Legislature(2003 - 2004)
05/06/2004 08:05 AM Senate FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE JOINT RESOLUTION NO. 26(FIN)
Proposing amendments to the Constitution of the State of
Alaska relating to and limiting appropriations from the Alaska
permanent fund based on an averaged percent of the fund market
value.
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this Percent of Market Value (POMV)
legislation would propose an amendment to the Alaska "Constitution
that would limit appropriations from the Permanent Fund to five
percent of the average of the market value of the Fund." He stated
that CS HJR 26 (FIN), Version 23-LS1006\Z, is accompanied by a
Division of Elections' fiscal note.
BOB BARTHOLOMEW, Chief Operating Officer, Alaska Permanent Fund
Corporation, Department of Revenue, noted that this resolution is
the result of approximately six years of effort on the part of the
Permanent Fund Board of Trustees to provide a simpler method "to
determine how much is available for appropriation from the
Permanent Fund."
SFC 04 # 109, Side B 08:52 AM
Mr. Bartholomew informed the Committee that The Alaska Permanent
Fund Board of Trustees supports the Version "Z" committee
substitute.
AT EASE 8:53 AM / 8:54 AM
The bill was HELD in Committee.
[Note: HJR 26 was re-addressed later in the meeting.}
CS FOR HOUSE JOINT RESOLUTION NO. 26(FIN)
Proposing amendments to the Constitution of the State of
Alaska relating to and limiting appropriations from the Alaska
permanent fund based on an averaged percent of the fund market
value.
[Note: This bill was heard earlier in the meeting.]
Co-Chair Wilken noted that this bill, which is referred to as the
Percent of Market Value (POMV) bill, is again before the Committee.
He stated that the bill proposes to place an amendment to the
Constitution on a Statewide ballot that would, were it approved,
limit the appropriation from the Permanent Fund to five percent of
the average of the market value of the Fund. He reminded that CS
HJR 26(FIN), Version 23-LS1006\Z is before the Committee.
BOB BARTHOLOMEW, Chief Operating Officer, Alaska Permanent Fund
Corporation, Department of Revenue, shared that the Permanent
Fund's Board of Trustees worked for approximately six years to
develop this proposal in order to prepare the Fund for the future,
both from an investment management perspective as well as "from the
perspective of how to make a stable and predictable amount of money
available to the Legislature if they desire to appropriate it." He
stated that this House of Representatives' legislation is
representative of the language proposed by the Board of Trustees.
He stated that the bill would establish "a spending limit of five
percent of the value of the Permanent Fund on an annual basis." He
exampled that were this methodology in effect for the next fiscal
year approximately $1.3 billion would be available for
appropriation from the Fund.
Mr. Bartholomew shared that were the current calculation
methodology in affect, and were the Legislature to require
additional resources, in excess of $4 billion could be available
for appropriation.
Mr. Bartholomew stated that this legislation would assure that "the
Permanent Fund is invested in long-term assets" with a goal of
trying to provide a stable and predictable payout. He pointed out
that one of the Board's concerns was to assure, were fiscal
concerns to be experienced in the future, that one of the State's
largest assets could be as productive as possible to assist in that
effort. He stated that inflation proofing has been conducted for 22
years. He stated that this would be inherent to the system, were
the spending limit in place. He stated that the goals of limiting
spending; protecting the fund against inflation; and granting the
Legislature and the public have a predictable payout in the future,
would be achieved by this legislation.
Senator Bunde stated for the record, that passing this legislation,
"while it might be a pre-cursor to some future activity that would
use some of the earnings for supporting State services, just
passing this does nothing to determine how the funds are spent."
Mr. Bartholomew confirmed Senator Bunde's comment to be correct. He
stated that, "there's two major public policy issues regarding the
Permanent Fund that … are being discussed in the Legislature this
year." The first, he noted, is the legislation regarding the
Constitutional amendment regarding the Board of Trust's POMV
proposal. This proposal, he opined, would serve to identify the
method through which to determine what is available and to protect
the Fund for the future. He clarified that the POMV proposal would
not change how the funds would be used, but would rather specify
the amount that could be used. He advised that a separate bill, HB
298, would address how the Permanent Fund's money would be spent.
He stressed that these are two separate issues.
Senator Bunde responded that the POMV proposal, were it approved,
would allow future Legislators to either designate all the earnings
calculated by the five-percent methodology, "as dividends or to
take all the earnings and put them into funding State services or
some combination thereof."
Mr. Bartholomew agreed that, "this Constitutional amendment would
limit the annual amount available, subject to the Legislature."
Senator Hoffman asked regarding the intent of a Board of Trustee's
POMV advertisement that had recently appeared in the Anchorage
Daily News newspaper. He also asked how the advertisement was
financed.
Mr. Bartholomew responded that the advertisement was paid for via
the Permanent Fund Corporation's operating budget. He stated that
the intent of the advertisement was to assist in educating the
public regarding the POMV proposal as, he noted, such things as
surveys indicate that, "there's still a high level of confusion in
the public as to what is the proposal." He stated that due to the
fact that "there's a lot of awareness and interest right now" in
regards to the Permanent Fund, the Board viewed this "as an
opportunity to provide education in as neutral a fashion" as could
be done. Therefore, he concluded that the intent was, "in a simple
way," to explain the difference between the current process and
"the Percent of Market Value (POMV) or endowment approach."
Senator Hoffman recalled a previous Finance Committee discussion
regarding the Board of Trustees' request for in excess of one
million dollars to inform the public about POMV. He stated that the
response from the Committee was unfavorable and that the request
had been denied. Therefore, he asked why the Board was furthering
this endeavor.
Mr. Bartholomew responded that "the request for both the authority
to do advocacy and for the funding to do the education and outreach
on POMV was because of the rule changes that take place" were the
legislation passed by the Legislature. He stated that it was
understood that, were the POMV proposal approved by the
Legislature, the Board's ability to advocate for a Constitutional
amendment would be restricted. He stated that, in his discussions
with the Board, it was not "linked" that advertisements prior to
the Legislative approval of the proposal would be prohibited.
Senator Hoffman asked for confirmation that it was not the intent
of the Board to get the public to apply pressure on the Legislature
to support POMV, by running the advertisement.
Mr. Bartholomew assured that the advertisement was not intended to
be a tool through which to lobby or influence passage of this
legislation. He assured that the Board understands that the issue
must be presented in a balanced fashion. He stated that aside from
working directly with the Legislature on issues, it would be
"inappropriate" for the Board to indirectly lobby the Legislature.
Therefore, he continued, the Board viewed the advertisement as an
educational tool.
Co-Chair Wilken complimented Mr. Bartholomew as being "good soldier
and he was glad he worked for the people of Alaska."
Senator Olson characterized the response to the advertisement
questions as "somewhat confusing, at best, if not "questionable."
Senator Dyson referenced the Permanent Fund Corporation's April
2004, "Percent of Market Value talking points" handout [copy on
file] and stated that in the subsection titled "how does POMV
provide the solution?" it is stated that, "The Fund is invested for
a 5-percent real rate of return after inflation." He noted that he
had previously asked regarding whether the language in Section 2(b)
of the bill on page two, line two, meant that it was "indeed" going
to be after inflation.
(b) Appropriations from the permanent fund for a fiscal year
may not exceed five percent of the average of the market
values of the fund on June 30 for the first five of the six
fiscal years immediately preceding that fiscal year.
Senator Dyson stated that is subsequent conversations, he had been
"reminded that the whole thing is a smoothing operation" in that it
was a five-year average. He recalled that he had asked whether any
language had been considered "that would make it clear that the
five percent that we are making available for appropriation is
protected against the year that we might have high inflation, and
actually, in a given year might be appropriating part of the real
value of the corpus." He noted that the response was to the affect
"that anything that we did along that line must be carefully worded
so that it was over a board period because it would vary from year
to year." Therefore, he re-asked whether language could be included
to clarify that in any given year, the amount being proposed would
"not dip into the principal," as he stated that, in addition to
preserving "the value of the principal," the people of the State
must be assured that the principal would "be intact."
Mr. Bartholomew replied that the issue regarding whether the POMV
would allow for the expenditure of the principal or corpus of the
Fund, has had a lot of discussion. He stated that it has been
determined that there are two methods through which to protect
against eroding the Fund. First, he communicated, the concept of
the word principal is included in Constitution through the "number
that is the sum of all the oil contributions, all the inflation
proofing appropriations the Legislature has done, and special
appropriations." This number, he specified, currently amounts to
$23.5 billion, and "only goes up." He communicated that "the
Legislature would not be allowed to appropriate any money that
would reduce the Permanent Fund below that level."
Mr. Bartholomew shared that an issue raised by the Board, regards
those times when there might be short-term extreme downturns in the
stock market that might reduce the value of the Fund down towards
the principal level. He stated that the Board determined that in
those times, "it would not be prudent for the economy" not to
distribute a Permanent Fund Dividend to the citizens. Therefore, he
continued, the Board proposed an endowment method of not just the
principal of the fund, but of the entire fund. Therefore, he stated
that in order to respond to the question of how to assure the
public that the corpus of the Fund would not be attached, the House
of Representatives' legislation before the Committee has adopted a
statutory limitation through which the Constitution would allow a
five-percent of the total market value to be spent in any one year.
Senator Dyson understood that the language specifies market value
as opposed to principal.
Mr. Bartholomew confirmed, and stated that this would include the
entire fund including the principal and the excess earnings. He
stated that this currently amounts to $27.5 billion dollars. He
stated that it is expected that the total rate of return would be
eight-percent, including a three percent inflation factor.
Therefore, he stated the real earnings of five-percent, after
inflation, would be utilized over time.
Mr. Bartholomew stated that in question is how to assure that
public that the principal would not be spent. He stated that there
is a provision in HB 298-DISTRIBUTIONS OF APPROPS FROM PERM FUND,
that, states that every ten-year period would be reviewed by the
Corporation to assure that the fund has earned five-percent above
inflation. Were this not to occur, he continued, the spending limit
would be lowered to the real rate of return. Therefore, he
recommended that the expenditure not be viewed on a year to year
basis "as there have definitely be years that the Permanent Fund
has not make money;" however, he attested, there has never been a
ten year period in which the five-percent level was not exceeded.
Continuing, he stated that over the 25-year period that the Fund
has existed, it has earned six-percent over inflation. He referred
the Committee to a PFC graph titled "Rolling 10-year real return -
Fiscal year" [copy on file]. He stated that "the Legislature has
not spent anywhere near the available funds."
Mr. Bartholomew stated that the statutory limitation addresses
Senator Dyson's concern. He stated that were a higher rate of
protection desired, a Constitutional amendment would be required as
opposed to the statutory limitation.
Senator Dyson understood that while appropriate inflation proofing
could not occur in a year of double-digit inflation; an
appropriation of up to five percent of the market value could
continue to be made. Doing so, he contended, might result in a net
loss of three to five percent of the Funds' market value that year.
Mr. Bartholomew replied that while this is correct, what makes this
"allowable and prudent" is the fact that the rate of return for
fiscal year 2004, for instance, is going to exceed the rate of
inflation by ten percent. He stated that adoption of the POMV would
limit the expenditures to five percent of the market value, which
in this case would have grown in excess of ten percent. This, he
attested "would serve to carry that money forward and over time,"
he stated, it is "believed that the good years would outweigh the
bad" years. He stated that limiting the spending in the good years
to five percent by retaining those excess earnings via the
implementation of a spending limit, would serve to protect the
Permanent Fund.
Senator B. Stevens pointed out that on the effective date of the
amendment that sweeps the Earnings Reserve Account (ERA) into the
Principal, as specified in Section 3 of the bill, the ERA would
crease to exist. He stated that HB 298 would allow the Legislature
to change the distribution of the five percent by a simple majority
vote. Therefore, he declared that the concept of the distribution
of the earnings "would be at the full discretion of future
Legislatures, just as it is now," with the only difference being
that the ERA is swept into the principal.
Co-Chair Wilken asked whether this legislation would allow for an
FY 05 CBR draw.
Mr. Bartholomew replied that, as drafted, the POMV program would
not allow for an appropriation until July 1, 2005, which would be
the beginning of FY 06. Therefore, he concluded the October 2004
Permanent Fund Dividend, which would occur in FY 05, is accounted
for in the FY 04 operating budget. He noted, that unless there was
a need for other appropriations "as written," that would be no
other appropriations from the Permanent Fund until July 1, 2005. At
that time, he continued, the appropriation would be limited to five
percent, were POMV enacted.
Senator Bunde reiterated that there are Alaskans who are concerned
that with the adoption of POMR, the Permanent Fund "would go away."
He referred to the aforementioned Ten-year look back chart, and
stated that while the past few years' stock market performance was
dismal, the Fund still made five-percent including the recent
years' worst-case scenario. Therefore, he observed that were the
POMV in affect for the past ten years, the corpus would not have
been used and any appropriation would have been limited to five
percent.
Mr. Bartholomew responded that this is correct, and were the POMV
five-percent spending limitation in place for the entirety of the
Fund's history, the expenditures would not have exceeded what the
Fund had earned above the rate of inflation. He reiterated the
importance of viewing the Fund over a ten-year period verses a
year-to-year basis. He noted that HB 298 would provide "guidance to
the Legislature" to reduce the five-percent Constitutional spending
limit appropriation down to the real earnings level were the
average earnings of the Fund to fall below that five-percent level.
Senator Bunde stated that the Legislature currently appropriates
between three and five million dollars of earnings, on an annual
basis, from the Permanent Fund to inflation proof the account.
Mr. Bartholomew agreed that the Legislature, on an annual basis,
appropriates money from the Fund's earnings account into the
protected principal. He stated that under POMV, the earnings would
be protected by the five percent limit, but would not subject to a
future appropriation.
Senator Bunde stated therefore, that were the Constitutional
amendment approved, the State would crease to appropriate up to
five million dollars of Fund earnings each year.
Mr. Bartholomew stated that is correct. He stated that POMV would
eliminate the Board's current concerns regarding inflation proofing
the Fund when there are other fiscal pressures such as the need to
find additional funds to support such things as education and
transportation.
Senator Bunde pointed out that while "many people say, 'don't'
spend the Permanent Fund," they do not understand that the
Legislature already spends money to inflation proof the Fund and
provide "for the Permanent Fund Dividend itself." He stated that
using the POMV method to provide funding for State programs and
Dividend checks, "would not change significantly the amount"
currently being utilized from the Fund were inflation proofing
factored into that amount.
Senator Hoffman stated that the Legislature could assess the
earnings from the ERA and "spend those dollars with a simple
majority today, but we haven't." He attested that the Legislature
has not done this, but has rather chosen to take "the more
difficult road" of balancing the budget by accessing the CBR, which
requires a three-quarter vote of the Legislature, because they are
aware that spending the Fund would be perceived by the people as
"tapping into… and threatening the Fund."
Senator Hoffman continued that were the POMV program adopted, the
Legislature could interpret it to state that the people have
granted them the authority to spend the five-percent as needed. He
stated that the POMV would provide no protection to the Permanent
Fund Dividend. He stated the participants of the Conference of
Alaskans stated they went one-step above and beyond what they were
charged to do by stating that the Permanent Fun should be protected
in the Constitution. Therefore, he stressed that consideration of
protecting the Permanent Fund be provided were the POMV "management
tool" to be adopted.
Senator Bunde stated that people could protect their PFD by
supporting a person to represent them in the Legislature.
Co-Chair Wilken asked for clarification regarding whether the five-
percent value of the fund is the value of the fund at a certain
point of time over the last five-years, as specified in the bill in
Section 2(b).
Mr. Bartholomew responded that the applicable rules in this regard
as included in statute. He stated that the value of the Permanent
Fund would be determined on June 30th of each year as that is the
end of each fiscal year. He stated that in order to accommodate the
"ups and downs of the financial markets, it's prudent to take an
average of the previous five years." Therefore, he stated that this
proposal would mandate that, on June 30th, an average of the
previous five-years' market value of the Fund, would be determined
based upon Generally Accepted Accounting Principals. That value, he
continued, would then be multiplied by five-percent in order to
determine the amount that would be available.
Co-Chair Wilken understood therefore that this would equate to
"five June 30's divided by five."
Senator Bunde moved to report the bill from Committee with
individual recommendations and accompanying fiscal notes.
Senator Hoffman stated that his not objecting to the motion does
not mean that he supports the proposal.
There being no objection, CS HJR 26(FIN) was REPORTED from
Committee with $1,500 fiscal note #3, dated January 16, 2004 from
the Division of Elections and new zero fiscal note #4, dated April
13, 2004 from the Department of Revenue.
RECESS TO THE CALL OF THE CHAIR 10:33 AM / 5:06 PM
[NOTE: Due to an audio malfunction, the adjournment of this meeting
was not recorded]
| Document Name | Date/Time | Subjects |
|---|