Legislature(2001 - 2002)

10/19/2001 11:11 AM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HJR 15 - CONST. AM: PERMANENT FUND                                                                                            
[Contains brief  reference to SJR  13, the companion bill  to HJR
Number 0020                                                                                                                     
CHAIR ROKEBERG announced  that the first 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.                                                                                                    
Number 0036                                                                                                                     
CLARK  GRUENING,   Member,  Board  of  Trustees   of  the  Alaska                                                               
Permanent  Fund Corporation  ("the board"),  said that  the board                                                               
enthusiastically supports HJR 15.  He  noted that it was upon the                                                               
recommendations  of the  board that  the  Legislative Budget  and                                                               
Audit  Committee   requested  that   the  House   Rules  Standing                                                               
Committee and the Senate Rules  Standing Committee sponsor HJR 15                                                               
and  SJR 13,  respectively.   He relayed  that for  the first  21                                                               
years  of  the permanent  fund's  existence,  the fund  has  been                                                               
governed by a  six-member board of trustees  whose single highest                                                               
priority policy has  been to protect the  fund against inflation.                                                               
The very  first board testified  before the legislature  that the                                                               
greatest  threat to  permanence of  the  fund is  inflation.   In                                                               
response,  the legislature  adopted statutory  inflation-proofing                                                               
in 1982.   In more recent years, he said,  the board has examined                                                               
various  large endowments  and public  funds that  use a  formula                                                               
approach to determine the method and size of payouts.                                                                           
MR. GRUENING  explained that this approach  is generally referred                                                               
to as  the "percentage of  market value payout," or  POMV payout.                                                               
The  purpose of  this endowment-type  formula is  to protect  the                                                               
long-term   viability   of   a  fund   and   provide   consistent                                                               
distributions to the  beneficiary's of that fund.  He  went on to                                                               
say  that after  considerable  review and  discussion, the  board                                                               
recommends the constitutional change that  is proposed in HJR 15.                                                               
The language  of HJR  15 provides  a spending  limit on  what can                                                               
currently   be  appropriated.      The  existing   constitutional                                                               
language, which  established the  permanent fund,  only prohibits                                                               
the  appropriation  of  principal;  in  other  words,  he  added,                                                               
anything that  is not principal  is considered income,  which can                                                               
be spent.   He explained that principal does not  vary or move up                                                               
and  down  with the  market;  instead,  principal is  a  notional                                                               
number  that  simply  equals  the  sum  of  the  constitutionally                                                               
mandated  25  percent  deposit   of  mineral  proceeds,  and  the                                                               
voluntary deposits that the legislature may choose to make.                                                                     
MR.  GRUENING acknowledged  that  two-thirds of  the $21  billion                                                               
deposited to the principal of  the fund has been made voluntarily                                                               
by  the  legislature as  either  inflation-proofing  or as  extra                                                               
deposits  to the  principal; only  one-third of  the $21  billion                                                               
came  from  the  mandated  deposit   of  25  percent  of  mineral                                                               
proceeds.   Over the past  year, he  noted, "we" have  lost three                                                               
former trustees  who had a  great deal  to do with  the formation                                                               
and  success  of the  permanent  fund:   Elmer  Rassmussen,  Hugh                                                               
Malone,  and Oral  Freeman.   He added  that they  were concerned                                                               
with  the  future of  the  fund  and  were totally  committed  to                                                               
inflation-proofing it,  recounting that Elmer Rassmussen  used to                                                               
say, "Inflation is a thief in  the night," which is as true today                                                               
as it was in 1982.                                                                                                              
MR. GRUENING went on to say  that things have changed since 1982.                                                               
For  instance,  the  earnings  reserve  is  now  a  much  greater                                                               
proportion of the  total fund.  Also, the fiscal  position of the                                                               
state  is dramatically  [different].   Mr. Gruening  informed the                                                               
committee that  if all  the deposits to  the fund  from 1977-1992                                                               
were  averaged, the  earnings  reserve  averaged approximately  8                                                               
percent of the fund.  Even  today, with the recent payout and the                                                               
travails  of the  market,  the earnings  reserve  still makes  up                                                               
about  14 percent  of the  fund.   Unlike  the current  statutory                                                               
provision, for which the  legislature has faithfully appropriated                                                               
money, the proposal before the  committee provides for inflation-                                                               
proofing  of  the entire  fund.    Moreover,  the proposal  is  a                                                               
formula  that will  maximize distributions  over  the long  term,                                                               
which  is   significant  due  to   the  state's   current  fiscal                                                               
situation.  "The Alaska permanent  fund has, and will continue to                                                               
be  in the  future,  the  largest single  revenue  source ...  as                                                               
compared to any other Alaska  resource," Mr. Gruening emphasized.                                                               
The Alaska permanent fund will be  larger than oil in the future,                                                               
and larger  than tourism, fishing, and  anything anticipated from                                                               
a natural gas pipeline.   Mr. Gruening explained that the board's                                                               
proposal  for inflation-proofing  doesn't  require any  statutory                                                               
change,  including  the  dividend  statute.    Therefore,  the  5                                                               
percent  payout of  market value  assures complete  and protected                                                               
inflation-proofing  while  providing maximum  sustainable  payout                                                               
over the  long term, regardless  of future decisions made  by the                                                               
legislature or the voters.                                                                                                      
MR. GRUENING concluded by saying that  if Alaska is going to have                                                               
a fund that  is truly permanent, steps to ensure  that have to be                                                               
taken.    Therefore,  there  has  to  be  investment  for  future                                                               
generations  as  well  as  current  generations,  which  requires                                                               
commitment to the  principles of long-term investment.   The long                                                               
term is more  than a business or political cycle.   At a minimum,                                                               
the long  term should  include the time  in which  "our children,                                                               
grandchildren,  and their  children  grow into  adulthood."   Mr.                                                               
Gruening  said,  "The critical  flip-side  of  a sound  long-term                                                               
investment  strategy  is  a sound  and  sustainable  distribution                                                               
payout plan;  a plan that  will sustain and maximize  benefits to                                                               
each generation  of Alaska."   The form  in which  these benefits                                                               
flow will be a subject of debate  in the years to come.  However,                                                               
the fund can't do it all.  Mr. Gruening remarked:                                                                               
     What, I  think we  ..., as Alaskans,  want to  avoid at                                                                    
     all  costs  is  defaulting  to  a  position  where  the                                                                    
     constitutional  budget reserve  is today.   Within  the                                                                    
     next  4-5  years,  the CBR,  without  some  change,  is                                                                    
     destined for extinction.  As  the investment horizon of                                                                    
     the CBR shortens,  it has been and will  continue to be                                                                    
     necessary to keep the assets  of the CBR in very short-                                                                    
     term and  less profitable investments.   As the  day of                                                                    
     the CBR's demise grows near,  the trustees and staff of                                                                    
     your  permanent  fund  will   also  have  to  seriously                                                                    
     consider   a   shorter   investment   horizon   for   a                                                                    
     significant  proportion of  the fund,  unless there  is                                                                    
     something that  changes.  Whether  we liken  an Alaskan                                                                    
     permanent fund  to a whole resource  industry, like the                                                                    
     Alaska  fisheries,   or  to  some  kind   of  perpetual                                                                    
     endowment, one  thing is clear:   the  Alaska permanent                                                                    
     fund imports more money into  the state year after year                                                                    
     than   any  other   revenues   or  natural   resources.                                                                    
     Legislative   passage  and   voter  approval   of  this                                                                    
     amendment would protect  the ability of the  fund to be                                                                    
     managed  for the  long  term and  to  continue to  pour                                                                    
     money  into the  Alaska  economy.   One final  thought:                                                                    
     Your   legislature,    that   is    the   Twenty-Second                                                                    
     Legislature,   has   an   opportunity   to   accomplish                                                                    
     something, I  think, as  significant and  as beneficial                                                                    
     as  the Ninth  Legislature did  25 years  ago with  the                                                                    
     original  constitutional   amendment.     The  trustees                                                                    
     believe that  this proposal for complete  and protected                                                                    
     inflation-proofing  makes   ultimate  good   sense  for                                                                    
     Alaska's permanent fund for Alaska's future.                                                                               
Number 0170                                                                                                                     
REPRESENTATIVE  BERKOWITZ remarked  that it  seemed that  most of                                                               
the [proposed] changes could be  done statutorily.  If that isn't                                                               
the case,  are there any  collateral benefits, such  as providing                                                               
Wall Street greater assurance with  regard to the security of the                                                               
permanent fund, that would enhance the state's bond ratings.                                                                    
MR. GRUENING  answered that a  statutory payout rule would  be no                                                               
different,  in terms  of its  impact on  inflation-proofing, than                                                               
the current  statute, which  has been  [saving] the  fund because                                                               
the money  was there.   Much of  the money that  was part  of the                                                               
principal  was   extra  that  wasn't   required.     However,  he                                                               
emphasized that  any appropriation  [that the  legislature makes]                                                               
overrides the  statute.  "Unless  it's in the  constitution, it's                                                               
not  constitutional to  protect it,"  he pointed  out.   When the                                                               
voters hear and understand this,  the public seems to accept that                                                               
the fund can be used for other things than its current use.                                                                     
Number 0193                                                                                                                     
ROBERT   STORER,  Executive   Director,  Alaska   Permanent  Fund                                                               
Corporation,   Department   of   Revenue,   responded   with   an                                                               
unequivocal yes to  Representative Berkowitz's question regarding                                                               
bond  ratings.   He pointed  out that  part of  recognizing one's                                                               
risk tolerance is one's discipline to  stay the course.  The past                                                               
three  years  of  fall  meetings with  the  rating  agencies  has                                                               
illustrated  that  rating  agencies  like to  see  a  disciplined                                                               
spending approach and such an  approach enhances the way in which                                                               
the  rating agencies  view the  State of  Alaska's finances,  and                                                               
therefore the state's credit rating.                                                                                            
Number 0204                                                                                                                     
REPRESENTATIVE MEYER commented on  the challenge of educating the                                                               
voters  on the  issue  and,  therefore, he  asked  if  that is  a                                                               
concern.  Furthermore,  the permanent fund is  a sensitive issue.                                                               
Representative Meyer asked whether any  thought had been given to                                                               
such  concerns   when  reviewing   whether  to  proceed   with  a                                                               
constitutional   proposal   versus   Representative   Berkowitz's                                                               
MR.  GRUENING related  his belief  that the  public would  feel a                                                               
greater degree of confidence  with [the constitutional proposal].                                                               
Clearly,  this  will  be the  [public's]  most  important  policy                                                               
initiative.  He highlighted his  belief that this is really going                                                               
to be  up to the  legislature, especially since there's  only one                                                               
more  session before  its possible  passage.   The  idea of  this                                                               
matter  being  in the  constitution  has  seemed to  provide  the                                                               
public with  some comfort.  He  noted that he discovered  this in                                                               
the presentations [with which he had taken been part].                                                                          
MR. STORER agreed.   Mr. Storer noted that  the challenge, during                                                               
these presentations, is to distill  this idea into understandable                                                               
terms.  From his speeches, he  has gathered that the public finds                                                               
comfort in seeing a disciplined approach to the permanent fund.                                                                 
Number 0235                                                                                                                     
REPRESENTATIVE  COGHILL returned  to the  issue of  the [state's]                                                               
bond rating.   He asked  if the combination of  the legislature's                                                               
actions with  regard to  the statute and  its authority,  and the                                                               
management of the fund, has lessened [the state's] bond rating.                                                                 
MR. STORER replied no.   He acknowledged that the legislature has                                                               
appropriated  money into  the principal  fund, inflation-proofing                                                               
as  well as  additional  sums.   The  rating  agencies have  been                                                               
comforted by that  action.  He clarified his  perspective that as                                                               
the  state's  finances are  debated  more,  the more  disciplined                                                               
approach  will  provide  continued  solace for  the  bond  rating                                                               
REPRESENTATIVE  COGHILL expressed  concern with  the notion  that                                                               
since the  fund, under  this proposal, would  be managed  under a                                                               
constitutional protection, it would  provide a better bond rating                                                               
than  if in  statute with  public debate.   He  said that  such a                                                               
situation  would  call in  to  question  the credibility  of  the                                                               
public debate in the legislature.                                                                                               
MR. STORER clarified that the  legislature's actions to date have                                                               
assisted in  the state's high  bond rating.  Therefore,  from his                                                               
perspective, the statute could settle  the issue if [the statute]                                                               
was memorialized in  the constitution, which is,  to some degree,                                                               
a higher  order of  discipline.  The  rating agencies  would find                                                               
solace  in that.   However,  that isn't  to say  that the  rating                                                               
agencies  would   view  some  use   of  the  permanent   fund  as                                                               
Number 0277                                                                                                                     
CHAIR  ROKEBERG  turned to  Mr.  Gruening's  statement that  this                                                               
amendment [HJR  15] wouldn't require  any statutory changes.   He                                                               
found  that  statement troubling  because,  in  his opinion,  the                                                               
current statute is broken and needs  to be fixed.  Chair Rokeberg                                                               
also  expressed concern  with how  the inflation-proofing  design                                                               
fits into the entire model  in terms of the statute, specifically                                                               
related to the sweep effect and down market situations.                                                                         
MR. GRUENING  clarified, "What is meant  by that is that  you can                                                               
adopt  a  constitutional  spending  limit  or  inflation-proofing                                                               
provision and still  administer the dividend statute  in the same                                                               
way."  Mr. Gruening noted that  "we" have indicated that having a                                                               
payout of  the dividend  based on market  value is  probably less                                                               
volatile.  Although  that would be advisable,  it isn't necessary                                                               
for  passage   of  [HJR  15].     However,  the   statute  could,                                                               
undoubtedly,  be  improved  upon  and  that will  be  up  to  the                                                               
legislature to decide how to do so.                                                                                             
CHAIR  ROKEBERG recalled  earlier comments  that CBR  investments                                                               
must be for the short-term  horizon because of the contraction of                                                               
the length  and need for the  funding.  Chair Rokeberg  said that                                                               
he  understood  that  the  perceived  need  for  funding,  market                                                               
conditions, and the amount available  has an impact on the length                                                               
and  quality  of  the investment  instrument  that  [is  chosen].                                                               
However, he  also understood testimony  to indicate that  as time                                                               
passes without any changes, the  same type of policy changes that                                                               
relate  to the  permanent fund  itself will  have to  occur.   He                                                               
     I  suspect  that that's  because  ...  if we  kept  the                                                                    
     status quo,  the earnings reserve  is in  the situation                                                                    
     where  it could  be  appropriated  by the  legislature;                                                                    
     therefore,  as  a  matter of  policy,  the  corporation                                                                    
     would have to  shorten the length of  commitment on the                                                                    
     part  of the  investment  vehicle in  the security  you                                                                    
     might buy to make sure  that those funds were available                                                                    
     for  appropriation  on  a near-term  basis  as  we  get                                                                    
     nearer falling of the cliff and go broke.                                                                                  
MR. GRUENING agreed with Chair Rokeberg's understanding.                                                                        
Number 0332                                                                                                                     
MR. STORER  posed the question:   Why 5  percent?  He  noted that                                                               
the staff and  the board have spent much time  reviewing that and                                                               
have determined that  5 percent of a five-year  moving average is                                                               
on the high end of achievable.   He explained that over the long-                                                               
term, the current  asset allocation of the fund  would earn about                                                               
8.25 percent.   Analysis  suggests that  inflation will  be about                                                               
3.25 percent.   Therefore, "we know that we can  afford to payout                                                               
up  to 5  percent  of the  fund  and retain  the  balance of  the                                                               
earnings to  ensure that  the fund  is inflation-proofed  for the                                                               
future,"  he explained.   However,  Mr. Storer  acknowledged that                                                               
markets change and  thus there has been review  of history, which                                                               
has found that  asset allocation similar to the  fund and statute                                                               
have also amounted  to about a 5 percent payout.   This review is                                                               
over about  a 75-year course.   Mr. Storer reiterated  that there                                                               
is  review  of risk,  which  is  measured  by volatility  of  the                                                               
market.   He expressed  the need to  define an  asset allocation,                                                               
within  a risk  tolerance,  that achieves  the  goals while  also                                                               
having  the  discipline  to  stay   the  course.    Without  that                                                               
discipline, one won't achieve his/her goals.                                                                                    
MR. STORER informed  the committee that there  are two components                                                               
of  this fund.    What makes  the fund  unique  is its  principal                                                               
protection  via the  constitution.   However, when  reviewing any                                                               
fund, one would  review the fund's cash flow.   The fund has been                                                               
in a situation whereby it has been  in a negative cash flow for a                                                               
decade.   Although  such  a situation  is fine  and  part of  the                                                               
analysis,  one must  recognize that  and include  it in  the risk                                                               
return  profile.   He explained  that he  mentioned this  because                                                               
most endowment funds  that use this model have  a 4.5-5 [percent]                                                               
payout rule,  although some  payout more.   In response  to Chair                                                               
Rokeberg,   Mr.   Storer   said   that   the   inflation-proofing                                                               
appropriation isn't  part of  cash flow in  his calculation.   He                                                               
explained that "we"  are paying out $1.1 billion  on the dividend                                                               
while receiving about $400 million.                                                                                             
CHAIR ROKEBERG  related his understanding  that although  it's an                                                               
appropriation    to    the   corpus,    the    inflation-proofing                                                               
appropriation isn't considered part of the cash flow.                                                                           
MR. STORER clarified, "I do not  consider it a negative cash flow                                                               
because it's retained in the fund."                                                                                             
CHAIR  ROKEBERG asked  if it's  a positive  cash flow  because it                                                               
moves from the earnings reserve into the corpus.                                                                                
MR. STORER said he would say  no, although he remarked that it is                                                               
a good point.   "If that's the case, we're at  about a push right                                                               
now," he said.   He specified that most would  define it as money                                                               
that  is leaving  the fund  rather than  entering the  fund.   He                                                               
explained, "My point is that if you  look at a Harvard or an MIT,                                                               
they can  afford to take  a greater  risk profile and  the reason                                                               
being  is  they  can  withstand the  near-term  volatility  of  a                                                               
riskier profile ... because they  are continuing to get new funds                                                               
so they can meet their payoff  discipline.  And if their wrong in                                                               
the near term, they know that  they'll have a positive cash flow,                                                               
which allows them ... to take  ... an asset allocation that would                                                               
have a higher expected return,  significantly higher than ours as                                                               
an example."  He explained that  he noted this because if the CBR                                                               
dissipates  and there  are greater  withdrawals on  the permanent                                                               
fund,  ironically,  the  fund  would  have  to  be  managed  more                                                               
conservatively.   Therefore,  the 5  percent discipline  provides                                                               
more effective management.                                                                                                      
Number 0429                                                                                                                     
CHAIR ROKEBERG asked  if the unrealized gains  are now considered                                                               
part of the principal.                                                                                                          
MR. STORER  replied no,  the principal would  be new  oil revenue                                                               
and  contributions to  the fund  by the  legislature, as  well as                                                               
inflation  that  the  legislature  appropriates  into  the  fund.                                                               
Unrealized  gains  and  losses  aren't  part  of  the  principal.                                                               
However,  the  accounting  records  have  changed.    Mr.  Storer                                                               
explained  that the  dividend is  calculated by  realized income,                                                               
which is the  dividend's interest plus the  actual realized gains                                                               
of a buy and sell of  a security.  However, "GAP" accounting says                                                               
that one must book  the gains and losses every day.   "It's not a                                                               
question of principal, it's how you  mark to market the fund on a                                                               
daily basis," he explained.                                                                                                     
CHAIR ROKEBERG  inquired as to  the position of  the corporation.                                                               
He asked, "Which set of books do you use?"                                                                                      
MR. STORER  answered that  the "GAP"  is followed  for accounting                                                               
purposes as well as the annual  report, which says that gains and                                                               
losses are recognized.                                                                                                          
CHAIR  ROKEBERG interjected  that he  disagrees with  that ["GAP"                                                               
MR.  STORER  continued  by  informing  the  committee  that  [the                                                               
corporation]  does  recognize  realized  income  to  compute  the                                                               
dividend.  Therefore, "you see it both ways."                                                                                   
Number 0496                                                                                                                     
MARY GRISWOLD testified  via teleconference in support  of HJR 15                                                               
because it  provides a  better money  management framework.   She                                                               
said that POMV reduces the  pressure to manage the permanent fund                                                               
for  return  over  value.    "Managing  for  value  is  generally                                                               
considered  a better  fiscal approach.    A 5  percent payout  is                                                               
generally  recognized   by  large   endowments  as   the  highest                                                               
sustainable  payout, beyond  which  the real  value  of the  fund                                                               
would diminish over  time."  She highlighted  a secondary benefit                                                               
of HJR 15  as providing a reasonable money  stream for government                                                               
if the  legislature chooses to use  it.  Currently, the  money in                                                               
the  earnings  reserve  account   is  available  for  legislative                                                               
appropriation for  purposes other  than dividends.   Although the                                                               
legislature  has never  spent it,  she felt  that there  would be                                                               
more  pressure in  the future  for  the legislature  to use  this                                                               
money.  Therefore,  HJR 15 will limit the  amount the legislature                                                               
can use to a predictable and modest amount.                                                                                     
MS.  GRISWOLD  noted  that  it is  important  to  recognize  that                                                               
dividends are  as much as  they are because the  legislature made                                                               
special appropriations  from the earnings reserve  account to the                                                               
principal and  did not  spend the  earnings available.   However,                                                               
any  use  of permanent  fund  earnings  for purposes  other  than                                                               
dividends  will  decrease  the  value  of  the  dividend  because                                                               
whatever is spent won't be available  to earn more money.  Still,                                                               
dividends could be reduced by  much more under the current payout                                                               
system versus  POMV.   The status quo  dividend formula  could be                                                               
preserved with a 5 POMV,  an 80 percent allocation for dividends,                                                               
and a  20 percent allocation  for government.  However,  one must                                                               
realize that a 20 percent transfer  from the fund will reduce the                                                               
fund's  future income-producing  potential.    Ms. Griswold  said                                                               
that  she believes  it is  time to  allocate some  permanent fund                                                               
earnings to government  and she saw a  5 POMV as the  best way to                                                               
do  so.   More importantly,  Ms.  Griswold saw  the 5  POMV as  a                                                               
better money  management tool that  will keep the  permanent fund                                                               
permanent for future generations.                                                                                               
MS.  GRISWOLD, in  response to  Chair Rokeberg,  agreed that  her                                                               
understanding  was  that   there  would  have  to   be  an  80:20                                                               
allocation in  order to maintain  the permanent fund  dividend at                                                               
its current level.                                                                                                              
Number 0546                                                                                                                     
ARLISS  STURGULEWSKI, former  Senator, Alaska  State Legislature,                                                               
remarked that  she is really proud  of the Board of  Trustees and                                                               
its  management of  the  fund.   She  felt  that  there has  been                                                               
extraordinarily good management of the  fund, and that has placed                                                               
the state in its current  position.  Furthermore, the legislature                                                               
has been [helpful as well].   Ms. Sturgulewski announced that she                                                               
is in  strong support of this  proposed constitutional amendment.                                                               
Ms. Sturgulewski commented that  Hugh Malone and Elmer Rasmussen,                                                               
as well  as people from around  the country who dealt  with large                                                               
foundations  really  developed  the idea  of  inflation-proofing.                                                               
She  informed the  committee that  last year,  32 percent  of the                                                               
amount of the  dividend came from inflation-proofing.   There was                                                               
also a  substantial portion  of the dividend  that came  from the                                                               
dollars  that   the  legislature   put  into   the  fund.     Ms.                                                               
Sturgulewski related  her feeling  that the permanent  fund would                                                               
be the  target if the fiscal  gap isn't answered, which  she felt                                                               
would be  a mistake.  Ms.  Sturgulewski noted that she  serves on                                                               
the  University  of  Alaska  foundation,  the  Board  of  Sheldon                                                               
Jackson,  and the  local  board of  the YMCA,  all  of which  use                                                               
similar principles  [to that of inflation-proofing  the permanent                                                               
TAPE 01-82, SIDE B                                                                                                              
MS. STURGULEWSKI  highlighted the  fact that  [even with  HJR 15]                                                               
the  legislature would  maintain its  authority.   The resolution                                                               
merely protects a  pot of money that will  afford the legislature                                                               
the  ability to  appropriate  money  from this  pot  in times  of                                                               
pressure.  She hoped the committee would move ahead with this.                                                                  
Number 0009                                                                                                                     
CHAIR ROKEBERG remarked  that one of the problems with  HJR 15 is                                                               
that  it requires  the legislature  to place  a de  facto cap  or                                                               
stipulate an allocation.                                                                                                        
MS. STURGULEWSKI  [agreed] that HJR  15 doesn't solve  the fiscal                                                               
planning, although it  provides a tool:  money.   The legislature                                                               
still has to make the decision.                                                                                                 
CHAIR ROKEBERG surmised then  that [the constitutional amendment]                                                               
would have to proceed one step  further in order to impact any of                                                               
the long-range fiscal gaps.                                                                                                     
MS. STURGULEWSKI agreed.                                                                                                        
CHAIR  ROKEBERG  expressed  concern  with the  adoption  of  this                                                               
amendment without the ability of  the legislature to deviate from                                                               
the 5 percent constitutional rate,  in the event of an emergency.                                                               
He said  that flexibility  would probably  give this  amendment a                                                               
MS. STURGULEWSKI  echoed earlier statements  that it would  be up                                                               
to the legislature  to make the determination.   Furthermore, the                                                               
earned income account would still be available.                                                                                 
CHAIR ROKEBERG  interjected that  with the  adoption of  [HJR 15]                                                               
the earned income account would go away.                                                                                        
MR. GRUENING remarked that the  only thing that would be limiting                                                               
would  be the  concept of  principal.   He posed  a situation  in                                                               
which [HJR  15] was  in place  and there  was a  large emergency,                                                               
which would result in the reordering of priorities.                                                                             
MS.  STURGULEWSKI  said  that  everyone  should  understand  that                                                               
currently  "we"   have  the  components  of   the  constitutional                                                               
appropriation and  there is the  amount that the  legislature has                                                               
placed in the corpus.  Furthermore, there are the earnings.                                                                     
Number 0044                                                                                                                     
CHAIR ROKEBERG restated his question  that deals with the circuit                                                               
breaker  concept.    He  saw  this  amendment  as  allowing  [the                                                               
legislature access to] only the 5  POMV funds.  Therefore, he was                                                               
concerned that the  legislature has no provision to  allow for an                                                               
emergency allocation.                                                                                                           
MR.  GRUENING said,  "Without amending  the  constitution."   Mr.                                                               
Gruening  pointed out  that  such an  argument  was made  against                                                               
establishing  the permanent  fund in  the first  place.   Senator                                                               
Radar  said  to   the  Senate  that  it   shouldn't  tell  future                                                               
legislatures that it can't spend it all.                                                                                        
CHAIR ROKEBERG  commented that  such was taken  care of  with the                                                               
creation of  the statutory earnings  reserve, although  he wasn't                                                               
sure that was fully understood at the time the fund was created.                                                                
MR.  STORER  pointed  out  that there  is  5  percent,  $1.2-$1.3                                                               
billion,  available per  year under  this program.   However,  it                                                               
would  mean  spending  the  dividend.     In  response  to  Chair                                                               
Rokeberg, Mr.  Storer said that  this year  it was just  short of                                                               
$1.1 billion.  Therefore, the  legislature would have about $1.25                                                               
billion  to address  an  emergency.   He  noted  that usually  an                                                               
emergency of the magnitude [that  would be addressed by the $1.25                                                               
billion] would take years to address.                                                                                           
CHAIR ROKEBERG questioned whether $9  [a barrel for] oil would be                                                               
considered an emergency.                                                                                                        
MR. GRUENING  facetiously pointed  out that a  three-quarter vote                                                               
could be taken.                                                                                                                 
CHAIR  ROKEBERG expressed  concern with  the potential  $800-$900                                                               
million  annual gap  and the  availability of  [only] about  $200                                                               
million [to address that gap].                                                                                                  
MS. STURGULEWSKI commented that  such difficulties illustrate why                                                               
the  permanent  fund  is  a  target.    She  asked  whether  [the                                                               
legislature] wants to have [the 5  POMV of the permanent fund] as                                                               
one of its tools on an ongoing basis [as proposed under HJR 15].                                                                
Number 0089                                                                                                                     
REPRESENTATIVE COGHILL turned to  the mechanics, the timing, that                                                               
would take  place if HJR  15 were to pass  and be adopted  by the                                                               
voters.  He inquired as to  the timing in relation to overlapping                                                               
the statute with  regard to the earnings reserve  account and the                                                               
determination of  advisory averaging  while moving into  a market                                                               
MR. STORER  answered that  he believes  there is a  60 or  90 day                                                               
lag.   However, the  computation would use  the prior  five years                                                               
and thus one would immediately know how much is available.                                                                      
Number 0100                                                                                                                     
JIM  KELLY, Research  & Liaison  Officer,  Alaska Permanent  Fund                                                               
Corporation, Department  of Revenue,  clarified that it  would be                                                               
less than 90 days; it would  be some time prior to February 2003.                                                               
At  that time,  the projections  show  a 5  percent payout  being                                                               
around  $1.3  [billion].    He  pointed  out  that  in  terms  of                                                               
emergencies, the  legislature has a  solution in the form  of the                                                               
CBR,  which has  $3 billion  and that  is as  much as  is in  the                                                               
earnings reserve account.   Mr. Kelly remarked that  if one wants                                                               
to think  about a long-term solution  to a problem, one  wants to                                                               
keep  a constitutional  budget reserve.   However,  the permanent                                                               
fund should  be looked  at as  a growing source  of income.   Mr.                                                               
Kelly reviewed the forecast over time  in regard to the growth of                                                               
the   [earnings  reserve   account]  and   emphasized  that   the                                                               
legislature wants to  ensure that it has this  resource.  Without                                                               
[the earnings  reserve account], there  is not only  no resource,                                                               
there is no solution to the problem.                                                                                            
Number 0125                                                                                                                     
REPRESENTATIVE  COGHILL referred  to  lines 9-11  of  HJR 15  and                                                               
asked if  that was taken care  of in [subsection] (b).   He asked                                                               
whether that language [on lines 9-11] was necessary.                                                                            
MR. KELLY  explained that  when the  constitution was  created 20                                                               
years  ago, all  the income  from the  permanent fund  was to  be                                                               
deposited  into the  general fund,  unless otherwise  provided by                                                               
law.  Therefore,  the permanent fund was the principal  only.  In                                                               
1980, with the  passage of the Alaska  Permanent Fund Corporation                                                               
Act, the  law was changed  to provide  that income stayed  in the                                                               
permanent fund  in an  earnings reserve  account.   Therefore, it                                                               
was clear in statute that the  income was included as part of the                                                               
permanent fund.  This constitutional  change clarifies the matter                                                               
further  by   placing  [the   aforementioned  language]   in  the                                                               
constitution and thus the income  of the earnings reserve account                                                               
is part of  the permanent fund.  Therefore, the  5 percent of the                                                               
income is paid plus the principal.                                                                                              
MS. STURGULEWSKI clarified, "On top of that."                                                                                   
Number 0157                                                                                                                     
CHAIR ROKEBERG requested that Mr.  Storer or Mr. Kelly comment on                                                               
his  belief that  the  statute is  broken as  it  relates to  the                                                               
Mother of all Models (MOMA) and  thus [the state] finds itself in                                                               
a negative market situation.   He recalled that particular run of                                                               
the model  was based on  the 1970s.   He also  requested comments                                                               
regarding what  would happen  in relation to  the statute  with a                                                               
Nikkei market that was 10-year down or flat-lined.                                                                              
MR. STORER said that without using  the MOMA but rather a simpler                                                               
model he [researched] the type  of market impacts that would have                                                               
an  adversarial effect  on  the  permanent fund.    He found,  in                                                               
reviewing the  size of  the fund  now back to  1971, there  was a                                                               
lag.   In about 1977 he  found that the dividend  ceased to exist                                                               
and  it was  difficult  to fund  inflation-proofing  for about  a                                                               
year, after  which it went back  up.  That was  the most negative                                                               
scenario  he  could   find.    He  mentioned   that  he  actually                                                               
[reviewed] the Depression era, where he found no impact.                                                                        
CHAIR  ROKEBERG  recalled testimony  from  the  corporation at  a                                                               
Senate  Finance Committee  hearing that  if the  large amount  of                                                               
monies  in  the  earnings  reserve  hadn't  been  available,  the                                                               
dividend  wouldn't have  been  paid.   He  mentioned a  timeframe                                                               
[during which the market] was on the downside.                                                                                  
MR. STORER agreed that the  earnings reserve does allow a cushion                                                               
in really negative environments such as is the case currently.                                                                  
CHAIR ROKEBERG  surmised then  that if all  the money  people had                                                               
wanted to take  from the earnings reserve to place  in the corpus                                                               
had  been done,  there may  not have  been the  money to  pay the                                                               
dividend, even in the near term.                                                                                                
MR. STORER  agreed.  He noted  that in the late  1980s some money                                                               
did  go  into  the  principal,  which  replenished  the  earnings                                                               
reserve  very  quickly.   Although  that  cushion  [the  earnings                                                               
reserve] is  down, it still  constitutes about 15 percent  of the                                                               
fund.    Mr. Storer  indicated  agreement  with Chair  Rokeberg's                                                               
statement  that in  the 1980s  almost  everything was  inflation-                                                               
CHAIR ROKEBERG  expressed concern  with the allocation  issue and                                                               
reiterated  his  concern with  the  circuit  breaker issue.    He                                                               
related  his belief  that  if  [HJR 15]  is  adopted, then  there                                                               
should be a statutory scheme in  place that goes along with it so                                                               
that voters understand  what will happen.  He  explained that the                                                               
threat of  an untoward  allocation on  the PFD  could be  used by                                                               
opponents of  the amendment.   For instance,  there [could  be] a                                                               
50:50 split between  the GF and the PFD that  would lower the PFD                                                               
to the point that this amendment  [HJR 15] would be defeated.  On                                                               
other hand,  having a  residual of $100-$200  million for  the GF                                                               
seems to  "lock up" the  permanent fund for perpetuity  and would                                                               
also lead to  the defeat of [HJR 15].   Therefore, Chair Rokeberg                                                               
felt  that  the  statute  has   to  be  changed  along  with  the                                                               
amendment,  and also  there  needs  to be  some  sort of  circuit                                                               
breaker even if that is the three-quarter vote.                                                                                 
Number 0242                                                                                                                     
SCOTT  GOLDSMITH, Economist,  University of  Alaska -  Anchorage,                                                               
spoke in  support of this amendment,  HJR 15.  He  felt that [HJR
15] would achieve  three very important objectives.   First there                                                               
is always the potential, under  the current structure, that there                                                               
may  be conflicting  management  objectives.   On  the one  hand,                                                               
there  is the  objective  of maximizing  long-term  real rate  of                                                               
return on the  fund.  On the other hand,  there is the short-term                                                               
objective of meeting any dividend  payment target, which would be                                                               
eliminated with a 5 percent  annual automatic draw from the fund.                                                               
Furthermore,  Mr. Goldsmith  felt that  the 5  [POMV] would  free                                                               
management to  look to the  long-term and maximize the  real rate                                                               
of return of the fund.   Second the current annual flow of income                                                               
off  the  fund is  somewhat  unstable.    Although the  5  [POMV]                                                               
wouldn't completely eliminate  that instability, the fluctuations                                                               
from year  to year  would be  significantly reduced,  he thought.                                                               
Such  would be  useful in  regard to  long-term fiscal  planning.                                                               
Finally, this amendment would  solidify the inflation-proofing of                                                               
the principal  so that there would  be no chance of  having years                                                               
without inflation-proofing.                                                                                                     
Number 0276                                                                                                                     
REPRESENTATIVE DAVIES explained  that the inflation-proofing [the                                                               
5 POMV]  is built in  to the calculation, assuming  the long-term                                                               
rate of return  and the long-term inflation rate.   Therefore, he                                                               
questioned how "good" those numbers are.                                                                                        
MR. GOLDSMITH  noted that he isn't  an expert in how  other funds                                                               
have performed.   However, in speaking with others  that are more                                                               
knowledgeable,  he  understood that  5  percent  is a  reasonable                                                               
target  that can  be achieved  over the  long-term.   He said  he                                                               
wouldn't recommend going higher than 5 percent.                                                                                 
CHAIR ROKEBERG  pointed out  that [the 5  percent] is  the payout                                                               
and isn't necessarily the real rate  of return, which is based on                                                               
the level of inflation.                                                                                                         
MR. GOLDSMITH  clarified that he  has the understanding that  a 5                                                               
percent rate  of return  isn't unreasonable  over the  long term.                                                               
In response  to Chair Rokeberg,  Mr. Goldsmith remarked that  a 6                                                               
percent rate of return would be "stretching it a little bit."                                                                   
MR. GOLDSMITH, in response to  Chair Rokeberg's concern regarding                                                               
a  circuit breaker  for emergencies,  noted that  the legislature                                                               
would probably have other sources  available in an emergency.  He                                                               
felt  that turning  to  the  permanent fund  should  be the  last                                                               
resort.   He echoed earlier  testimony that the CBR  or temporary                                                               
taxes could be options.                                                                                                         
CHAIR ROKEBERG announced that the  public hearing on HJR 15 would                                                               
be recessed until some time in January.                                                                                         
[HJR 15 was held over.]                                                                                                         

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