Legislature(2003 - 2004)
05/16/2003 01:49 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE JOINT RESOLUTION NO. 26
Proposing amendments to the Constitution of the State
of Alaska relating to and limiting appropriations from
and inflation proofing the Alaska permanent fund by
establishing a percent of market value spending limit.
Co-Chair Williams assigned HJR 26 to a Subcommittee to work
on during the interim. Members of the subcommittee will be:
Representative Meyer, Chair, Representative Joule,
Representative Croft, Representative Whitaker and
Representative Chenault.
ROBERT D. STORER, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, DEPARTMENT OF REVENUE, expressed that the Board
of Trustees believes that it is important to inflation proof
the fund.
TAPE HFC 03 - 98, Side A
Mr. Storer noted that currently that it is in statute. The
Legislature has always inflation proofed to maintain the
purchasing power of the fund. This could inflation proof
the entire fund and not just the principle of the fund,
which could be achieved by a spending limit, which would
suggest that limit be no more than 5% of the 5-year moving
average of the fund. Less could be appropriated.
Mr. Storer explained that could be achieved by a spending
limit. The Board suggests that the limit be no more than 5%
of the five-year moving average of the fund and that less
could be appropriated. Currently, the entire earnings
reserve could be appropriated so the magnitude varies from
year to year. There have been "big swings based on the
market conditions". Using a moving average improves
stability each year versus the status quo.
The 5% number was determined by looking at historical data
and prospectively at the capital markets, the current
diversified portfolio will be able to achieve 5% real income
over inflation. The old statute was developed about 26
years ago at a time when people only thought about bonds.
Now that more is invested in the equity market, amore
volatile high-expected return, half of the fund is invested
in that market. There will be more volatility and less
income unless the managers take profits over time. He added
this is more predictable than the current methodology. The
computation would be from the five previous fiscal years.
That would provide the legislators information in January
each year to know the exact amount of available funds.
Mr. Storer noted that at present time, there is a positive
earnings reserve at about $2 billion dollars. The fund has
incurred much volatility to date. What is being proposed
would substantially increase the predictability of the fund.
Co-Chair Williams requested further definition of the
language of the resolution.
BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA PERMANENT
FUND CORPORATION, DEPARTMENT OF REVENUE, pointed out that
the version before the Committee was from the House
Judiciary Committee. Basically, that is a two-page
amendment making changes to the constitution. The title is
a policy statement regarding why the trustees are proposing
the change to protect the Permanent Fund from inflation.
Mr. Bartholomew noted that the first change was indicated on
Page 1, Line 10, referring to a new second paragraph to be
added to the constitution. Page 1, Line 11 is the most
significant change, which would delete "principal" and that
the Permanent Fund would be protected with a spending limit
of up to 5% per year, which could be taken. That would be a
policy call to balance. Incorporating the new language
would provide that there would always be an annual
distribution from the fund limited to 5%. The action would
balance the benefit of providing a distribution every year
against the short-term risk of spending down the fund. He
acknowledged that would be a significant policy decision.
Mr. Bartholomew continued, Page 1, Lines 13-14, would delete
the language "all income from the Permanent Fund shall be
deposited in the General Fund unless otherwise provided by
law". The intent would be that all income earned by the
Permanent Fund remain in the fund. The two pools of funds
would be combined which would not need a separate
itemization of where the income was placed.
Page 2, Line 2, begins the new paragraph, which establishes
a not to exceed spending limit of 5% of the year-end market
value. That amount is averaged over a five-year period.
Page 2, Line 4, clarifies that it would be for the first
five of the six fiscal years, immediately preceding that
fiscal year. Under current rules, the available amount is
not known because the five-year average used, includes the
th
June 30 of the present year. Looking back six years,
th
making the last June 30 the end point for the following
year, provides information indicating exactly what is
available for Legislative appropriation.
Mr. Bartholomew stated that Section #3 provides the language
proposed by Legislative Legal, transitional language, which
clarifies that any money in the earnings reserve would
remain a part of the Permanent Fund and states that it would
stay with the Permanent Fund.
Mr. Bartholomew noted that Section #4 stipulates that to
make it effective to change the constitution, it would go
before the voters of Alaska at the next general election,
November 2004.
Co-Chair Williams appointed a subcommittee to address
concerns of the legislation. Representative Meyer would
chair the Subcommittee with members Representative Croft,
Representative Chenault, Representative Whitaker, and
Representative Joule. Co-Chair Williams encouraged
statewide participation.
HJR 126 was HELD in Committee for further consideration.
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