Legislature(2001 - 2002)
02/08/2002 01:05 PM House JUD
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* first hearing in first committee of referral
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HJR 15 - CONST. AM: PERMANENT FUND Number 2458 CHAIR ROKEBERG announced that the next order of business would be HOUSE JOINT RESOLUTION NO. 15, Proposing amendments to the Constitution of the State of Alaska relating to inflation- proofing the permanent fund. CHAIR ROKEBERG called an at-ease from 1:50 p.m. to 1:52 p.m. TAPE 02-13, SIDE B Number 2459 REPRESENTATIVE MEYER moved to adopt the proposed committee substitute (CS) for HJR 15, version 22-LS0568\C, Cook, 1/31/02, as a work draft. There being no objection, Version C was before the committee. CHAIR ROKEBERG noted that Version C merely changes, from 5 percent to 6 percent, the maximum amount that can be appropriated from the permanent fund. He asked for comments regarding this change Number 2437 CLARK S. GRUENING, Member, Alaska Permanent Fund Corporation Board of Trustees ("the board"), noted that other testifiers would speak more specifically to that change, whereas he preferred to address the purpose of [HJR 15], which is to provide "complete and protected inflation-proofing" for the permanent fund ("the fund"). He explained that [HJR 15] does this by limiting the annual appropriation to 5 percent of the "moving average." Simply speaking, he said, the "projected long-term average earning return of the fund" is 8 percent, whereas inflation is 3 percent; so by only spending 5 percent, the fund retains that 3 percent inflation figure. In an effort to explain why inflation-proofing is so important for the fund, he mentioned that 25 years ago, when the ninth legislature amended the Alaska State Constitution, they knew that although the state would quickly get used to using oil revenue, oil production would decline at some point. Because of this inevitable decline, it made sense to set up a savings account even though, at the time, it was not known exactly what that savings account would be used for, nor what kind of financial situation the state would find itself in. MR. GRUENING, in response to a question, elaborated that some of the things that could not be foreseen were the rate of oil production and the exact timeframe when the oil money would run out. He said that according to his recollection, the projections of when the money would run out were a lot earlier than has proven to be the case, and this has been due in part to good luck and a lot more oil production than was initially anticipated by the oil companies. CHAIR ROKEBERG added that to his recollection, it was projected that the state would be out of oil in 2003. MR. GRUENING confirmed that. "It was very pessimistic," he added. He said that the one point he wanted to bring to the committee's attention as it looks forward for the next 25 years is that if it could be legislated that an industry produce "X" amount of revenue, the legislature would do so. He recalled a joke that he has heard from time to time regarding a hypothetical piece of legislation that says, "The price of oil will be 'X.'" He posited that what HJR 15 does is the equivalent of taking an industry such as fishing, oil, or tourism, for example, and saying, "You're going to produce this much income over this period of time." Passage of HJR 15 will ensure that over the next 25 years - looking at the oil industry to produce under $20 billion, and even after the inflation- proofing money is retained - the permanent will produce, for the legislature's and the people's use, more than twice $20 billion. He stated that in the larger context, inflation-proofing makes "good policy sense." He indicated that the next testifier would speak to the issue of why the appropriation limit should remain 5 percent instead of 6 percent as is proposed in Version C. Number 2240 ROBERT D. STORER, Executive Director, Alaska Permanent Fund Corporation (APFC), indicated that he would speak briefly about how the APFC and its staff came to the conclusion that 5 percent is the appropriate number to have as an appropriation limit, and about how the Earnings Reserve Account (ERA) functions as a shock absorber for market volatility. He noted that next week, the APFC's consultant will make the yearly presentation before the board wherein it will review the capital market assumptions that the consultant prepares. During the review, the board looks at an array of options, and what they mean to the board is a median expected return over the next five years. "Over the last few years and, in fact, next week, you're going to find our existing asset allocation ... has a median expectation of producing a 5 percent real rate of return, a return that would be 5 percent over the rate of inflation," he said. This is more than coincidence, he warned, it is actually the long-term historical rate of return of what the asset allocation earns. CHAIR ROKEBERG asked what that amount was. "It was more than 5 percent then, right?" MR. STORER acknowledged that "the history of the permanent fund is in fact more than 5 percent." He said that it can be looked at two ways: one way is to look at "five years projecting forward," but when he refers to long-term, he said he is actually talking about data since 1926. CHAIR ROKEBERG asked: "But you just said last year we just got the data, and it was the inflation plus 5 [percent] - which added up to how much, then?" MR. STORER asked whether he is referring to returns. CHAIR ROKEBERG indicated he is referring to returns. "I thought you said you met the 5 percent target based on what inflation occurs." Number 2175 MR. STORER, to clarify that point, said that last year, when there was actually a negative return, the [real rate of] return of the fund was below inflation. He noted that this information segues into another point he wanted to make: When looking at long-term numbers and how they are interpreted, there are periods, sometimes prolonged periods, when that real rate of return can not be achieved, such as happened last year. He pointed out that if members had looked at this same proposal in 1983, when he first came to work for the APFC, they would have disapproved of the measure because the asset allocation for the decade previous to 1983 did not achieve a 5 percent real rate of return. But over the longer term, he noted, the APFC has been able to achieve a return in excess of that 5 percent rate of return. CHAIR ROKEBERG remarked that it has been closer to 12 percent. MR. STORER indicated that that is a fair statement; "double digits at least ... over last year." But there are prolonged periods of time, he reiterated, when that goal cannot be achieved, though there are also prolonged periods of time when the return is in excess of that goal. Which is why the ERA is so important, he added. He explained that the permanent fund is divided into two components: the principal, which cannot be touched without a vote of the people, and the ERA, which is, in essence, the profits and the income of the fund realized through the normal market process [and] the unrealized gains through stock and bond appreciation. The ERA is actually the component that absorbs the market volatility, he noted. When the value of the fund goes down because of the market, the principal does not change but the ERA goes down dramatically. He pointed out that the ERA is also the component that allows the legislature to appropriate money for the permanent fund dividend (PFD), for inflation-proofing, et cetera. CHAIR ROKEBERG remarked that if [HJR 15] is adopted, there wouldn't be an ERA. MR. STORER said that technically, there would still be an ERA; there would still be a principal that could be measured by ... CHAIR ROKEBERG interjected, pointing out that all the funds would be commingled, and that there would be no need for an ERA. "That's the whole idea of an endowment, I thought," he added. Number 2070 MR. STORER acknowledged that the funds would be commingled. He noted, however, that the language pertaining to "principal" still exists in HJR 15; this underscores the importance of having an ERA as a cushion. He said that it could be considered a belt-and-suspenders way of protecting the earnings. CHAIR ROKEBERG noted that "that's what we have now." If HJR 15 were adopted, however, then future legislatures would be limited to the amount constitutionally stipulated via this legislation. "So we [won't] have an [ERA] that we could dip into," he added. MR. STORER said: "Not all of it, no." CHAIR ROKEBERG countered: "We wouldn't have any." There would just be the 6 percent or 5 percent or whatever appropriation limit the legislature stipulates. MR. GRUENING noted that the part that doesn't change in HJR 15 is the concept of protecting the principal. Once "principal" is defined, the rest is earnings reserve or whatever the legislature wants to call it, he added. That aspect of the statute doesn't get repealed by HJR 15, so that difference between that notional number of principal - which is simply what has gone in by constitutional mandate plus what the legislature, over the last 25 years, has put in voluntarily, which amounts to $7 billion - and the market value is what is currently available for appropriation. He remarked that HJR 15 doesn't change the concept that once all that is left is just the principal, either through spending or market volatility, then there is no spending, period. CHAIR ROKEBERG asked: "At the 5 percent figure, all things being equal right now, what would that dollar amount be?" MR. STORER offered that it would be about $1.2 billion. CHAIR ROKEBERG asked what the amount would be at 6 percent. MR. STORER said that it would be about $1.5 billion. CHAIR ROKEBERG asked what amount of the "unencumbered earnings reserve" could be paid out in 2003, for example, "if we wanted to dip into the [ERA], that's over and above the PFD and inflation?" Number 1914 MR. STORER said that the projection is that the APFC will earn about 8 percent on June 30, after the liability of the PFD is encumbered and after inflation-proofing. This should leave about $3 billion in the ERA, the projected amounts of about 8 percent earnings and about 3 percent inflation, he noted. CHAIR ROKEBERG remarked that he has heard numbers ranging between $175 million to $200 million a year as the profit. MR. STORER clarified that the "residual" is about $175 million to $300 million; "we use a range because of our components." REPRESENTATIVE JAMES noted that the remark that HJR 15 is not changing a certain portion of the statute is incorrect; HJR 15 stipulates that all income from the permanent fund shall be deposited into the permanent fund rather than in the general fund as is currently required. She said: So you are making the permanent fund, in total, a permanent fund. And I assume that this means that the appropriations shall be limited to 6 percent but it doesn't say [that] no other appropriations from the permanent fund may be made. But what you're allowing us, then, is to appropriate from the permanent fund itself. Isn't that correct? MR. GRUENING pointed out that when he is speaking of the market value of the fund, he is referring to the principal and the earnings reserve, so in a sense, right now, because of the current statutory language that sets up the ERA, the money does go into the permanent fund. REPRESENTATIVE JAMES said that she disagrees with that statement because it is not [put into the] permanent [fund], it is [put into the] general [fund]; all of the state's income is currently put into the general fund. CHAIR ROKEBERG indicated that he, too, disagrees with Mr. Gruening's statement. MR. GRUENING acknowledged that HJR 15 would change it from the way it is done now. Under current statute, money is deposited into the ERA, which sets up the mechanism. But in terms of what the APFC manages, it's the total amount, including the ERA. "And when you take a percent of market value, it includes the total market value - principal and earnings reserve," he said. Number 1792 REPRESENTATIVE JAMES sought confirmation that it is true that when the permanent fund is managed, when part of it is permanent and part of it isn't, there could be a difference in the way that some of [the money] is "deposited," and thus the portion that is not permanent might be invested a little differently. MR. STORER explained that APFC manages the permanent fund with a single asset allocation; in terms of managing the assets of the fund there's no distinction between the principal and the earnings reserve. He noted that if HJR 15 were to pass, that management style would continue. CHAIR ROKEBERG sought confirmation that the APFC does "manage for payouts," such as the PFD. MR. STORER acknowledged that there is a cash-flow issue and that is part of the whole asset-allocation development. REPRESENTATIVE JAMES asked whether the 5 percent figure that Mr. Storer is advocating for would then be the only amount available for liquidation in order to have cash available. MR. STORER said: We would basically manage the fund as we do now, which has, to date, the dividend, [and] you can expect to average about 4 percent, and so that cash requirement's nominally more in terms of managing a $25 billion fund. And so that certainty, if you will, would allow us to maintain the stock exposure that we have. If the payout were to increase dramatically, then we might consider managing the fund more conservatively to meet the cash-flow needs. REPRESENTATIVE JAMES said that she does not know whether she is more comfortable with a 6 percent or with a 5 percent limitation. She added, however, that she is not comfortable with the fact that "if we do this and we don't change the way we calculate the permanent fund dividend, that's all that ever gets paid - or mostly all that ever gets paid." She said that she is not willing "to go there until we've made some changes in how we allocate the permanent fund dividend over the long period ...; in fact, I'm not sure the current calculation we have even works with this situation because of the way the statutory language is." Number 1639 CHAIR ROKEBERG noted that they would have to leave the existing statutory language in until the voters get a chance to vote on a constitutional amendment. He said that he would not be averse to changing the current "statutory regime" because he thinks it's broken. REPRESENTATIVE JAMES remarked that she has a plan. CHAIR ROKEBERG asked how much was paid out in PFDs last year. MR. STORER said $1.182 [billion]. CHAIR ROKEBERG asked how much the inflation-proofing was. MR. STORER said roughly $700 million. CHAIR ROKEBERG surmised, then, that the 5 percent figure wouldn't have been sufficient for last year's inflation-proofing and PFDs. MR. STORER said that is correct. CHAIR ROKEBERG said that depending on the level of inflation, if the 5 percent figure is adopted, there is still the risk that the dividend would have to be reduced and that there would be nothing available for the legislature to appropriate. He said that was his rational for raising the appropriation limit to 6 percent. He asked whether the $7 billion that the legislature has voluntarily placed into the principal is "nominal dollars or growth dollars." MR. GRUENING said it is actual dollars. CHAIR ROKEBERG surmised, then, that "the growth is more than half." For those that are concerned that the permanent fund has not been inflation-proofed enough, he said that he would suggest instead that the legislature has "inflation-proofed the kitchen sink; we have inflation-proofed every dime and dollar in every nook and cranny of the permanent fund - we've over-inflation- proofed it." The legislature has added fully half of the permanents fund's whole value, he noted, "by nominal direct dollar deposits" and the appreciation of those dollars. He said: If we look at the integers of what can really be the proper endowment amount, in my ... opinion we could probably go 50 years at 6 percent and wouldn't eat up what we've already got inflation-proofed in there now. I'd love to see some numbers on that in a model. I think we've already inflation-proofed it so far ahead that ... to say that we [should] just stick here at the old conservative 5 percent rate - and leaving us nothing on table for maneuver-room - is ridiculous, because we've already [done] our job over and over again, as the legislature, and being responsible to the public. ... I'm a firm believer, gentlemen, in your endowment plan and your recommendation, but to tie the legislature's hands in this manner, when we already have done the good job of protecting it, is, I think, a false economy and not good, given the financial circumstances we're going into. In other words, I can't believe that we could sell this to the public, and even our own colleagues here, if we have such a miniscule amount. That's my opinion. Number 1484 JIM KELLY, Director of Communications, Alaska Permanent Fund Corporation (APFC), to clarify, said: Any discussion about how much money needs to be inflation-proofed isn't included in the $1.2 billion. We will make $2 billion in this coming year, and the money that would be available would be made available for dividends and any other public use that you'd have, and that would be out of the $1.2 billion. In this fiscal year that's coming up, the dividend is going to be right around [$1] billion, so there would, in fact, be close to $250 million available for another use. MR. KELLY said that the more important point has to do with the long-term, and although part of it is about inflation-proofing, the other part of it, as Mr. Gruening points out, is about producing a sustainable income stream. "And if your intent, Mr. Chairman, is to produce as much money as possible from the permanent fund, over the next 25 years you will get more money at a 5 percent limit than you will with a 6 percent limit," he stated. CHAIR ROKEBERG mentioned that he "would also be interested in seeing that, because you're talking about building the critical mass, so 5 percent of 200 is bigger than 5 percent of 100." MR. KELLY acknowledged that it is a "math thing and it has to do with compounding." But over time, when more money is paid out, there is less money to invest in the future, and so less is produced, he noted. He continued: I can tell you that over a 25-year period - and with the permanent fund we try to think of it in terms of generations, which is 35 years, 65 years, 100 years ... - you're going to get more money. CHAIR ROKEBERG pointed out a picture located on the back wall of the committee room. He said that it is "from about 1886 and it's of Liberty being strangled to death by taxes; that's where we're at today, we're about ready to be strangled to death by taxes." He said he didn't know if there is time to build a critical mass, and fiddle while Rome burns, without using some permanent fund earnings of one nature or another. He noted that although he doesn't disagree with Mr. Kelly's point, it is a matter of how much patience "we" have. Number 1356 REPRESENTATIVE KOOKESH asked the representatives from the APFC and the board whether "the 5 percent is supportable by you all." He said that although he understands Chair Rokeberg's position regarding 6 percent, he doesn't automatically support that figure and would like to hear the representatives' viewpoint. MR. GRUENING said: "It's on the aggressive side, [though] we believe it's supportable. MR. STORER said: We concluded that given our existing statutes that limit the amount of money we can invest in the equity market, ... a 5 percent was on the high end of achievable; it's aggressive but we believe we can achieve that goal and still ensure that the permanent fund is inflation-proofed well into the future. Recognizing, because of market volatility, that certain years you would not make (indisc.--coughing), and certain years you would make considerably more than that sum. CHAIR ROKEBERG surmised, then, that the APFC would be able to "guarantee the basic valuation of the fund's ability to produce a real dollar, not nominal dollar, in the future; so your future income stream would be consistent. MR. STORER said that is correct. CHAIR ROKEBERG added that that does not take into account any market volatility or economic volatility the state may face; "therefore, it's like the permanent fund will be this solid, growing rock ... of financial stability, as the state goes bankrupt - potentially." He said that that is how he is interpreting the testifiers' comments. MR. KELLY advised members not to forget that [the permanent fund] is going to be producing $2 billion a year of income - or $1.250 billion - which is going to be in excess of any other source of income in the state. "It's twice as large as your next largest source of income," he added. CHAIR ROKEBERG said he agrees, adding that he wants to make sure it remains a bountiful source of income. Number 1228 REPRESENTATIVE MEYER, referring to the memorandum from the APFC in members' packets, asked how increasing the appropriation limit in HJR 15 to 6 percent would impact the amount available to help fill the fiscal gap. MR. STORER, after noting that the dividend formula would remain the same, said that there could be between $375 million and $550 million available for appropriation. He reminded members, however, that ultimately, if more is taken "off the table," there would be some diminishment of the dividend over time, though that impact would be relatively small. REPRESENTATIVE JAMES remarked that the legislature is attempting to fill a $900 million hole this year, and to fill even half of that with taxes is going to have a huge impact on Alaska's economy, "to suck that out of the people's pockets." She also remarked that Alaska is going to have to "grow our economy," which is going to take money. "You don't get anywhere without investing in something; we need to probably spend some more money, ... and so, quite frankly, I don't want to have my hands tied right now," she added. She said that although she likes the concept of HJR 15, she has concerns about going that route at this time. REPRESENTATIVE COGHILL stated: It's available now. He also mentioned that it wasn't going to be easy to go to the people and convince them to vote to allow the legislature to appropriate from the permanent fund. CHAIR ROKEBERG remarked that HJR 15 would protect the permanent fund much better than it is being protected now, since the current "statutory regime is broken." If there is an extended period of "negative markets," and if there are not adequate amounts in the ERA, it may result in not being able to pay a dividend, he predicted. Number 1041 MR. KELLY said that there is no doubt that HJR 15 adds a level of protection to the permanent fund. Even using the 6 percent figure, it is still a limit on how much can be appropriated from the fund, he noted, and is a tighter limit than what exists right now, which is none. Right now, the legislature can appropriate all $3 billion that's in the permanent fund's ERA, and that would be that; HJR 15 at least limits that ability. He noted that the APFC has spoken to people in different communities throughout the state and there has been a great deal of support for the notion of a constitutional amendment that would limit the annual payout of the permanent fund earnings and that would ensure that that money is "at as high a level as possible for as long as possible"; that's something that resonates with the people. REPRESENTATIVE JAMES asked whether, during those conversations, the APFC told people that "all of this was going to go to permanent fund dividends - or most of it." MR. KELLY replied that there is a long-standing tradition at the APFC that the trustees do not opine on issues of what should be done with that money, and "we've just never crossed that line." REPRESENTATIVE COGHILL asked how the payout and the fund's valuation would be affected should there be another recession such as the one that occurred in the early '70s when "we did get into double-digit inflation." MR. STORER posited that it could limit the amount that could be paid out. He said that there are two questions: If we get into double-digit inflation, then what happens to the financial markets, and how long would they both perform "in the manner that they did." He remarked that "we" didn't even experience double-digit inflation in the '70s; it was actually rather short-lived, and more like 6 to 8 percent. A prolonged double- digit inflation combined with a bear-equity market, which would have some impact on the bond market as well, would create the biggest problem, he noted. The problem of lower earnings combined with higher inflation could exist, he added, regardless of whether [HJR 15] passes; however, [HJR 15] would allow a consistent level of appropriation so that the needs of the state could be met in such an environment. REPRESENTATIVE COGHILL said that his point is that the legislature would still be limited to 5 percent of whatever the value of the fund is, and people might view it differently in that kind of situation. Number 0740 REPRESENTATIVE MEYER relayed that a constituent of his had mentioned that back when the permanent fund was started, no one had ever dreamed that it would one day be worth $25 billion, and had proposed that some of that money could be used to close the fiscal gap. Representative Meyer surmised that in his constituent's opinion, $25 billion was enough; he posited that it might be time to question how big the permanent fund should get. Are "we" going to be here 20 years from now with a fund that's worth $75 billion, he asked. CHAIR ROKEBERG offered that it is a question of whom the fund should benefit: "you, or your grandchildren?" REPRESENTATIVE MEYER said that the question for him is, "At what point is enough, enough: when has it grown enough, and when should we start using it for something?" MR. GRUENING remarked that Representative Meyer has brought up a point regarding the way inflation-proofing is done now: it actually is taken from the earnings reserve and placed into the principal, where it can't be spent. Under [HJR 15], that money would actually be retained and become part of that total market value, which is another way of saying it inflation-proofs the whole fund. MR. KELLY noted that he'd received a call from a reporter who asked, "What if you stopped inflation-proofing; ... what would be the impact in 25 years?" Mr. Kelly explained that although the fund will still be $25 billion, the value of the dollars paid out - in dividends or anything else - would shrink at the rate of inflation. So in 25 years, that $25 billion would be the equivalent of $6 billion in today's dollars, which would not be good for either "you, or your grandchildren," if inflation- proofing is discontinued. REPRESENTATIVE MEYER indicated that he is hopeful that "someday we will have [Arctic National Wildlife Refuge] (ANWR) open, we'll have another 'Prudhoe Bay,' we'll have a gas pipeline," and then as more money becomes available, it can again be used to inflation-proof the permanent fund. He posited that adoption of [HJR 15] would definitely tie the legislature's hands. Number 0565 REPRESENTATIVE OGAN asked whether HJR 15 would change the way PFDs are distributed and whether any statutes related to that distribution would need to be changed. MR. KELLY indicated that HJR 15 would not change the way PFDs are distributed and no statutory changes would be needed. CHAIR ROKEBERG said he disagrees; "we would have to make statutory changes to reflect [changes created by] the constitutional amendment. REPRESENTATIVE OGAN asked what would be the payout of the PFD, under HJR 15, if the statutes don't change. MR. KELLY said that the [PFD] projection for the following year is a little bit under $1 billion - under the existing statutes - and that is also what it would be under HJR 15. The [PFD] statute wouldn't change and wouldn't need to change; the amount that would be needed to pay the PFD falls well within the 5 percent limit proposed by HJR 15. CHAIR ROKEBERG asked whether the PFD would be around $1,300 to $1,400. MR. KELLY said that it is not yet that low although it moves down towards $1,400 over several years. Number 0441 REPRESENTATIVE JAMES said that according to her understanding, "even though this fund is a total fund, you still know what the earnings are, and the [PFD] is calculated on the average of the last five years of earnings." So she is assuming, she said, that even if "you had all the permanent fund in as a permanent fund, you could still identify what those earnings were over the last five years and average it." She suggested, however, that "it goes on to say ..., 'or half of the earnings reserve', which is ever smaller, and now we don't have an earnings reserve anymore [under HJR 15]; it's all permanent [fund], with an allocation for us to appropriate." That's not the same thing, she argued, adding that if it is the 5 percent, the amount "in that pot" is reduced to half - instead of almost all, as indicated the APFC representatives. "So it either can't be done at all, or it greatly changes the way we do it, in one fell swoop," she said. CHAIR ROKEBERG said that that is why he believes a statutory change is needed, "because, number one, there's statutory requirements for inflation-proofing, which would be obviated by the adoption of [HJR 15]; so because inflation-proofing is internalized and automatic, ... those provisions for inflation- proofing need to be repealed." He noted that "the rest of the mechanics of the fund would have to be adjusted also, to reflect the reality of the payout, because right now it says, 'the general fund', and that creates the earnings reserve," whereas [HJR 15] would change it to say, "permanent fund", which to him means that "the earnings reserve goes away." MR. GRUENING pointed out that actually, the legislature appropriates funds in each year's budget for inflation-proofing. He added that there was an attorney general's opinion - "back in the 'Dave Rose days'" - that indicated that such inflation- proofing is automatic, but the legislature was of a contrary opinion. Number 0263 RONALD W. LORENSEN; Attorney; Simpson, Tillinghast, Sorensen & Longenbaugh; noted that he has been counsel to the APFC for over five years. He said that his interpretation of [HJR 15] is that it would not change the present distinction between what is principal and what is income - earnings reserve. He said that the reason for this interpretation can be found in Section 1 of HJR 15, which says that the principal into which all funds are deposited shall only be used for certain purposes. It is the following sentence in Section 1 that stipulates what happens to income, he explained, adding that although HJR 15 says that income shall be deposited into the permanent fund, it does not automatically become principal; income is still income, so for accounting purposes, the principal continues to be accounted for as principal, and the income is accounted for as income by accruing it in what has been designated by the legislature as the ERA. He advised the committee not to assume that just changing where the income goes - from general fund to permanent fund - by itself, turns income into principal, which is inviolate. REPRESENTATIVE COGHILL asked whether what is currently done with unrealized gains would change under HJR 15. MR. LORENSEN said that the simple answer is that unrealized gains, under accepted accounting principles, are required to be accounted for as income; under HJR 15, they would continue to be treated in the same manner for purposes of the five-year market value, which is as income and not as principal. He pointed out that for purposes of calculating the PFD, only realized income is considered, not unrealized income. REPRESENTATIVE COGHILL remarked that he is referring to the value upon which the 5 percent limitation is based, so he is wondering at what point do [unrealized gains] discount that value. MR. LORENSEN said that under the 5-percent-of-market-value approach, the market value would be based on generally accepted accounting principles (GAAP), which say that unrealized gains are included as income; hence they would be part of the total value. REPRESENTATIVE JAMES asked whether this means that at any given time, the APFC could calculate how much is in the ERA, and if so, whether [that calculation] would include the unrealized gains. MR. LORENSEN said yes. TAPE 02-14, SIDE A Number 0001 CHAIR ROKEBERG closed the public hearing on HJR 15. He indicated that he would like to see either Version C or the original version of HJR 15 move from committee. REPRESENTATIVE JAMES indicated that she is not willing to move either version at this point in time. CHAIR ROKEBERG announced that HJR 15 would be held over.
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