Legislature(2019 - 2020)GRUENBERG 120
04/25/2019 03:00 PM House STATE AFFAIRS
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Audio | Topic |
---|---|
Start | |
HB139 | |
HB132 | |
HJR18 | |
HJR6 | |
Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
*+ | HB 139 | TELECONFERENCED | |
*+ | HB 132 | TELECONFERENCED | |
*+ | HJR 6 | TELECONFERENCED | |
*+ | HJR 18 | TELECONFERENCED | |
+ | TELECONFERENCED |
HJR 18-CONST AM: PERMANENT FUND; POMV; EARNINGS 4:03:12 PM CO-CHAIR FIELDS announced that the next order of business would be HOUSE JOINT RESOLUTION NO. 18, Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund and to appropriations from the Alaska permanent fund. 4:03:22 PM CO-CHAIR KREISS-TOMKINS, as prime sponsor HJR 18, paraphrased the sponsor statement, which read as follows [original punctuation provided]: House Joint Resolution 18 (HJR 18) constitutionally protects the real value of the Alaska Permanent Fund permanently, for future generations by "hardening" the POMV structure of SB 26, as passed by the legislature in 2018. HJR 18 constitutionally limits appropriations from the Permanent Fund to 5% of the average of its market value for the first five of the preceding six fiscal years. Because POMV-based management of the Permanent Fund renders the function of the earnings reserve account obsolete, HJR 18 also merges the earnings reserve account with the principal; effectively all the Permanent Fund becomes the principal. Most important, HJR 18 addresses the urgent and bipartisan goal of protecting the real value of the Permanent Fund for future generations. In addition, HJR 18 provides the Alaska Permanent Fund Corporation certainty in managing assets, allowing APFC to earn a best possible return on its investments, for the benefit of Alaskans. CO-CHAIR FIELDS asked the reason for Representative Kreiss- Tomkins concern regarding the legislature drawing down the state's savings account. CO-CHAIR KREISS-TOMKINS explained that since he was elected, the legislature has spent $14 billion out of savings, because doing so was easier than cutting the operating budget and/or passing taxes. He maintained that one or the other of those two actions should have been taken, but neither occurred because it was easier to spend down savings. He stated that he has been frustrated by that scenario and believes that putting in place hard protections is an important and prudent measure. He offered that the permanent fund is one of the largest sovereign wealth funds in the world and certainly the largest in the U.S. He mentioned that the permanent fund is a huge intergenerational asset and expressed his desire that it be there permanently. CO-CHAIR FIELDS mentioned that his staff has prepared long-term projections for the permanent fund under different scenarios and offered them to the committee members to review. 4:06:50 PM REPRESENTATIVE SHAW referred to Representative Kreiss-Tomkins's testimony that $14 billion has been spent from the savings accounts - the Statutory Budget Reserve (SBR) and the Constitutional Budget Reserve Fund (CBRF). He mentioned that Representative Kreiss-Tomkins was involved in the legislative process that resulted in the spending and asked, "We now have to be prudent because there is a potential that we could go broke in that savings account?" CO-CHAIR KREISS-TOMKINS explained that the $14 billion is an approximate number; the spending began in 2013; the SBR has about $1.7 billion remaining; and therefore, the legislature has effectively spent the savings down. He concluded that it was that situation which prompted the passage of Senate Bill 26 [during the Thirtieth Alaska State Legislature, 2017-2018, signed into law 6/27/18]. REPRESENTATIVE VANCE concurred with the need to protect the corpus of the permanent fund and the importance of it remaining in perpetuity. She asked whether there is a need for inflation- proofing in the proposed legislation. CO-CHAIR KREISS-TOMKINS responded that inflation-proofing is effectively accounted for in the percent of market value (POMV) structure provided the draw is sufficiently conservative. He said that the 5 percent draw proposed in HJR 18 and also incorporated in Senate Bill 26 beginning in fiscal year 2021 (FY 21), effectively accounts for inflation in looking at the average market value of the permanent fund in the first five of the preceding six fiscal years. With a greater percentage draw, the real value of the fund would be eroded over time by inflation. REPRESENTATIVE VANCE asked whether the inflation-proofing is in statute. CO-CHAIR KREISS-TOMKINS explained that under the POMV approach the permanent fund is basically a classical endowment: there is a big pot of money, and the draw down each year is a certain percentage of the pot. Currently, Alaska has two pots of money: one pot is static; the other constantly grows; and money is transferred from the growing pot to the static pot. He stated that it is important to account for inflation by shifting money from the earnings reserve account (ERA) to the corpus on an annual basis to ensure that the corpus will not lose value over time. Under his proposed legislation, the structure is simplified to have one large corpus - all principle - and the draw already accounts for inflation; in other words, inflation- proofing is built in. CO-CHAIR FIELDS added that with an 8 percent or more annual return and a 5 percent draw, the remaining 3 percent is more than enough to prevent against inflation. 4:11:23 PM REPRESENTATIVE VANCE asked, "While this protects the corpus in the constitution, where is the dividend?" CO-CHAIR KREISS-TOMKINS responded that there have been discussions among legislators about whether the [amount of the] permanent fund dividend (PFD) should be addressed in the constitution. He added that he personally believes that it should be and has sponsored a constitutional amendment to do so. He noted the lack of legislative support for that idea. He stated that as a baseline, all legislators, regardless of their views on the PFD, agree on the importance of protecting the fund itself. Under HJR 18 and the POMV approach to managing the permanent fund, the amount of the PFD becomes a decision of the legislature, as it is currently. He mentioned that the 5 percent draw from the fund would be more than enough to pay a PFD that follows the statutory formula, if the legislators supported it. Currently, the political is to distribute a lesser amount. REPRESENTATIVE VANCE referred to page 1, line 15-16, of HJR 18, which read in part: "Each fiscal year, the legislature may appropriate from the permanent fund to the general fund an amount that is not more than five percent...." She asked whether this could be interpreted as "may appropriate the POMV." She added that historically the words "may appropriate" have been "fighting words." She asked the reasoning behind choosing this wording for the constitutional amendment. CO-CHAIR KREISS-TOMKINS restated the question, Why does the amendment use "may" instead of "shall"? He stated that if oil exceeds $140 barrel and a large amount of traditional petroleum revenue is flowing into the state treasury, the legislature may choose to draw down only 4.25 percent of the market value, because it doesn't need the full 5 percent; the remaining money could be left to grow in the fund for future generations. He suggested that there may be scenarios in which the legislature decides that spending the full 5 percent is unnecessary. 4:15:14 PM REPRESENTATIVE LEDOUX asked whether under HJR 18, taking a 5 percent draw rather than a 5.25 percent draw, would subject the state to greater reductions in services or a lower PFD check than currently experienced. CO-CHAIR KREISS-TOMKINS agreed that there would be less money available with a POMV draw of 5 percent compared with a POMV draw of 5.25 percent; however, there are many other variables at play. REPRESENTATIVE VANCE asked Representative Kreiss-Tomkins to explain how the ERA is currently used. CO-CHAIR KREISS-TOMKINS said that currently the ERA consists of realized and unrealized earnings from the permanent fund; this is the account use by the legislature to pay dividends and some public services. He added that the permanent fund is generally understood to consist of the corpus and the ERA combined. REPRESENTATIVE VANCE asked for confirmation that the two accounts are clearly different regarding accessing the funds. She asked for clarification of the motivation behind combining the accounts. CO-CHAIR KREISS-TOMKINS agreed that there is a very important and profound difference between the funds: the corpus is protected in the constitution and cannot be accessed for appropriation, whereas the ERA - which is close to $19 billion - is available for appropriation by a simple majority vote of the legislature. He noted that the two-account structure of the permanent fund is highly unusual relative to other sovereign wealth funds. [HJR 18 was held over.]