01/26/1994 09:06 AM Senate STA

 CHAIRMAN LEMAN moves to bring up SB 170 DISPOSITION OF PERMANENT              
 FUND INCOME.  The Chairman calls on Senator Rieger, the prime                 
 sponsor of SB 170, to testify.                                                
                                                                               
 Number 463                                                                    
                                                                               
 SENATOR RIEGER explains the reason for SB 170 is to address the               
 issue of the difference between nominal earnings and real earnings            
 in the permanent fund.  Historically, in financial management,                
 inflation has not been a major issue until, perhaps, the last                 
 twenty or thirty years.  Because of that, it's taken a while for              
 the concept of real earnings, which means the earnings which exceed           
 inflation, to gain understanding.  The concept of real earnings is            
 extremely important when we're referring to an endowment fund.  Any           
 long-term plans, such as the permanent fund, must preserve the                
 underlying purchasing power by measuring growth in real earnings to           
 inflation-proof the fund.  SB 170 will define earnings based not on           
 nominal earnings, but real earnings: the total return minus the               
 rate of inflation.                                                            
                                                                               
 Number 428                                                                    
                                                                               
 SENATOR RIEGER states that the other statutory provisions, which              
 relate to how earnings are used, will not be changed under SB 170.            
 The way the amount of money to be disbursed in dividends is                   
 calculated will not be affected by this bill.  What will change,              
 however, is that real earnings will be used to calculate                      
 disbursements, not nominal earnings.  The affect of this change is            
 that the rate of growth of dividends will be slower, and could                
 possibly be reduced in the near-term.  But we will have the comfort           
 of knowing the fund is protected against inflation, and there will            
 not be an annual debate over whether or not to inflation-proof the            
 permanent fund.                                                               
                                                                               
 Number 404                                                                    
                                                                               
 SENATOR RIEGER notes that the Permanent Fund Corporation has made             
 some projections which use conservative, long-standing assumptions,           
 one of which incorporated the idea that over the long-term the                
 permanent fund would earn a total realized return of 9%, with an              
 inflation rate of 6%, for real earnings of 3%.  Over the last                 
 decade, the Permanent Fund Corporation has invested very heavily in           
 bonds, but is changing their asset allocation targets and investing           
 more in higher-yielding securities.  Senator Rieger mentions and              
 quotes from a January, 1994 study commissioned by the Legislative             
 Budget & Audit Committee (LB&A) which was prepared by Ibbotson                
 Associates, Inc.                                                              
                                                                               
 Number 364                                                                    
                                                                               
 SENATOR RIEGER notes the difference between variable-rate                     
 investments and fixed-rate investments, and says variable-rate                
 investments are considered to be riskier.  What people want to know           
 is what the effect will be of using real earnings as the basis for            
 projecting how much money will be available for appropriations                
 under various scenarios, and what the effect will be on the size of           
 dividends.  Under the most optimistic scenario, the size of the               
 dividends will continue to rise, but at a slower rate than if we              
 continue to compute dividends based on nominal earnings.                      
                                                                               
 Number 338                                                                    
                                                                               
 SENATOR RIEGER adds that the need for a large permanent fund                  
 earnings reserve would be reduced under SB 170.  He believes it is            
 a mistake to use total nominal earnings as a base for computation             
 of earnings of the permanent fund.  We need to prioritize                     
 inflation-proofing; it should be the top priority.  He thinks SB
 will make inflation-proofing of the permanent fund a priority.            
                                                                               
 Number 299                                                                    
                                                                               
 CHAIRMAN LEMAN asks if anyone has questions for Senator Rieger.               
 Hearing none, he announces SB 170 will be held over until Friday,             
 January 28, 1994, which will allow members to review the                      
 information they have received today on the bill.                             
                                                                               
 Number 289                                                                    
                                                                               
 SENATOR DUNCAN asks what the administration's opinion of SB 170 is.           
                                                                               
 Number 282                                                                    
                                                                               
 SENATOR RIEGER replies that he has not had any communications with            
 the governor in regards to SB 170; however in informal                        
 conversations with persons in the administration, they have voiced            
 concern over the impact of unrealized gains and whether those gains           
 should be considered if we move to a real earnings concept.                   
                                                                               
 Number 268                                                                    
                                                                               
 CHAIRMAN LEMAN thanks Senator Rieger for his testimony.