country, the largest                                                               
ever  in the  history of  the nation,  sooner or  later the  bond                                                               
market is  going to have  to react to  that and I  think interest                                                               
rates are going to have to go  up. And so I'm just concerned that                                                               
unless we  put some positive  guarantee of inflation  proofing on                                                               
paper -  because in your  system, inflation proofing  is implicit                                                               
and  I'd like  to  make  it explicit.  I  guess  that's my  chief                                                               
concern.                                                                                                                        
                                                                                                                                
MR.  STORER:  Mr. Chair,  first  off  I've  looked  at a  lot  of                                                               
scenarios and the worst case  scenario, in either case I believe,                                                               
is, I'll call it hyper-inflation.  We can handle rising inflation                                                               
to some degree  but if we revisit  the '70s - the  '70s, like the                                                               
Depression, were  the two very  singular events. Can  they happen                                                               
again? Of course they can  happen. That's the worst-case scenario                                                               
under either scenario. It seems to  be, well, if it happens, it's                                                               
not  in the  foreseeable future.  But the  one thing  I want  - a                                                               
couple of  elected officials have  asked me to  provide statutory                                                               
guidance, statutory insight  that essentially addresses precisely                                                               
what you're talking  about - about memorializing  the guidance by                                                               
statute.                                                                                                                        
                                                                                                                                
CHAIR SEEKINS:  And I understand  that. In fact, I  would support                                                               
that. Go ahead, Senator Therriault.                                                                                             
                                                                                                                                
SENATOR  THERRIAULT: If  we got  into a  situation like  the '70s                                                               
with staggering  inflation, under  the current  system we  have a                                                               
big problem too.                                                                                                                
                                                                                                                                
MR. STORER:  That's the worst-case scenario,  there's no question                                                               
about it.  For a long  time I've run  models just trying  to find                                                               
what  is the  worst-case scenario.  It gets  postponed for  a few                                                               
years but  you would  have a  big issue  in terms  of maintaining                                                               
purchasing power  and, at least  historically, you would  see low                                                               
returns in bonds and equities during that period as well.                                                                       
                                                                                                                                
SENATOR  THERRIAULT:  So the  current  system  has not  only  the                                                               
instability  of  the  dividend  roller  coaster,  but  it's  more                                                               
susceptible to  hyperinflation and the erosion  that would accrue                                                               
to the fund?                                                                                                                    
                                                                                                                                
MR. STORER:  I believe  it is.  I believe it  is because  of that                                                               
line that  it is  principal that  you cannot  go below  and there                                                               
would  be  -  the  question  was -  it  becomes  would  inflation                                                               
proofing  be abandoned  in that  scenario? I  personally find  it                                                               
hard to  believe it would not  be because the only  way you could                                                               
access income,  or the first  line would be to  abandon inflation                                                               
proofing so  you're no longer  maintaining your  purchasing power                                                               
anyway.                                                                                                                         
                                                                                                                                
SENATOR  THERRIAULT: Mr.  Chairman, it  is  true, as  far as  the                                                               
wording here,  Section 3 is  a one  time deposit of  $4.5 billion                                                               
that the legislature  would be putting before the  people and the                                                               
people would  vote on  [whether] that  $4.5 billion  deposit from                                                               
the earnings reserve would go  into the principal, establishing a                                                               
new level for  principal. So I just wanted to  clarify that. But,                                                               
with regards  to the 5  percent draw,  the language says  you may                                                               
take up  to - it  may not exceed 5  percent. It doesn't  say thou                                                               
shalt take 5 percent each year.  And, in fact, because you've got                                                               
4 or 5-year  averaging, you are actually drawing off  less than 5                                                               
percent. It's  more like  4.75 or 4.8.  Is that  correct? Because                                                               
you've got  a growing fund  - you've  got new resources  that are                                                               
going in,  you've got  inflation proofing going  in, so  when you                                                               
take the  5-year average  of a growing  fund, it's  actually less                                                               
than 5 percent of that year's market value.                                                                                     
                                                                                                                                
MR. STORER: Through the chair,  that's absolutely correct. If you                                                               
look at  the snapshot of  the payout  versus the ending  value of                                                               
the  fund,  it  looks  more  like  around  4  and  three-quarters                                                               
percent.                                                                                                                        
                                                                                                                                
SENATOR THERRIAULT: So  we look back on the  history. The 10-year                                                               
history shows  that from a 10-year  look back that we  could have                                                               
paid the 5  percent and if we want additional  protection, we can                                                               
consider statutory  language or if  somebody wants to  propose or                                                               
come up with a way sensibly  to put it into the Constitution, you                                                               
could have language  that says if you get into  a situation where                                                               
you're  going to  dip  down below  that line,  then  you put  the                                                               
brakes on and your allowable draw is even less.                                                                                 
                                                                                                                                
CHAIR SEEKINS: I think it's very easy  for us - I always - what I                                                               
hear now -  people say is well, it could  erode the principal, we                                                               
could be  dipping into the principal  and that's why I  wanted to                                                               
make it very clear that there's  a $4.5 billion buffer from where                                                               
the fund  is now until  we get to the  principal. So that,  in my                                                               
mind, kind  of satisfies that  argument. And secondly,  you know,                                                               
I'm concerned  about the faults  of the current system  where our                                                               
growing  fund  causes us  to  overspend.  We  can exceed  that  5                                                               
percent  if we  wanted  to  in overspending  and  how  we do  it,                                                               
including  inflation proofing  - inflation  proofing appreciating                                                               
assets,  which  sometimes doesn't  make  that  much sense  to  me                                                               
unless somebody  else is  willing to  do it for  me, but,  when I                                                               
look at  the current method, and  if I try to  characterize - let                                                               
me ask you  a question. How many investment  funds and investment                                                               
managers are just looking ... [END OF SIDE A].                                                                                  
                                                                                                                                
TAPE 04-4, SIDE B                                                                                                             
                                                                                                                                
CHAIR SEEKINS: ... current method of handling endowment funds?                                                                  
                                                                                                                                
MR. STORER: Mr.  Chair, the answer is not many  because there are                                                               
already - rushing to our methodology?                                                                                           
                                                                                                                                
CHAIR SEEKINS: Yes, our current methodology.                                                                                    
                                                                                                                                
MR. STORER:  85 percent of  the endowments, the  universities use                                                               
some  variant of  what we're  proposing.  I'm not  sure that  I'm                                                               
aware of any entity that still  lives off the concept of realized                                                               
income.  Even accounting  standards  changed in  the mid-'90s  to                                                               
recognize that appreciation is income as well.                                                                                  
                                                                                                                                
CHAIR SEEKINS: So  we're not thinking up something new  and a lot                                                               
of other financial  minds have said how can we  best preserve our                                                               
endowment without,  you know,  over the long  term eroding  it to                                                               
nothing? And a  percent of market value methodology  is what they                                                               
have found to be the best way to do that. Am I correct?                                                                         
                                                                                                                                
MR. STORER: That  is correct and there's many  examples in Alaska                                                               
that have adopted the percentage of market value payout as well.                                                                
                                                                                                                                
CHAIR SEEKINS: For example?                                                                                                     
                                                                                                                                
MR. STORER: For example Anchorage.  I was just talking to Senator                                                               
Stedman - Sitka.  I know the University of Alaska  at Fairbanks -                                                               
the foundation for years in Alaska has that methodology.                                                                        
                                                                                                                                
CHAIR SEEKINS: The City of Fairbanks.                                                                                           
                                                                                                                                
MR. STORER:  The City  of Fairbanks has  one. Bob  Bartholomew in                                                               
our office, the  chief operating officer, was just  in Barrow and                                                               
he  said that  they've adopted  the POMV  as well.  I'm not  sure                                                               
whether Valdez has or not.                                                                                                      
                                                                                                                                
CHAIR SEEKINS: Okay. Senator Therriault?                                                                                        
                                                                                                                                
SENATOR  THERRIAULT: Bob,  you're a  fiduciary for  the permanent                                                               
fund so you  understand the fiduciary duty or  obligation. Do you                                                               
think it would  be fair to characterize that if  we had POMV, and                                                               
you  proposed  to  go  to   our  current  system,  would  you  be                                                               
subjecting  yourself to  possible  litigation  for breaking  your                                                               
fiduciary  obligation  - taking  us  to  a  system that  is  more                                                               
subject to the  ups and downs of the markets  and more subject to                                                               
the dangers of high inflation?                                                                                                  
                                                                                                                                
MR. STORER: I'm sorry - if we?                                                                                                  
                                                                                                                                
CHAIR SEEKINS: If we...                                                                                                         
                                                                                                                                
SENATOR THERRIAULT: The POMV.                                                                                                   
                                                                                                                                
CHAIR SEEKINS: If we had the POMV.                                                                                              
                                                                                                                                
SENATOR  THERRIAULT: And  you were  proposing that  we go  to the                                                               
system that we have currently, which  is more of a roller coaster                                                               
and  more subject  to inflation,  would you  possibly be  setting                                                               
yourself  up for  a claim  that  you have  broken your  fiduciary                                                               
obligation?                                                                                                                     
                                                                                                                                
MR. STORER: One  of the keys in a fiduciary  is showing a process                                                               
to make  an informed decision. So  if I was trying  to convert us                                                               
back, I  would - within  that obligation would  be to show  you a                                                               
process that why  - to give you an informed  decision and I don't                                                               
think I  would be breaking  my fiduciary responsibility.  I think                                                               
it would  be a real challenge  though, to convert from  a POMV to                                                               
realized income when you realize  there's so many complexities in                                                               
terms of our  equity portfolio structure and  the appreciation of                                                               
those assets.                                                                                                                   
                                                                                                                                
CHAIR SEEKINS:  If I could reword  that just a little  bit then -                                                               
would recommending  that someone go  from a percentage  of market                                                               
value process,  similar to  one that's  been recommended,  to the                                                               
current  realized   income,  would  it  be   in  compliance  with                                                               
reasonable person responsibilities? I mean you...                                                                               
                                                                                                                                
MR. STORER: It would be a challenge.                                                                                            
                                                                                                                                
CHAIR SEEKINS: It would be a challenge. I'll leave it at that.                                                                  
                                                                                                                                
MR. STORER:  But it would  be - as I  noted earlier, it  would be                                                               
inconsistent with  current accounting  standards. So, one  of the                                                               
challenges  would  be  to say  if  current  accounting  standards                                                               
recognize appreciation  of the assets  as earnings, then  why are                                                               
you  saying that  that doesn't  matter and  only realized  income                                                               
matters? That would be a challenge.                                                                                             
                                                                                                                                
CHAIR SEEKINS:  So if  we divorce ourselves,  if we  separate how                                                               
any distribution would  be used from the process,  the process is                                                               
the  one  that's  most currently  adopted  by  major  endowments,                                                               
financial advisors across the nation if not the world.                                                                          
                                                                                                                                
MR.  STORER: True,  Mr. Chair.  The  permanent fund  is about  27                                                               
years old  now and if  you look  at our statutes  - distribution,                                                               
inflation  proofing,  they're  27   years  old.  We've  [indisc.]                                                               
additions to  try and meet  contemporary investment  standards in                                                               
there  but they're  27 years  old. Our  realized income  statutes                                                               
made sense back then. I think  you've all seen a slide that shows                                                               
how our  asset allocation has  changed. I think our  objective is                                                               
to  create a  permanent  fund  that can  meet  the  needs of  the                                                               
legislature,   the  citizens   of   Alaska,   and  also   address                                                               
contemporary investment  management issues and that's  what we're                                                               
trying to do.                                                                                                                   
                                                                                                                                
CHAIR SEEKINS: Senator French?                                                                                                  
                                                                                                                                
SENATOR FRENCH:  Thank you.  Call me hard  headed but  I'm really                                                               
stuck  on the  inflation proofing  issue and  I think  this chart                                                               
makes  my point  as  well  as it  makes  yours.  I'm not  against                                                               
modernizing the way the fund is  handled, but if this model holds                                                               
true, you  can write  into the  Constitution, you  must inflation                                                               
proof the  fund before distributing  earnings and as long  as you                                                               
are, you know,  over the last five years you  would have beaten 5                                                               
percent - oh, I'm sorry - back  to 1994, to the beginning of this                                                               
chart, you would have beaten 5  percent every single one of those                                                               
10-year  rolling averages  and  so you'd  have  exactly what  you                                                               
want, which  is a  predictable payout, and  exactly what  I want,                                                               
which is concrete inflation proofing.  Am I misunderstanding this                                                               
chart?                                                                                                                          
                                                                                                                                
MR. STORER:  No. That chart -  there'll be some point  where that                                                               
chart will go below the 5 percent.                                                                                              
                                                                                                                                
SENATOR FRENCH: Sooner or later in time.                                                                                        
                                                                                                                                
MR. STORER: Yes.                                                                                                                
                                                                                                                                
SENATOR FRENCH: It just happens.                                                                                                
                                                                                                                                
MR. STORER:  Yes. It will happen.  And, if I arrived  here in May                                                               
of  '83 and  we  were  having this  conversation,  you would  say                                                               
Storer, you're crazy, you can't  achieve it, so that's an example                                                               
and all of that.  The question for all of you  in regards to that                                                               
in  my mind  is predictability  and stability  versus that  piece                                                               
then,  which  would  eliminate  some  of  the  predictability  or                                                               
stability  of  payout, wherever  it  goes.  That's there  in  the                                                               
discussion  point. And  whether  -  how one  wants  to have  that                                                               
decision,  either  have  that  decision  taken  away,  have  that                                                               
decision by statute,  or address it every  year, etcetera, that's                                                               
the debate.  What we're  proposing gives  greater predictability,                                                               
greater  stability to  the payout  over time,  but the  potential                                                               
exists that  at some  time you  could go below  what we  now call                                                               
principal. The  other side  of the coin,  the benefit,  is you're                                                               
not  going to  overspend  in the  good years.  So,  in a  perfect                                                               
world, if it happens in  this environment, you've got the cushion                                                               
to where you never have to go there.                                                                                            
                                                                                                                                
CHAIR SEEKINS:  I think, as a  way of comment, I  think inflation                                                               
proofing is  important but, as  I said  earlier, it's not  a hard                                                               
decision for  me - if  I was going  to inflation  proof my   if I                                                               
couldn't feed my  kids. I think the legislature  deserves to have                                                               
that  kind  of  flexibility  if  we  get  into  that  kind  of  a                                                               
situation. The  state's going bankrupt and  our Constitution says                                                               
we must inflation proof our fund.  I don't think that that's good                                                               
fiduciary responsibility for the  legislature to even think about                                                               
that and  so, in many respects,  when I look, Mr.  Storer, at how                                                               
we  inflation proof  now, we're  inflation proofing  appreciating                                                               
assets, which in  many schools of thought would  not be something                                                               
that most people would do. Am  I again fairly close to correct on                                                               
that?                                                                                                                           
                                                                                                                                
MR.  STORER:  Mr. Chair,  to  use  the  POMV  you don't  need  to                                                               
inflation  proof  it  because  you  are  investing  in  inflation                                                               
proofing  assets so  it  occurs.  The problem  we  have is  those                                                               
inflation  proofing assets,  such as  equities, can  be converted                                                               
into profits  and then  those profits can  be distributed  and so                                                               
POMV  actually   does  memorialize   inflation  proofing   -  the                                                               
appreciation  as  well. The  current  statutes  do not  guarantee                                                               
inflation proofing.  You still have  the same debate  either way,                                                               
which is inflation proof or make a payment.                                                                                     
                                                                                                                                
CHAIR SEEKINS:  In your estimation,  for the coming  fiscal year,                                                               
what would inflation proofing be in total dollars?                                                                              
                                                                                                                                
MR. STORER: I'm going  to say about 575 - I  don't think it's 600                                                               
million. Inflation  is a  bit over  2 percent  right now  and the                                                               
fund is such  - I guess more like 500 million.                                                                                  
                                                                                                                                
CHAIR  SEEKINS: So  $500 million  that we'll  put into  inflation                                                               
proofing, regardless of what other needs the state has.                                                                         
                                                                                                                                
MR. STORER: Correct.                                                                                                            
                                                                                                                                
CHAIR SEEKINS: Thank you. Senator Therriault?                                                                                   
                                                                                                                                
SENATOR THERRIAULT: Thank  you. At looking at this  chart I think                                                               
- something  that this chart also  points out that -  in addition                                                               
to  the  inflation  proofing  we   have  -  the  legislature  has                                                               
continued to put excess money  into the permanent fund and that's                                                               
basically what  the hills - the  peaks are here is  the retention                                                               
in the  fund of excess  dollars above  and beyond the  25 percent                                                               
contribution every year  above and beyond inflation.  If you look                                                               
back  over the  years, of  course, we've  dumped in  billions and                                                               
billions of dollars in just  additional cash deposits too. So the                                                               
allowance over a  long period of time, you know,  coming close to                                                               
this line or  slightly dipping below and then going  back up, you                                                               
made your  extra deposits, you  retained the extra value  here to                                                               
protect  yourself against  that and,  you know,  in addition,  we                                                               
could put something  on the books that would limit  the draw, you                                                               
know put some dampers on the draw  in any period that you did get                                                               
below.                                                                                                                          
                                                                                                                                
MR. STORER:  That is  correct and also  the legislature,  if this                                                               
were the  February 2000 and 25  percent of the fund  was profits,                                                               
the legislature  displayed the discipline  that we're  asking for                                                               
and did  not overspend,  did not  exceed the  5 percent  and that                                                               
gave us the  cushion to work through a very  severe bear market -                                                               
a  3-year  bear  market  to  where  we  were  able  to  make  the                                                               
distributions,  we were  able to  inflation  proof. Why?  Because                                                               
that discipline was there, both  in the special appropriations to                                                               
the fund and  not taking more of the earnings  than is necessary,                                                               
reasonable.                                                                                                                     
                                                                                                                                
CHAIR SEEKINS: Senator Therriault, go ahead.                                                                                    
                                                                                                                                
SENATOR THERRIAULT: Thank  you Mr. Chairman. So  with the current                                                               
situation,  if you  are concerned  about the  legislature eroding                                                               
the value  of the fund,  and we're  getting into a  tight revenue                                                               
scenario and more  and more pressure to come up  with money, with                                                               
that $4.5  billion sitting out  there that can be  realized, that                                                               
should be weighing on your mind I would think.                                                                                  
                                                                                                                                
MR. STORER: It's available for consideration.                                                                                   
                                                                                                                                
CHAIR  SEEKINS: Mr.  Storer,  conceivably  the legislature  could                                                               
establish  - to  answer the  question, the  concern about  eating                                                               
into the  principal of the  fund, which has been  dedicated there                                                               
and I think  is defined legally -  am I correct there  - what the                                                               
principal is?                                                                                                                   
                                                                                                                                
MR. STORER: It is.                                                                                                              
                                                                                                                                
CHAIR SEEKINS: So there's a  legal definition of what we consider                                                               
the principal of the fund.                                                                                                      
                                                                                                                                
MR. STORER: Um-huh.                                                                                                             
                                                                                                                                
CHAIR  SEEKINS: If  we were  to say  okay, as  a legislature,  we                                                               
could take that  principal fund as of the end  of the last fiscal                                                               
year, we could deposit into it  the royalty income that we get in                                                               
from  oil and  natural resources.  And, in  addition to  that, we                                                               
could theoretically  take an average inflation  proofing over the                                                               
last two or three or four - we do 2 years now, don't we?                                                                        
                                                                                                                                
MR.  STORER: We  take 1  year, Mr.  Chair, but  it's the  rate of                                                               
change between the 2 years.                                                                                                     
                                                                                                                                
CHAIR  SEEKINS: We  could add  an inflation  proofing number  and                                                               
establish  a statutory  principal number,  which the  legislature                                                               
could use and say you can't  spend below this line and still keep                                                               
track  of what  the  principal  of the  fund  is after  inflation                                                               
proofing and compare  that to the market value to  be able to see                                                               
whether or not we really  are, through disbursement of the market                                                               
value, eating  into the  principal of  the fund  and use  that as                                                               
legislative guidance.                                                                                                           
                                                                                                                                
MR. STORER: There's any number of  pieces like that - using a 10-                                                               
year rolling average, a 5-year  RIT (ph), redefining principal in                                                               
the statutes, recognizing the impact  of inflation on - principal                                                               
is  a notational  number.  It's a  recordkeeping  number. It  has                                                               
nothing to  do with how  we manage the  money so you  can convert                                                               
that  recordkeeping number  by statute.  My Director  of Finance,                                                               
[indisc.] but  that's okay, because  it's one more thing  to keep                                                               
track of. But that's another way  of doing it and then you'd have                                                               
to change the statutes or address it through statutory change.                                                                  
                                                                                                                                
CHAIR  SEEKINS:  And   by  doing  that  we   could  provide  some                                                               
indication  of the  fiscal responsibility  of the  legislature to                                                               
the people of the state of Alaska as we go forward.                                                                             
                                                                                                                                
MR. STORER: It would be a more rigorous process if that occurs.                                                                 
                                                                                                                                
CHAIR SEEKINS:  Okay. Other  questions? Hearing  none, I  want to                                                               
thank  you very  much, Mr.  Storer, for  coming to  talk with  us                                                               
today and  we will move  next - I think  we're going to  give the                                                               
full committee the  opportunity to take a look  and we'll address                                                               
this when everyone  can be here - Senator Ellis,  Senator Ogan as                                                               
well. So  we'll move on from  SJR 18 and  set it aside and  go to                                                               
[SJR]   19   and   I  see   representatives   here.   We've   got                                                               
Representative Croft, welcome to  the committee, and representing                                                               
Senator  Lincoln, if  you gentlemen  will put  yourselves on  the                                                               
record, welcome  to the  committee and we're  eager to  hear your                                                               
testimony.                                                                                                                      

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