Legislature(2021 - 2022)ANCH LIO DENALI Rm

06/04/2021 01:00 PM House JUDICIARY

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Audio Topic
01:04:28 PM Start
01:05:43 PM HJR7|| SJR6
03:07:09 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Location Change --
Heard & Held
-- Testimony <Invitation Only> --
- Angela Rodell, Chief Exec. Officer, Alaska
Permanent Fund Corp.
- Curtis Thayer, Exec. Dir., Alaska Energy
- Former Senator Rick Halford
+ Bills Previously Heard/Scheduled TELECONFERENCED
               HJR 7-CONST. AM: PERM FUND & PFDS                                                                            
[Contains discussion of SJR 6.]                                                                                                 
1:05:43 PM                                                                                                                    
CHAIR CLAMAN  announced that the  only order of business  would be                                                              
HOUSE  JOINT  RESOLUTION  NO.  7,   Proposing  amendments  to  the                                                              
Constitution  of  the  State  of Alaska  relating  to  the  Alaska                                                              
permanent fund,  appropriations from  the permanent fund,  and the                                                              
permanent  fund  dividend.    [Before   the  committee  was  CSHJR
1:06:45 PM                                                                                                                    
[Due to technical difficulties, sound was lost briefly.]                                                                        
1:08:24 PM                                                                                                                    
ANGELA  RODELL, Chief  Executive  Officer,  Alaska Permanent  Fund                                                              
Corporation,  provided  a  PowerPoint  presentation,  titled  "The                                                              
Alaska  Permanent  Fund"  [hard  copy included  in  the  committee                                                              
packet].   She  recalled that  in  the late  1990s, the  generally                                                              
accepted  accounting  principles   changed  to  include  the  fair                                                              
market value  concept into the  definition of income,  which meant                                                              
that  the  concept  of  unrealized  gains and  losses  had  to  be                                                              
included  as  well.    She  said   that  created  an  "interesting                                                              
conundrum" for  the Permanent fund  and how it was  accounted for,                                                              
ultimately  leading  to the  two-account  structure  that is  used                                                              
today.    She   directed  attention  to  slide   2,  "two  Account                                                              
Structure,"   which   read  as   follows   [original   punctuation                                                              
       ? is constitutionally established as the permanent                                                                       
     part of the Fund                                                                                                           
         ? grows through royalty contributions, special                                                                         
     appropriations, and inflation proofing                                                                                     
     ? is to be used only for income-producing investments                                                                      
     Earnings Reserve Account                                                                                                   
     ?  is statutorily  established  to hold  the net  income                                                                   
     from the Fund's investment portfolio                                                                                       
     ? grows  through the receipt  of statutory net  income -                                                                   
     monthly  cash inflows  from investments  and net  income                                                                   
     from asset sales                                                                                                           
     ? is available for Legislative appropriation                                                                               
MS. RODELL noted that the Principal Account cannot shrink                                                                       
through changes in market value.                                                                                                
1:10:42 PM                                                                                                                    
MS. RODELL continued to slide 3, "Principal Contributions,"                                                                     
which read as follows [original punctuation provided]:                                                                          
     $17.8  Billion  Royalty Deposits  -  AS  37.13.010(a)(1)                                                                 
     and (a)(2)                                                                                                               
     The  constitutionally minimum  required  25% of  royalty                                                                   
     proceeds, and  the statutorily mandated deposits  of 50%                                                                   
     for leases after 1979.                                                                                                     
     $18.0 Billion Inflation Proofing - AS 37.13.145(c)                                                                       
     The   inflation  proofing   calculation   is  based   on                                                                   
     deposits  into  the  Principal   of  the  Fund  and  the                                                                   
     inflation rate as calculated per statute.                                                                                  
     $11.0    Billion    Special    Appropriations         AS                                                                 
     Legislative Deposits  from both the General  Fund $2.7 B                                                                   
     and the ERA $8.3 B.                                                                                                        
MS. RODELL  stated that  the Principal  has grown  as a  result of                                                              
the appropriation  activity that has  taken place around it.   She                                                              
further  noted that  $4 billion  of  the $8.3  billion in  special                                                              
appropriations was the appropriation  that came through in FY 20.                                                               
1:12:28 PM                                                                                                                    
MS. RODELL proceeded to slide 4, "ERA: Statutory Net Income,"                                                                   
which read as follows [original punctuation provided]:                                                                          
     AS  37.13.140 (a)  directs the  net investment  earnings                                                                   
     of the  Fund to  the ERA and  excludes unrealized  gains                                                                   
     and losses.                                                                                                                
          Statutory Net Income is the direct result of                                                                          
     investment activity, and includes:                                                                                         
        ?Monthly cash inflows from stock dividends, bond                                                                        
     interest, and real estate                                                                                                  
       ?Realized Capital Gains/Losses: All the net income                                                                       
     (i.e., realized gains minus realized losses) generated                                                                     
     by the sale of investments.                                                                                                
     FY21 as of April 30, 2021                                                                                                  
     ?Statutory Net Income = $5,995,200,000                                                                                     
MS. RODELL  pointed  out that the  graph on  slide 4  demonstrates                                                              
how  statutory  net  income  (SNI),  which  is  how  the  Earnings                                                              
Reserve  Account   (ERA)  grows,  moves  differently   than  total                                                              
return.    She  explained  that  the  total  return  reflects  the                                                              
volatility in the  market, as indicated by the  yellow line, while                                                              
the SNI  steadily increases  after a  withdrawal, as indicated  by                                                              
the black line.   She noted that as of April 30,  2021, the SNI is                                                              
almost  on par  with 2018  at nearly  $6  billion.   In 2018,  the                                                              
increased SNI  was due to a  specific asset sale that  generated a                                                              
large  gain  whereas  the  current  SNI  in  FY 21  is  due  to  a                                                              
rebalancing effort to manage risks appropriately.                                                                               
1:13:55 PM                                                                                                                    
MS. RODELL  advanced to  slide 5,  "Investment Management,"  which                                                              
read as follows [original punctuation provided]:                                                                                
     Constitutional and Statutory Mandates                                                                                      
     ?Principal provides permanent savings                                                                                      
     ?ERA holds the investment income for appropriation                                                                         
     ?Prudent rules govern Saving, Spending, and Growth                                                                         
     APFC Stewardship                                                                                                           
     ?Long-term horizon Prudent Diversification                                                                                 
MS. RODELL  pointed out that the  Permanent fund is managed  as if                                                              
it  were one  total  fund;  therefore, the  investment  management                                                              
strategy does  not differ for the  ERA versus the Principal.   She                                                              
related that  investment allocation is  looked at from  a 10-plus-                                                              
year view  rather than  day-to-day or  month-to-month.   She added                                                              
that  this strategy  requires  Alaska Permanent  Fund  Corporation                                                              
(APFC)  to   be  accountable  and   ensures  that   the  necessary                                                              
resources are available to work effectively.                                                                                    
1:15:30 PM                                                                                                                    
MS.  RODELL  progressed  to  slide 6,  "Asset  Allocation."    She                                                              
explained that  in 1980, the  [investments were comprised]  almost                                                              
entirely of  bonds.  In 1983, APFC  was allowed to invest  in U.S.                                                              
real  estate   and  stocks,   which  over   time,  expanded   into                                                              
international  markets.    In  2005,  statutes  were  passed  that                                                              
allowed APFC to  take more risks and to invest  in private equity,                                                              
absolute return,  and private  income.   She reported  that today,                                                              
the  FY  21  target  allocation  is 39  percent  stocks  and  [21]                                                              
percent bonds.   She added that the entirety of  assets managed by                                                              
APFC,  including the  Alaska  Mental Health  Trust,  ERA, and  the                                                              
Principal,  are all  invested in  the asset  allocation with  each                                                              
pool of money  owning a pro rata  share of every investment.   She                                                              
reported that reconciliation  takes three to four  weeks, as there                                                              
are over 700 accounts with multiple investments.                                                                                
1:17:34 PM                                                                                                                    
MS. RODELL  turned to slide  7, "Resolutions 03-05,  04-09," which                                                              
read as follows [original punctuation provided]                                                                                 
      ?Supporting a constitutional amendment to limit the                                                                       
     annual Fund payout to not more than a 5% POMV averaged                                                                     
     over a period of 5 years.                                                                                                  
       ?Implementation of a constitutional POMV spending                                                                        
      limit for the Fund, has the accompanying benefit of                                                                       
     assuring permanent inflation proofing of the Fund.                                                                         
MS.  RODELL  explained  that the  constitutional  amendment  under                                                              
current  consideration [CSHJR  7(STA)] would  transition the  fund                                                              
from  a  two-account  structure  to a  single  account  structure,                                                              
which  has been  a  priority  of the  trustees  since  2000.   She                                                              
reminded the  committee that the  accounting rules changed  in the                                                              
late  1990s,  at  which time,  APFC  realized  the  importance  of                                                              
holding on to  its gains; therefore, appropriations  for inflation                                                              
would  no  longer   be  needed  and  spending   would  be  limited                                                              
naturally  as  result  of  the  percent  of  market  value  (POMV)                                                              
1:18:57 PM                                                                                                                    
MS.  RODELL detailed  the  fund's current  structure  on slide  8.                                                              
She proceeded  slide 9, which  illustrated the proposed  endowment                                                              
structure.   She  explained that  under  the endowment  structure,                                                              
all  of  the   funds  that  come  in  would   be  constitutionally                                                              
protected  and remain  that way  while continuing  to be  invested                                                              
into  income-producing   investments.    Furthermore,   gains  and                                                              
losses  would  stay  with  the   fund  while  POMV  and  corporate                                                              
expenses  would  move  out.   She  emphasized  that  the  proposed                                                              
endowment structure  is a simpler and more straightforward  way to                                                              
manage the fund.                                                                                                                
1:20:36 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  pointed out  that  Ms. Rodell  had                                                              
mentioned  the Alaska Mental  Health Trust's  pro rata  ownership.                                                              
Further, he referenced  an amendment to the operating  budget that                                                              
pertained to other  state assets that could be  managed for return                                                              
by APFC.   He questioned the  pros and cons of  placing additional                                                              
state accounts  or public  assets under  management of  the Alaska                                                              
Mental Health Trust under APFC management.                                                                                      
MS.  RODELL  said APFC  is  prepared  to manage  additional  state                                                              
assets should  it be necessary.   She explained that  depending on                                                              
what  the  assets   are,  they  could  be  placed   in  the  asset                                                              
allocation  unless the  money that  comes in  has different  usage                                                              
requirements, such  as statutory duration  limits.  She  said APFC                                                              
could make it work, but it requires resources.                                                                                  
1:24:41 PM                                                                                                                    
REPRESENTATIVE   EASTMAN  inquired  about   the  costs   that  are                                                              
withdrawn  from   the  fund   by  APFC,  as   well  as   the  POMV                                                              
withdrawals, and their associated timelines.                                                                                    
MS.  RODELL  responded  that the  APFC  operation  and  investment                                                              
management  moneys  are  taken  in  accordance  with  the  adopted                                                              
budget documents,  which serve as  the cap/limitation.   She added                                                              
that APFC  withdraws them  throughout the  fiscal year  as needed;                                                              
for   example,  for   APFC's  personal   services,  the   required                                                              
distribution is  taken out  of the ERA  every couple of  weeks for                                                              
the purpose of  payroll.  Regarding the POMV  withdrawal, she said                                                              
that those  moneys are taken out  in accordance with  a memorandum                                                              
of understanding  by the  Treasury Division  under the  Department                                                              
of Revenue  (DOR).   She reported  that each  year since  the POMV                                                              
statutes were adopted  in 2018, APFC has worked  with the Treasury                                                              
Division  to  set  up the  withdrawals  based  on  the  division's                                                              
expected  cash  needs.    She noted  that  the  division  has  the                                                              
ability to change those withdrawals.                                                                                            
1:27:20 PM                                                                                                                    
CHAIR  CLAMAN  asked  if  unrealized gains  are  included  in  the                                                              
calculation of the fund and the ERA's total value.                                                                              
MS. RODELL  answered yes.   She noted that  the next  slide [slide                                                              
10] shows  that figure.   She added that  calculation is  based on                                                              
net market value, which includes unrealized gains/losses.                                                                       
CHAIR  CLAMAN  asked  whether  the change  to  the  definition  of                                                              
earnings that  occurred in  the late 1990s  impacted how  the fund                                                              
looked at unrealized  and realized gains for purposes  of earnings                                                              
versus the Principal.                                                                                                           
MS. RODELL explained  that it required the legislature  to come up                                                              
with  the  definition  of  SNI   to  better  understand  what  was                                                              
considered  income and  what would  be moved  into the  ERA.   She                                                              
said  there  were   times  when  all  of  the   gains/losses  were                                                              
recognized  in the ERA  and a  time when  they were recognized  in                                                              
the Principal;  however, for  the past few  years, they  have been                                                              
shared pro  rata between the  two accounts until  they're realized                                                              
due  to the  different  interpretations  that have  been  received                                                              
from the  Department  of Law (DOL).   She  relayed that  investing                                                              
grew more  sophisticated  compared to what  was contemplated  when                                                              
the  original constitutional  amendment was  passed, which  became                                                              
part  of the  challenge.   She emphasized  the  importance of  the                                                              
POMV structure  to the  Permanent fund  because it recognizes  all                                                              
the different asset classes that are currently invested.                                                                        
CHAIR   CLAMAN  questioned   whether   the   income  account   was                                                              
originally named the  Earnings Reserve Account or if  it was given                                                              
that name at a later point in time.                                                                                             
MS. RODELL said as  long as she has been aware  of it, the account                                                              
has been named the ERA.                                                                                                         
1:31:03 PM                                                                                                                    
CHAIR  CLAMAN  asked  whether  the  deposit  of  $18  billion  for                                                              
inflation  proofing  pursuant to  AS  37.13.145(c)  has been  made                                                              
every year.                                                                                                                     
MS. RODELL  noted that inflation  was zero  in 2010, so  there was                                                              
no  inflation  proofing  deposit.   Additionally,  there  were  no                                                              
inflation proofing  appropriations  in 2017, 2018,  and 2019.   In                                                              
FY 20,  she said, the  $4 billion that was  moved from the  ERA to                                                              
the  Principal had  legislative  intent language  to forward  fund                                                              
inflation proofing.   Furthermore, she  pointed out that  there is                                                              
no inflation  proofing in the  FY 21 budget  or either  version of                                                              
the operating budget  for FY 22, which is currently  in conference                                                              
CHAIR  CLAMAN sought  to clarify  that  in 2017,  2018, and  2019,                                                              
there was  inflation; however,  the legislature  did not  make the                                                              
deposit pursuant to AS 37.13.145(c).                                                                                            
MS.  RODELL confirmed  [that  the legislature  did  not make  that                                                              
deposit in 2017, 2018, and 2019.]                                                                                               
CHAIR  CLAMAN asked  for  verification that  the  ERA, because  it                                                              
needs to be  available for appropriation, consists  of more liquid                                                              
appropriations  and  may  not  realize   the  same  gains  as  the                                                              
MS.  RODELL said  that is  incorrect.   She  explained that  every                                                              
single asset  is owned  on a  proportional pro  rata share  by the                                                              
Principal,  the ERA,  and the  Alaska  Mental Health  Trust.   She                                                              
said  the ERA  has a  long-time  horizon on  its asset  allocation                                                              
based on statutory directive.                                                                                                   
CHAIR CLAMAN  questioned  whether sales are  made consistent  with                                                              
the asset  allocation or if the  liquid assets are sold  when cash                                                              
is needed for state operations.                                                                                                 
MS. RODELL  stated that the POMV  structure allows for  the surety                                                              
of knowing what  the cash calls by  the state are going  to be, so                                                              
APFC can plan ahead.  She remarked:                                                                                             
     if we  know, for example,  we are  going to make  a $480                                                                   
     million payment  at the end of June, as  we're receiving                                                                   
     cash  this  month,  we'll  hold on  to  it  rather  than                                                                   
     investing it  in the asset  allocation in order  to make                                                                   
     that payment,  so that we  don't have to sell  something                                                                   
     at a gain or a loss in order to make those payments.                                                                       
MS.  RODELL noted  that  60 percent  of the  fund  is invested  in                                                              
highly liquid  stocks and  bonds that  could be liquidated  within                                                              
three days.                                                                                                                     
1:35:06 PM                                                                                                                    
CHAIR CLAMAN  referred to  slide 6  and asked  how [APFC]  has the                                                              
authority  to change  the asset  allocation  and what  legislative                                                              
action allowed that.                                                                                                            
MS.  RODELL  explained  that  in  APFC's  enabling  statutes,  the                                                              
legislature  included a  specific list  of allowable  investments.                                                              
She expounded that  in 1980, the statutes specified  that APFC was                                                              
only allowed  to invest the fund  in bonds.  The list  was amended                                                              
over the  years to  include investments  in U.S.  stocks and  U.S.                                                              
real estate,  for example.   In  2005, she  said, the statute  was                                                              
completely  revised, and  the allowable  list  of investments  was                                                              
repealed and replaced  by the prudent investor  rule, meaning that                                                              
APFC could  invest in  anything a prude  investor of  similar size                                                              
and scope would  invest in.  Subsequently, that  revision required                                                              
APFC  to  adopt  regulations  outlining  the  types  of  allowable                                                              
investments.     She  stated  that   now,  APFC   has  regulations                                                              
outlining  and  defining  their   investments;  additionally,  the                                                              
corporation continues  to follow the prudent investor  rule, which                                                              
led to the change in asset classes that appears in FY 21.                                                                       
CHAIR   CLAMAN  concluded   that   in  1980,   [investments   were                                                              
comprised]  entirely  of  bonds,  which changed  over  the  years.                                                              
Going  forward,  the legislature  would  periodically  change  the                                                              
statute  giving APFC  the authority  to invest  in other types  of                                                              
investments.    Finally, in  2005,  APFC  changed to  the  prudent                                                              
investor  rule,   which  gave  APFC's   board  the   authority  to                                                              
establish  regulations  that  established   how  investments  were                                                              
MS. RODELL confirmed.                                                                                                           
CHAIR  CLAMAN  surmised  that  APFC  has  not  been  back  to  the                                                              
legislature to change that authority since 2005.                                                                                
MS. RODELL  said that's correct.   She said APFC does  not require                                                              
additional authority.                                                                                                           
1:37:41 PM                                                                                                                    
MS. RODELL  resumed the  presentation on slide  10, which  read as                                                              
follows [original punctuation provided]:                                                                                        
     Percent of Market Value -AS 37.13.140 (b)                                                                                  
     ?Based on market value, rather than realized income                                                                        
     ?Subject to annual appropriation                                                                                           
        ?average market value of the Fund for the first                                                                         
          five of the preceding six fiscal years                                                                                
     5.25% -July 1, 2018, FY19; Effective Rate                                                                                  
     ?FY19 POMV $2.72 billion; 4.13%                                                                                            
     ?FY20 POMV $2.93 billion; 4.52%                                                                                            
     ?FY21 POMV $3.09 billion; ~4.68%                                                                                           
     5.0% -July 1, 2021, FY22; Effective Rate                                                                                   
     ?FY22 POMV$3.07 billion; ~4.55%                                                                                            
     ?FY23 POMV~$3.21billion; ~4.66%                                                                                            
     ?FY24 POMV~$3.29billion; ~4.68%                                                                                            
MS. RODELL  explained that as the  fund grows or has  flat growth,                                                              
such  as in FY  21 to  FY 22,  the POMV  structure prevents  "wild                                                              
swings" in revenue for the state.                                                                                               
1:38:59 PM                                                                                                                    
MS. RODELL  continued to  slide 11,  which highlighted  the fund's                                                              
growth from FY  16 to FY 21.   She pointed out that  the Principal                                                              
is unable to  grow without support of the  special appropriations.                                                              
She  added that  once  unrealized gains  in  the Principal  become                                                              
realized,  they move  into  the  ERA. She  advanced  to slide  13,                                                              
"Callan's Capital  Market Projections," noting that  Callan is the                                                              
board's general  consultant.   She related  that Callan's  10-year                                                              
projection indicates  that the total fund is  expected to generate                                                              
6.75 percent,  which  will decrease  to 6.2 percent.   She  stated                                                              
that the  forecast  suggests that  the fund will  enter a  10-year                                                              
period  of  much  slower  growth,  adding that  the  bulk  of  the                                                              
earnings will  come from  private equity and  public equity.   She                                                              
said in  order to run  a diversified portfolio  with a  balance of                                                              
risks,  there needs  to be  (indisc.) absolute  returns and  fixed                                                              
income.  She  added that at 2.25  percent, bonds are not  going to                                                              
generate much income in return over the next 10 years.                                                                          
1:42:19 PM                                                                                                                    
MS.  RODELL  proceeded to  detail  the  fund's performance  as  of                                                              
April 30, 2021,  on slide 14.  She informed the  committee that to                                                              
date,  the  total  fund  is  at 25.02  percent,  which  is  a  big                                                              
difference in  performance from  2 percent in  FY 20.   She stated                                                              
that for  the most part, the  fund is meeting all  its performance                                                              
benchmarks.       She  highlighted  that  the   board's  long-term                                                              
objective is  to generate  5 percent  real return plus  inflation,                                                              
which  at 2.05  percent  versus  5.65 percent,  was  not met  last                                                              
1:43:41 PM                                                                                                                    
REPRESENTATIVE  SNYDER asked how  the fund's performance  compares                                                              
to  similar funds  in  other locations.    She questioned  whether                                                              
there are  any lessons  the state could  learn from  similar funds                                                              
and  how  Alaska's   fund  performance  benchmarks   an  objective                                                              
matchup with other funds across the nation.                                                                                     
MS. RODELL  offered to follow  up with the requested  information.                                                              
She  noted  that  Callan  conducts reviews  of  funds  across  the                                                              
country such as endowments, foundations, and pension funds.                                                                     
1:45:00 PM                                                                                                                    
REPRESENTATIVE  EASTMAN inquired  about the  5 percent  POMV.   He                                                              
recalled that  he had heard the  perception that 5 percent  is too                                                              
high,  and  that 4.25  percent  would  be  more sustainable.    He                                                              
acknowledged that  the state could  go forward with the  5 percent                                                              
POMV and discover  that it is not sustainable.  He  noted that Ms.                                                              
Rodell  had  provided  the  committee  a  letter  surrounding  the                                                              
"loyalties issue"  and the legislature  not meeting  the statutory                                                              
obligations regarding  loyalty and  asked whether she  has another                                                              
letter surrounding  the inflation proofing to which  the 5 percent                                                              
might be eroding the corpus.                                                                                                    
MS. RODELL  responded  that the  concepts of  having a corpus  and                                                              
the need  for inflation-proofing  would have  to be eliminated  in                                                              
order to  implement a  constitutional amendment.   She  noted that                                                              
these concepts are  in place due to the two-account  structure and                                                              
a requirement  for  an appropriation  to put  money back into  the                                                              
principal.   She explained  that  the only way  the principal  can                                                              
grow today  is through the action  of the legislature.   Under the                                                              
endowment structure  contemplated  by HJR 7,  she said  that there                                                              
would be  no need  for these  concepts.   She identified  that the                                                              
importance  of  the  endowment  structure  in  HJR 7  is  that  it                                                              
eliminates the need  for these concepts and there will  be no need                                                              
for legislative  action to  grow the fund.   She emphasized  that,                                                              
regarding  inflation-proofing,   it's  important  to  respect  the                                                              
legislative intent  language.  She acknowledged the  concerns that                                                              
"inflation will  get away from  us" [if inflation-proofing  is not                                                              
REPRESENTATIVE  EASTMAN  asked whether  Ms.  Rodell  has a  number                                                              
readily available  as far as what  the legislature could  do under                                                              
the  current system  to (indisc.)  inflation-proofing  obligations                                                              
already in place.                                                                                                               
MS. RODELL  responded that  she doesn't have  the number  in front                                                              
of her  at the  moment but  that she  will follow  up and  provide                                                              
that information to the committee.                                                                                              
REPRESENTATIVE  EASTMAN  asked   Ms.  Rodell  whether  it  can  be                                                              
expected that, if  the 5 percent figure passes and  is revealed to                                                              
be too  high, the corporations will  argue for a  lower threshold.                                                              
He asked what she thinks would occur in this situation.                                                                         
MS. RODELL explained  that the 5 percent is supported  by the data                                                              
on  slide  14   [entitled,  "Performance"]  and   the  projections                                                              
depicted therein  show that  it is a realistic  number.   The idea                                                              
is that the growth  of the fund smooths out over  time and creates                                                              
more stability  for the fund.   She noted that APFC  has supported                                                              
the 5 percent number for over 20 years.                                                                                         
REPRESENTATIVE  EASTMAN   asked  Ms.  Rodell  whether   the  asset                                                              
allocation  currently includes future  contracts and  derivatives,                                                              
and if so, how the assets would be classified.                                                                                  
MS.  RODELL responded  that  derivates  and future  contracts  are                                                              
included  and  usually happen  within  the  same portfolio.    She                                                              
offered  the example  of currency  exposure, which  would be  done                                                              
through futures  contracts.  She  noted that all of  the exposures                                                              
listed can be found in APFC's annual report.                                                                                    
1:52:31 PM                                                                                                                    
MS. RODELL  resumed the presentation  on slide 16,  "Evolving Role                                                              
of  the  Fund,"  which  read  as   follows  [original  punctuation                                                              
      Successful SWFs operate within a rules-based system                                                                       
      that allows them to perform a combination of saving,                                                                      
     stabilization, and income-generation functions.                                                                            
      In Alaska, the latter function has come into sharper                                                                      
     focus, as the Fund income supports the State budget in                                                                     
     an era of lower oil revenues.                                                                                              
       This paper proposes a number of reforms that will                                                                        
         strengthen the stability and sustainability of                                                                         
     Alaska's Permanent fund:                                                                                                   
     LESSON # 1: MISSION CLARITY                                                                                                
     LESSON #2: THE IMPORTANCE OF RULES                                                                                         
     LESSON #3: SUCCESSFUL ENFORCEMENT OF SAVING RULES                                                                          
     LESSON #4: DESIGNING A POMV SPENDING RULE                                                                                  
     LESSON #5: REFORMING THE ERA                                                                                               
1:53:14 PM                                                                                                                    
MS.  RODELL  advanced  to  slide  17,  "Revenue  Generation,"  and                                                              
acknowledged that  this type of revenue generation  [referenced on                                                              
the slide]  is a different  concept "culturally" for  everyone and                                                              
it is  not common to  think of the  permanent fund as  the primary                                                              
source  of revenue  for  the state.   The  slide  read as  follows                                                              
[original punctuation provided]:                                                                                                
     Now,  more  than  ever,  the  State  is  dependent  upon                                                                   
     APFC's  effective  management   and  investment  of  the                                                                   
     Alaska permanent  fund, one of Alaska's  primary sources                                                                   
     of renewable revenue.                                                                                                      
     The  POMV draw  from the  Earnings  Reserve Account  now                                                                   
     supports  ~70%  of Alaska's  undesignated  general  fund                                                                   
     APFC's stewardship fulfills dual roles                                                                                     
     Protecting  the Principal  of the Fund  for the  benefit                                                                   
     of current and future generations of Alaskans.                                                                             
     Providing a  predictable revenue stream to  help balance                                                                   
     the State's budget.                                                                                                        
1:54:32 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  asked  Ms.  Rodell  if  she  could                                                              
restate the  historic figure of  the real return of  the permanent                                                              
fund  [seen  on slide  14,  "Performance"],  and how  that  number                                                              
compares to the projections done by Callan.                                                                                     
MS. RODELL  responded that  the Callan's  projections are  looking                                                              
at a 4.2  percent real return for  the next 10 years.   She stated                                                              
that the  intention of the  APFC Board of  Trustees is to  be able                                                              
to meet  Callan's forecasts.   She acknowledged  that it  is going                                                              
to be  a challenge  to meet  the 5  percent real  return in  a low                                                              
growth and  slow return  environment, and  there is concern  about                                                              
that, but  APFC is not recommending  any changes to the  5 percent                                                              
1:58:08 PM                                                                                                                    
REPRESENTATIVE  VANCE   asked  Ms.  Rodell  what   trustees  would                                                              
consider  when evaluating  whether  a one-time  unstructured  draw                                                              
can be taken without  undermining the health of the  growth of the                                                              
MS.  RODELL  answered  that  the   trustees  are  adamant  in  the                                                              
recommendation  that there be  no unstructured  draws on  the fund                                                              
at all, no matter  the size or the reason.  She  said that part of                                                              
the concern is  that every year, if there are  unstructured draws,                                                              
the POMV would lose all of its effectiveness.                                                                                   
1:59:16 PM                                                                                                                    
REPRESENTATIVE  SNYDER, regarding the  proposed $3 billion  bridge                                                              
draw that's  referred to  in HJR  7, asked  Ms. Rodell  to specify                                                              
the particular losses  that would be incurred with  a draw of that                                                              
MS. RODELL  responded that it is  important to recognize  that the                                                              
role of the APFC  is to manage the assets it has.   She noted that                                                              
the withdrawal would  have a cost impact on the fund.   She shared                                                              
that the  Legislative Finance Division  has run various  scenarios                                                              
on potential  losses to give  a sense of  their magnitude.   These                                                              
are the decisions that are beyond APFC, she said.                                                                               
CHAIR  CLAMAN announced  that  the committee  would  proceed to  a                                                              
presentation  on power  cost equalization  (PCE)  from the  Alaska                                                              
Energy Authority (AEA).                                                                                                         
2:01:18 PM                                                                                                                    
CURTIS  THAYER,  Executive  Director,   Alaska  Energy  Authority,                                                              
provided   a   PowerPoint   presentation,   titled   "Power   Cost                                                              
Equalization" [hard  copy included in  the committee packet].   He                                                              
began on  slide 2, "Who We  Are," which read as  follows [original                                                              
punctuation provided]:                                                                                                          
     Created in  1976 by the  Alaska Legislature,  the Alaska                                                                   
     Energy Authority  (AEA) is  a public corporation  of the                                                                   
     State of  Alaska governed by  a board of directors  with                                                                   
     the mission  to "reduce the  cost of energy  in Alaska."                                                                   
     AEA is  the state's  energy office  and lead agency  for                                                                   
     statewide energy policy and program development.                                                                           
MR. THAYER advanced  to slide 3, "Power Cost  Equalization," which                                                              
read as follows [original punctuation provided]:                                                                                
     The PCE  Program was established  in 1985 as one  of the                                                                   
     components   of  a   statewide  energy   plan  to   help                                                                   
     "equalize"  the  high  cost   of  electricity  in  rural                                                                   
     communities with the lower costs in more urban areas.                                                                      
MR. THAYER advanced to slide 4, "What is PCE?" which read as                                                                    
follows [original punctuation provided]:                                                                                        
        • PCE helps ~82,000 Alaskans in ~200 rural                                                                              
          communities with their high energy costs.                                                                             
        • The program seeks to reduce the high costs of                                                                         
          electricity paid by rural consumers to a level                                                                        
          comparable to an average of rates paid in                                                                             
          Anchorage, Fairbanks, and Juneau.                                                                                     
        • PCE ensures the financial viability of rural                                                                          
        • Reliable lower-cost energy enhances the quality                                                                       
          of life, the standard of living, and the economic                                                                     
          strength of the communities.                                                                                          
2:03:29 PM                                                                                                                    
MR. THAYER proceeded to slide 5, "PCE Eligible-Communities,"                                                                    
which depicted a map of Alaska showing eligible PCE communities,                                                                
and read as follows [original punctuation provided]:                                                                            
        Residential and community facility customers in                                                                         
       approximately 200 communities are eligible for PCE                                                                       
2:03:57 PM                                                                                                                    
MR. THAYER continued to slide 6, "PCE Program in Fiscal Year                                                                    
2020," which read as follows [original punctuation provided]:                                                                   
     Alaskans benefited from PCE Credits                                                                                        
     Communities were eligible for PCE Credits                                                                                  
     In Fiscal Year 2020, $29.6 million was disbursed                                                                           
2:04:27 PM                                                                                                                    
MR. THAYER advanced to slide 7, "PCE Endowment Fund," which read                                                                
as follows [original punctuation provided]:                                                                                     
        • PCE disbursements are funded from the PCE                                                                             
          Endowment Fund.                                                                                                       
      • Created and capitalized in Fiscal Year 2001, the                                                                        
        • PCE Endowment Fund is managed by the Department                                                                       
          of Revenue.                                                                                                           
        • Alaska Statute 42.45.085 provides that five                                                                           
          percent of the PCE Endowment Fund three-year                                                                          
          average market value may be appropriated to the                                                                       
MR.   THAYER   moved   to  slide   8,   "PCE   Endowment   History                                                              
(Thousands)," which  included a table that tracked  the history of                                                              
PCE from 2016 through  2020.  He noted that the  fund is currently                                                              
close to  $1.1 billion and  has remained fairly  consistent during                                                              
the last five years.                                                                                                            
2:05:59 PM                                                                                                                    
MR.  THAYER stated  that it  is important  to note  that when  one                                                              
looks  at  the PCE  endowment  and  sees  $1.1 billion  [PCE  fund                                                              
balance for 2020],  it is not evident that there  has been a large                                                              
amount of money  invested by the state into  urban infrastructure,                                                              
which  helps to  lower  the rates  for  everyone  on the  Railbelt                                                              
[region  in Alaska].   He  added that  AEA owns  and operates  the                                                              
large  "hydro" project  in Alaska,  which provides  10 percent  of                                                              
the Railbelt  energy needs.   He added that  it was the  result of                                                              
an  investment from  the state  of $300  million.   He noted  this                                                              
investment  saves  the  Fairbanks   consumers  about  $40  million                                                              
annually on  energy costs.   He reiterated  that the  $1.1 billion                                                              
figure  is  misleading   due  to  the  multitude   of  investments                                                              
included in that number, which also include tax credits.                                                                        
2:07:39 PM                                                                                                                    
CHAIR  CLAMAN  asked  Mr.  Thayer  if he  could  speak  about  the                                                              
governor's  proposal to  put these  PCE funds  into the  permanent                                                              
fund and manage it from the permanent fund.                                                                                     
MR.  THAYER  responded   that  this  is  something   a  subsequent                                                              
testifier plans to  address, but that inserting  the PCE endowment                                                              
into  the corpus  of  the permanent  fund  is  something that  the                                                              
Board  of Directors  of AEA has  unanimously  endorsed.  He  noted                                                              
that  when legislators  decided not  to reverse  the sweep  around                                                              
three  years  ago  and  the  PCE  endowment  got  swept  into  the                                                              
Constitutional Budget  Reserve, it caused concern  in rural Alaska                                                              
regarding energy  costs.   By putting the  endowment into  a "safe                                                              
place," he shared  his understanding that those  concerns would be                                                              
CHAIR CLAMAN invited questions from the committee.                                                                              
2:09:54 PM                                                                                                                    
REPRESENTATIVE  DRUMMOND  shared  her  understanding  that  nearly                                                              
82,000  Alaskans  benefit  from PCE  credits  through  residential                                                              
energy  costs.     She  asked  about   the  cost  of   energy  for                                                              
institutions,  such as  schools,  and whether  these  institutions                                                              
benefit from a reduction in energy costs.                                                                                       
MR. THAYER  asked for clarification  on Representative  Drummond's                                                              
CHAIR CLAMAN  restated the  question and  asked whether  community                                                              
groups  or  organizations,  such  as  schools,  benefit  from  PCE                                                              
MR.  THAYER stated  that  strictly residential  customers  benefit                                                              
from the PCE credits.                                                                                                           
REPRESENTATIVE  DRUMMOND  pointed out  that  energy  costs are  so                                                              
high  in schools  that  staff members  are  being laid  off.   She                                                              
asked Mr. Thayer  what it would take to extend  energy benefits to                                                              
organizations,  such as schools,  that must  function in  the same                                                              
high-cost environments  as the  residential energy consumers  that                                                              
benefit from the PCE credits.                                                                                                   
MR.  THAYER replied  that it  would  take a  statutory change  and                                                              
would  possibly  "double if  not  triple"  the  costs of  the  PCE                                                              
program in Alaska.                                                                                                              
2:13:04 PM                                                                                                                    
REPRESENTATIVE EASTMAN  asked whether  there is an  available list                                                              
of  communities  that  are  currently  benefitting  from  the  PCE                                                              
credits,  and  what   percentage  of  people  residing   in  those                                                              
communities are receiving the subsidies.                                                                                        
MR.  THAYER  answered  that  the   list  of  currently  benefiting                                                              
communities  is  public  information, along  with  other  relevant                                                              
statistics  about these  communities,  and he  would  be happy  to                                                              
provide this information to Representative Eastman's office.                                                                    
2:13:58 PM                                                                                                                    
REPRESENTATIVE  SNYDER  explained  that  she  reviewed  AEA's  PCE                                                              
program guide,  updated in  2019, and pointed  out that  it states                                                              
that 7  percent of the 3-year  monthly average market  value could                                                              
be  appropriated.   She asked  Mr.  Thayer whether  this has  been                                                              
updated in statute, as that that number is 5 percent now.                                                                       
MR. THAYER  said the information  that he has also  identifies the                                                              
5 percent standard.                                                                                                             
REPRESENTATIVE  SNYDER  referred   to  slide  8  of  Mr.  Thayer's                                                              
presentation  [titled, "PCE  Endowment  History (Thousands)"]  and                                                              
asked  if  he could  speak  about  2019  and 2020  "transfers  and                                                              
appropriations to other funds."                                                                                                 
MR.  THAYER  replied that  in  FY  19,  under statute,  the  first                                                              
(indisc.)  is May  1,  and then  up to  $30  million in  community                                                              
assistance  is provided.   He added  that if  there is  additional                                                              
revenue generated  from that, it  would be (indisc.), or  it would                                                              
go  into the  powerhouse upgrades.    In this  example, two  years                                                              
later,  $30  million  was  available.   In  2020,  there  was  $14                                                              
million allocated  by the  legislature for non-rural  investments,                                                              
he  explained,  with around  $7  million  to  $8 million  of  that                                                              
investment  going to  the  Department of  Corrections  (DOC).   He                                                              
offered  to provide  a breakdown  of  the FY20  statistics to  the                                                              
2:17:23 PM                                                                                                                    
REPRESENTATIVE  VANCE asked for  a description  of AEA's  past and                                                              
future  plans  for energy  solutions,  specifically  the  original                                                              
purpose of  the endowment, and if  there are any plans  for energy                                                              
solutions beyond subsidies in the future.                                                                                       
MR. THAYER replied  that the endowment was  originally established                                                              
to help lower  the cost of power  in rural Alaska through  the PCE                                                              
program.   The AEA as  an entity intends  to continue to  look for                                                              
ways to  lower the cost  of power in  rural Alaska  with renewable                                                              
energy.   He  noted that  these  rural communities  are often  far                                                              
apart, not  connected by a grid,  and lack the ability  to receive                                                              
energy  via hydro power.   For  these reasons,  the "backbone"  of                                                              
rural Alaska  continues to be  diesel, which requires  powerhouses                                                              
in order  to have the most  efficient diesel program  as possible.                                                              
He reiterated that  the PCE program was established  to help lower                                                              
those costs,  and the  endowment intends to  help rural  Alaska to                                                              
offset the costs of higher energy.                                                                                              
CHAIR  CLAMAN noted  that  the committee  would  now hear  invited                                                              
testimony from Mike Barnhill, Department of Revenue's (DOR).                                                                    
2:20:47 PM                                                                                                                    
MIKE BARNHILL,  Deputy Commissioner, Department of  Revenue, noted                                                              
that for  the purpose of his  testimony, he would be  referring to                                                              
the  committee substitute  (CS)  for  SJR 6(JUD),  which  proposes                                                              
that  the balance  of the  PCE endowment  fund on  June 30,  2023,                                                              
would be  transferred to the principal  of the permanent  fund and                                                              
would be  co-mingled with the  assets of  the permanent fund.   It                                                              
also  proposes   a  constitutional  dedication  of   revenue  from                                                              
(indisc.)  to  the purposes  of  power  cost equalization  in  the                                                              
state.  He directed  attention to language on page  2 [lines 7-11]                                                              
of CSSJR 6(JUD), which read as follows:                                                                                         
     (d)  Each  year, the  legislature  shall  appropriate  a                                                                   
     portion  of the amount  appropriated  under (b) of  this                                                                   
     section   for  power  cost   equalization.  The   amount                                                                   
     appropriated shall  be the amount necessary  to equalize                                                                   
     the  cost of  power  in the  State,  according to  State                                                                   
     law,  but may  not exceed  fifty percent  of the  amount                                                                   
     appropriated under (b) of this section.                                                                                    
MR. BARNHILL  explained that  this is  a mandatory  representation                                                              
of  PCE, the  details  of which  are intended  to  be provided  by                                                              
legislators through statute.                                                                                                    
CHAIR CLAMAN invited questions from the committee.                                                                              
2:23:09 PM                                                                                                                    
REPRESENTATIVE KURKA  shared his understanding that  PCE funds are                                                              
used  for the  purpose  of infrastructure  projects  to lower  the                                                              
cost  of energy.    He  stated that  it  seems  to him  that  this                                                              
proposal  would preclude  [the energy  cost  saving measure]  from                                                              
happening  by "locking  up"  the  fund in  the  constitution.   He                                                              
whether this is correct.                                                                                                        
MR.  BARNHILL explained  that the  details  of the  implementation                                                              
process  would be specified  by  the legislature  in statute.   He                                                              
shared  his  understanding  that (indisc.)  wouldn't  "offend  the                                                              
language" in the constitution as proposed.                                                                                      
REPRESENTAIVE  KURKA noted  Mr.  Barnhill's  earlier comment  that                                                              
the PCE  fund would  be co-mingled  with the  permanent fund.   He                                                              
asked what  the long-term consequences  of that might be  in terms                                                              
of  contributions   to  future   dividends,  and  what   would  be                                                              
preventing the endowment  from pulling from the  (indisc.) fund at                                                              
MR.  BARNHILL offered  clarification  that  if the  PCE  endowment                                                              
fund  balance  were  to  be  deposited  and  co-mingled  with  the                                                              
permanent fund  balance, there would  no longer be a  separate way                                                              
to  track  the balance  of  each  fund;  it  would simply  be  the                                                              
permanent  fund.   In exchange,  an important  change is  proposed                                                              
for  the constitution,  and  that  is  (indisc.) dedication.    He                                                              
noted  that  currently,   the  only  revenue  dedicated   that  is                                                              
proposed  in the  constitution  is 25  percent  (indisc.) that  is                                                              
dedicated to  the principal of the  permanent fund.   He explained                                                              
that this  would be  a new  dedication for  which the  legislature                                                              
would  specify the  details, and  the revenue  would be  dedicated                                                              
from  the   permanent  fund   for  the   purpose  of   power  cost                                                              
equalization.   He reiterated that  the two accounts  would become                                                              
one and would no longer be separately trackable.                                                                                
REPRESENTATIVE  KURKA stated  that  it seemed  to  him that  would                                                              
make   the  power   cost  equalization   (PCE)  appropriation   an                                                              
unstructured  draw.   He argued  that [the  legislature] does  not                                                              
know  what the  dollar amount  would  be if  (indisc.) could  grow                                                              
MR.  BARNHILL  said  the revenue  dedication  happens  within  the                                                              
context of  the percent of market  value (POMV) distribution.   In                                                              
other  words, he  continued, it  is a  portion of  that, so  it is                                                              
entirely  within  the structured  draw  that is  established,  and                                                              
CSSJR  6(JUD)  says that  5  percent  (indisc.) of  the  permanent                                                              
2:27:54 PM                                                                                                                    
REPRESENTATIVE  KURKA  pointed out  that  when  one looks  at  the                                                              
constitution,  the rights,  benefits, and  privileges are  for all                                                              
Alaskans.    He  recognized  the   original  purpose  of  the  PCE                                                              
endowment in  the fund  is to bring  a balance towards  government                                                              
investment for  infrastructure for  rural communities.   He opined                                                              
that  this  would be  a  dramatic  change  in  the nature  of  the                                                              
constitution  because  [the  legislature  would be]  enshrining  a                                                              
subsidy  program that  is  selective for  certain  regions of  the                                                              
state, for  select Alaskans, not  for all Alaskans.   He expressed                                                              
concern  about  going down  the  road  of segregating  people  and                                                              
treating  them differently  and having that  major departure  from                                                              
current (indisc.)                                                                                                               
MR.  BARNHILL replied  that the  governor has  suggested that  the                                                              
legislature consider  the policy, and if the  legislature supports                                                              
it by a super-majority,  it would be placed before  the people for                                                              
consideration  in  amending  the  constitution.    Ultimately,  he                                                              
said, the  constitution reflects  the will of  the people  and, if                                                              
the people  decided to achieve  equality or equalization  in power                                                              
costs throughout  the state, that  is a fair  topic to take  up in                                                              
the constitution.                                                                                                               
2:30:27 PM                                                                                                                    
REPRESENTATIVE  EASTMAN said  currently, the  PCE is addressed  in                                                              
statute (indisc.) reference  to in the constitution.   He asked if                                                              
CSSJR  6(JUD)  were  to  pass,  which  would  add  this  dedicated                                                              
appropriation   to  the   constitution,  would   that  create   an                                                              
entitlement to the constitution.                                                                                                
MR. BARNHILL  expressed  that his  preference is  to use the  word                                                              
dedication, because  that is  what it creates.   He said  he would                                                              
leave  it  to  others  to  decide  if  it  also  falls  under  the                                                              
characterization  of   an  entitlement.    But,  he   said,  as  a                                                              
constitutional  dedication of revenues  to a  purpose, it  has the                                                              
force of  constitutional law, which  presumably could  be enforced                                                              
by  the courts.   He  noted  that the  language  as drafted,  said                                                              
"shall  appropriate,"   so  it  cannot  be  circumvented   by  the                                                              
REPRESENTATIVE  EASTMAN sought  to clarify  whether the  intention                                                              
of  the  governor,   through  CSSJR  6(JUD),  was   to  create  an                                                              
expectation of  a subsidy.   He asked if  the legislature  were to                                                              
maintain or  update the statutes,  what is  to stop a  person from                                                              
coming  in  and saying  that  the  expectation  is bigger  in  the                                                              
future  than [what  is] currently  under statute.   He  maintained                                                              
that [the  current] language  in CSSJR 6(JUD)  is very broad.   He                                                              
stated  his  understanding  that  the  language  in  CSSJR  6(JUD)                                                              
indicates  that  the law  is  going to  explain  how  the cost  of                                                              
energy  is balanced  throughout the  state.   He noted that  there                                                              
are  only 191  communities  that are  currently  in that  program;                                                              
nonetheless, he said  he could see someone going  to court because                                                              
his/her costs are  higher than the community next  door, so he/she                                                              
might want to be part of the program.                                                                                           
MR.  BARNHILL  said  Representative  Eastman  is  proceeding  into                                                              
legal areas that  the Department of Law (DOL) could  speak to.  He                                                              
offered his belief  that in this particular case,  the court would                                                              
draw  from  the  fact  that  PCE has  been  in  statute  for  some                                                              
decades.    He  said  the  court   would  probably  interpret  the                                                              
constitutional  provision  from   the  statutory  history  to  the                                                              
extent that  it appears the  people sought to constitutionalize  a                                                              
particular program.                                                                                                             
REPRESENTATIVE  EASTMAN surmised  that the  governor's intent  was                                                              
to  add what  [is  currently in  statute]  into the  constitution;                                                              
therefore,  he stated  his belief  that  the language  in [SJR  6]                                                              
would not  be so broad.   He suggested  discussing that  with DOL.                                                              
He  questioned  what  would happen  to  the  community  assistance                                                              
program,   asking  if   that  would   go  away   under  this   new                                                              
constitutional plan.                                                                                                            
MR. BARNHILL  clarified that the  community assistance  program is                                                              
separate from  the constitutional  resolution.  He  explained that                                                              
currently,  it  is funded  by  PCE.   He  added that  funding  the                                                              
program  in  the   future  would  remain  a  prerogative   of  the                                                              
legislature's  appropriation power.   It  is the  administration's                                                              
expectation, he  answered, that  the community assistance  program                                                              
would continue in its current form and continue to be funded.                                                                   
2:35:46 PM                                                                                                                    
REPRESENTATIVE  SNYDER asked  if the  legislature were  to do  the                                                              
POMV  draw  with  a  50/50 split  between  the  dividend  and  the                                                              
government,  which  would  require  satisfying  the  PCE  payment,                                                              
would that result  in a lower amount of money  being available for                                                              
government  services if  [the  PCE fund  and  the permanent  fund]                                                              
were combined as opposed to separate.                                                                                           
MR. BARNHILL replied  that the amount that would  (indisc.) be for                                                              
PCE  would essentially  be what  the  legislature decided  through                                                              
statute and  appropriations.  He  explained that  the constitution                                                              
requires  amounts sufficient  to equalize  power.   He added  that                                                              
the  legislature decides  what  that  amount is,  so  it could  be                                                              
greater or less  than the amount today.  He reiterated  that it is                                                              
committed to  legislative discretion,  and the balance  of funding                                                              
available  to provide  funding  for  PCE is  the  same before  and                                                              
after.    In  other  words,  he stated,  there  is  money  in  the                                                              
Permanent fund  that distributes POMV  that would be added  to the                                                              
balance of the  PCE fund, which is  $1 billion.  He said  it is up                                                              
to  the legislature  to  decide whether  to  do it  formulaically,                                                              
like  it does  now.   He  concluded that  it  would be  up to  the                                                              
legislature to implement that through statute.                                                                                  
REPRESENTATIVE SNYDER  pointed out that now, [the  legislature] is                                                              
in a situation where  it is drawing from the same  funds and doing                                                              
a 50/50  split; further,  it is  funding both  government  and PCE                                                              
from that  split.  She added,  "Had the calculations been  done to                                                              
compare   if  there  is   any  difference,   however  small,   the                                                              
distribution would be, if PCE maintained its own fund.                                                                          
MR. BARNHILL said  if he understood her correctly,  in order to do                                                              
that,  [the legislature]  would  have  to maintain  some  internal                                                              
separate  balance for  the PCE  fund  once it's  shifted into  the                                                              
Permanent fund,  because right now,  the PCE endowment fund  has a                                                              
POMV  structure  similar  to  what   is  being  proposed  for  the                                                              
permanent  fund  in the  constitution.    He explained  that  [the                                                              
formula]  is 5 percent  of a  three-year market  value average  of                                                              
the  fund.  In order  to  maintain  that  formula, he  said,  [the                                                              
legislature]  would have  to maintain  some  internal balance  for                                                              
the  PCE fund  once  it was  deposited  into  the permanent  fund.                                                              
Alternatively, he  offered, [the  legislature] could come  up with                                                              
a  formulaic approach  that  would  divide the  POMV  distribution                                                              
every  year, which  is intended  to  equate to  what is  currently                                                              
[being calculated  by] the statutory  formula.  He  suggested that                                                              
there are mathematical  ways of achieving a similar  number before                                                              
and after the deposit.                                                                                                          
2:40:04 PM                                                                                                                    
CHAIR  CLAMAN recalled  earlier  testimony from  Ms. Rodell  about                                                              
APFC  managing  the  Alaska  Mental Health  Trust  funds  and  how                                                              
essentially,  they are mixed,  but they are  also segregated.   He                                                              
said APFC  knows how much is  allocated towards the  Alaska Mental                                                              
Health Trust.   He  then asked  if (the  governor) is  proposing a                                                              
similar  proposal  for  the  PCE.    He  suggested  using  similar                                                              
structure in  which [APFC]  manages the money  in the same  way as                                                              
the   Alaska  Mental   Health   Trust  with   certain   percentage                                                              
allocation  of the  total value  of the Permanent  fund, which  is                                                              
managed by  the PCE.   He added  that big  dollars are  managed by                                                              
the fund  but still  kept separate  from both  the Permanent  fund                                                              
monies and the Alaska Mental Health Trust monies.                                                                               
MR. BARNHILL  said  he has not  speculated why  the proposal  does                                                              
not do  that.  He  stated that perhaps,  [there are]  reasons that                                                              
[the legislature]  could spend more or less than  (indisc.) today.                                                              
He relayed  that by  not continuing the  statutory formula  in its                                                              
current  form, it  provides greater  legislative flexibility  with                                                              
respect to appropriation  for PCE.  He noted  that the flexibility                                                              
is governed by  the "shall" language in this  measure, which could                                                              
result  in a  greater or  smaller  amount of  money available  for                                                              
PCE, as long as it complied with the "shall" amount necessary.                                                                  
CHAIR  CLAMAN  considered  a scenario  in  which  the  legislature                                                              
wanted  to treat  the  PCE  fund like  other  funds,  such as  the                                                              
Alaska  Mental Health  Trust funds,  and let  [APFC] manage  those                                                              
funds,  but also  keep  them on  their  own in  the  same way  the                                                              
Alaska  Mental  Health   Trust  funds  are  on  their   own.    He                                                              
questioned whether  [the legislature] would need  a constitutional                                                              
change to do that by statute today.                                                                                             
MR.  BARNHILL confirmed  that  the legislature  could  do that  by                                                              
statute today.   He remarked that  the benefit of  [APFC's] method                                                              
is  that it's  not maintaining  separate  massive allocations  for                                                              
the three accounts.                                                                                                             
CHAIR  CLAMAN   interjected,  concluding  that   essentially,  the                                                              
legislature would be creating a fourth account.                                                                                 
MR. BARNHILL continued  by noting that as more  accounts are added                                                              
to  the permanent  fund,  a potential  issue  would arise  wherein                                                              
[the accounts] may  need different asset allocations  because they                                                              
have   different  risk   preferences   and  different   investment                                                              
horizons.  He posited  that if  the  decision were  that the  risk                                                              
preferences,  risk  tolerances,  and investment  horizons  amongst                                                              
the Permanent  fund, the Alaska  Mental Health Trust, and  the PCE                                                              
fund are  the same, [the legislature]  could co-mingle it  as they                                                              
did today.                                                                                                                      
2:44:28 PM                                                                                                                    
RICK  HALFORD,  former  Senate   President  in  the  Alaska  State                                                              
Legislature,  informed   the  committee  of  his   background  and                                                              
provided a  history of the  permanent fund  and the dividend.   He                                                              
stated  that he  came to  Alaska  in the  mid-1960s and  graduated                                                              
from   the   Alaska   Methodist    University   (AMU)   in   1968.                                                              
Subsequently,  he went  into  the National  Guard  and became  the                                                              
owner/operator in  an air-taxi business,  as well as a  guide.  He                                                              
shared  that he was  originally  elected to the  [Alaska House  of                                                              
Representatives] in  1978 and was  the House Majority  Leader when                                                              
the final dividend  passed in 1981.  He was elected  to the Alaska                                                              
State  Senate in 1982,  where he  was the  Senate Minority  Leader                                                              
for one term, the  Senate Majority Leader for four  or five terms,                                                              
Senate president, and a Finance Co-Chair.                                                                                       
MR. HALFORD opined  that some people who advocate  for the history                                                              
of  the   permanent  fund   think  [the   legislators  who   first                                                              
implemented   the   fund]   are    smarter   than   [the   current                                                              
legislators]; however,  he claimed that  that it is  the opposite.                                                              
He pointed out  that [the current legislature] has  forty years of                                                              
information and  history and the  ability to carry the  Library of                                                              
Congress  in [their  pockets] and  on their phones.   He  declared                                                              
that he  is very grateful  that [past  legislatures] were  able to                                                              
pass on some of the largess that was enjoyed.                                                                                   
MR. HALFORD said  [the permanent fund] is a very  important asset.                                                              
He  recalled that  Alaska  had a  fairly  aggressive state  income                                                              
tax.   He said  [the state]  was behind  on a  lot of things,  but                                                              
Alaska  was getting  the income  tax  and about  one-third of  the                                                              
value  of the oil.   Today,  he declared,  [Alaska]  is in a  very                                                              
different situation.                                                                                                            
2:47:05 PM                                                                                                                    
MR. HALFORD  mentioned that former  Governor Jay Hammond  is given                                                              
a lot of credit  for the permanent fund, adding  that he certainly                                                              
deserves  it "in  the  political push."    Nonetheless, he  noted,                                                              
Elmer Rasmuson was  a huge factor in how it was  organized and how                                                              
it worked.  He  said Mr. Rasmuson went around the  state trying to                                                              
get  people  to  decide  what  it was  for  and  there  was  never                                                              
agreement.    It is  written  in  the permanent  fund  papers,  he                                                              
cited,  that the only  agreement  was to have  a savings  account.                                                              
He  stated that  people have  added a  lot of  intent that  really                                                              
wasn't there.                                                                                                                   
MR. HALFORD said  that initially, people who opposed  the creation                                                              
of the permanent  fund were very  quick to come and say  that they                                                              
meant it was  a loan fund, or they  meant it was a  subsidy to the                                                              
government, or a  dividend fund, [amongst other  suggestions].  He                                                              
reiterated that  there was no  agreement on what  it was for.   He                                                              
then deferred to Chair Claman for questions.                                                                                    
2:48:42 PM                                                                                                                    
CHAIR  CLAMAN  inquired  about   about  the  history  of  dividend                                                              
formula.    He  asked  Mr.  Halford  to  divulge  more  about  the                                                              
original dividend  formula and what changes the  legislature made,                                                              
both  while  the   Zobel  lawsuit  was  pending   and  before  the                                                              
decision, as well as what happened after that decision.                                                                         
MR.  HALFORD said  the original  formula gave  [Alaskans] a  share                                                              
for  every year  since statehood  using  a differential  residency                                                              
formula that  was struck down  in the Supreme  Court.   He offered                                                              
his  belief that  in 1981,  the legislature  passed what  Governor                                                              
Hammond  considered   "the  backup   formula,"  which   was  equal                                                              
dividends for everyone.                                                                                                         
MR. HALFORD said  there were parts [of the  dividend negotiations]                                                              
that were contentious,  such as the inclusion of  minors, welfare,                                                              
hold  harmless,  and  inflation   proofing.    He  explained  that                                                              
looking  back,  the  repeal  of  the  state  income  tax  probably                                                              
represented  a  dividend of  $100,000  per  year  to the  top  one                                                              
thousand taxpayers in  the state of Alaska.  He  recalled that the                                                              
first  dividend was  $1,000, which  was  intended to  make up  for                                                              
three  years that [the  legislature]  was in  court.  After  that,                                                              
the  dividend went  down to  $300 -  $400.   Today, that  dividend                                                              
would  be somewhere  over $3,000,  he suggested,  if factored  for                                                              
inflation.   He explained that it  wasn't easy to  make decisions,                                                              
with regard  to minors and  the hold harmless.   He added  that it                                                              
had to be  looked at in the  context of everything else  going on.                                                              
He noted  that [the state] was  spending huge amounts on  of money                                                              
on  housing  subsidies  that,  in  some cases,  were  as  much  as                                                              
$15,000 to  $20,000 a year  to people that  could afford  to build                                                              
very expensive houses.                                                                                                          
2:51:41 PM                                                                                                                    
CHAIR CLAMAN  stated his understanding  that after the  passage of                                                              
the  first permanent  fund  constitutional  amendment, there  were                                                              
some  efforts  to  pass other  constitutional  amendments  in  the                                                              
early  1980s to  provide more  structure in  the constitution  for                                                              
the  permanent  fund.   He  asked  Mr.  Halford to  discuss  those                                                              
MR. HALFORD  said in the late 1980s,  there was a serious  bump in                                                              
the price of  oil and the state's  income.  Jay Hammond  was still                                                              
alive, he  noted, and the Senate  put together a package  that was                                                              
sent  to the  house.   He explained  that the  package included  a                                                              
constitutional  spending   limit  update,  the  creation   of  the                                                              
Constitutional  Budget   Reserve  [CBR],  and  a   permanent  fund                                                              
allocation  amendment, which  the  Senate called  "40/30/30."   He                                                              
indicated that  the plan specified  that 40 percent of  the income                                                              
went to dividends,  which matched what the actual  amount going to                                                              
dividends was  at that time.   He noted  that because  the balance                                                              
was going up rapidly, it was based on a five-year average.                                                                      
MR. HALFORD  said the package  passed the  Senate and went  to the                                                              
House, but  the House passed the  CBR with a floor  amendment that                                                              
increased  the required  two-thirds  majority  to a  three-fourths                                                              
majority  and  did not  pass  either  the  spending limit  or  the                                                              
constitutional amendment  with regard to the permanent  fund.  So,                                                              
he  said,  it  has  been a  continuous  debate.    At  that  time,                                                              
Governor Bill Sheffield  had been elected after  Governor Hammond.                                                              
He recalled that  the first place Governor Sheffield  wanted to go                                                              
for  shortages was  the permanent  fund  system; however,  because                                                              
that was  so unpopular, he  didn't do it.   Mr. Halford  then said                                                              
that  Governor Steve  Cowper  offered  an education  endowment  to                                                              
sideline some  of the permanent  fund's income.   He said  that if                                                              
that had  happened, the permanent  fund would be worth  about half                                                              
of what it  is worth today.   Governor Hickel, he  continued, said                                                              
that he  would go to  the ballot before  he did anything,  as well                                                              
as Governor Tony Knowles.                                                                                                       
2:55:00 PM                                                                                                                    
CHAIR CLAMAN inquired about the "40/30/30" plan.                                                                                
MR.  HALFORD  replied  that the  legislature  had  maintained  the                                                              
realized  income  formula.    He   said  it  was  30  percent  for                                                              
inflation  proofing,  30 percent  for  government  appropriations,                                                              
and 40 percent for dividends.                                                                                                   
2:55:40 PM                                                                                                                    
CHAIR  CLAMAN inquired  as  to the  role of  the  dividend in  the                                                              
structure of Alaska's government today.                                                                                         
MR. HALFORD replied  it is a huge benefit.  He  stated that Alaska                                                              
has become very  fortunate with all the oil value,  adding that if                                                              
Alaska is an  owner-state, the shares of that  ownership should be                                                              
equal.   One of  the things  that is  not pointed  out enough,  he                                                              
argued, is that  there is not significant tax money  in any of the                                                              
permanent fund  system; it  is ownership money.   If Alaska  is an                                                              
owner-state   and  owner-individuals,   he  continued,   then  the                                                              
ownership  should be  just as important  to somebody  who  holds a                                                              
sign standing by  Northern Lights Boulevard as somebody  else.  He                                                              
stated that  it is  not tax money,  and it never  has been  in any                                                              
significant  amount;  furthermore,  it  is  not  taking  from  one                                                              
person  to give  to  another  person.   He  explained  that it  is                                                              
sharing  the common  property  resources of  an  owner-state.   He                                                              
opined  that when  dealing  with  non-renewable resources,  it  is                                                              
important  to make  a  serious effort  to look  out  for not  just                                                              
oneself, but [future generations].                                                                                              
2:57:16 PM                                                                                                                    
CHAIR CLAMAN  questioned how to  balance protecting  the Principal                                                              
of the fund with paying a dividend.                                                                                             
MR.  HALFORD  opined  that eventually,  the  statutory  POMV  will                                                              
become  unconstitutional when  the  reserve is  gone, because  one                                                              
cannot reduce  the value  of the  Principal.  He  said that  is at                                                              
stake in this equation.   He offered his belief  that the solution                                                              
must be  a constitutional solution,  which would bring  the people                                                              
into a final decision.                                                                                                          
MR.  HALFORD said  the  permanent fund  must  be permanent,  which                                                              
means  whatever  percentage  or  mechanism  the  legislature  uses                                                              
should  never reduce  the real  value of  the fund.   Further,  he                                                              
stated his  belief that it  must be connected  to the people.   He                                                              
recalled  that when  an elementary  student used  to announce  the                                                              
[annual] amount  of the  PFD on television,  people did  not argue                                                              
if  it went  down because  they  recognized it  was following  the                                                              
market.  He  said they felt included  in the process.   He went on                                                              
to state  that power,  position, age, and  longevity all  help the                                                              
rich get richer  and the poor get  poorer.  He declared  that [the                                                              
legislature] tried  to circumvent that as much as  they could with                                                              
the  PFD,  the hold  harmless,  and  minors'  provision -  and  it                                                              
worked.   He said according  to data,  the difference  between the                                                              
rich and the poor  in Alaska did not grow as  astronomically as it                                                              
did in the rest of the country.                                                                                                 
CHAIR CLAMAN invited questions from the committee.                                                                              
3:00:29 PM                                                                                                                    
REPRESENTATIVE   SNYDER   pointed  out   that   Mr.  Halford   had                                                              
acknowledged  the utility  and importance  of  constitutionalizing                                                              
the permanent  fund and putting it  before the people as  a way to                                                              
finalize  this ongoing  conversation.   She  asked  if that  would                                                              
include  specifying  within  the  constitution  how  it  would  be                                                              
divided between the dividend and government services.                                                                           
MR.  HALFORD noted  that the  governor proposed  the 50/50  [plan]                                                              
and the  5 percent  [POMV draw  limit].   He said  the 50/50  plan                                                              
sounds  good  but expressed  concern  about  the  5 percent.    He                                                              
suggested  wording the  50/50 plan  as  follows: "No  more may  be                                                              
appropriated for  government than  is appropriated to  individuals                                                              
through  an  equal  dividend."    He  said  that  would  give  the                                                              
legislature a  defense against an  entitlement argument.   He went                                                              
on to state  that Alaska is "spoiled."   He said there  has been a                                                              
complete  generation  [that didn't  have  to pay  for  government]                                                              
because  the  cost  was  going somewhere  else.    Now,  he  said,                                                              
[Alaskans] must  recognize that they  should have to pay  for part                                                              
of it;  furthermore, they should  make certain they are  getting a                                                              
fair share  of resources.   He said  Alaska will  have to  look to                                                              
its savings.   He then argued  that everyone has their  own budget                                                              
priorities   and  will  defend   the  dividend   until  they   are                                                              
personally going  to see a cut.   He noted that those  in high tax                                                              
brackets  believe  that the  dividend  is  their tax  money  going                                                              
somewhere else.   Alaska must face all these issues,  he said, but                                                              
it  never will  until the  PFD and  the  fund itself  are off  the                                                              
table.   He  offered his  belief  that people  could go  backwards                                                              
over  time  with  court  participation   and  destroy  the  entire                                                              
3:04:40 PM                                                                                                                    
CHAIR  CLAMAN said  he didn't  know  about the  40/30/30 plan  and                                                              
asked if  there is  merit to including  inflation proofing  in the                                                              
MR.  HALFORD offered  his  belief  that [the  legislature]  should                                                              
include inflation  proofing, particularly  with a realized  income                                                              
formula.   He  suggested that  [the legislature]  could include  a                                                              
provision that  said, "Every  'X' year,  the inflation  rate shall                                                              
be adjusted  to whatever the real  inflation rate is."   He stated                                                              
that the  term "permanent,"  which went  before the voters,  means                                                              
just what  it says.   He argued  that it is  a lie to  tell people                                                              
they have a permanent fund if inflation "eats" it.                                                                              
CHAIR CLAMAN  thanked Mr. Halford  for taking the time  to testify                                                              
before the committee.                                                                                                           
3:06:39 PM                                                                                                                    
CHAIR CLAMAN announced that CSHJR 7(STA) was held over.