Legislature(2005 - 2006)BELTZ 211
03/22/2005 03:30 PM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SJR14 | |
| SJR8 | |
| SJR14 | |
| HB90 | |
| HB97 | |
| SB143 | |
| SB24 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SJR 8 | TELECONFERENCED | |
| *+ | SJR 14 | TELECONFERENCED | |
| + | SB 24 | TELECONFERENCED | |
| *+ | SB 143 | TELECONFERENCED | |
| + | HB 90 | TELECONFERENCED | |
| + | HB 97 | TELECONFERENCED | |
SJR 8-CONST. AM: PERMANENT FUND P.O.M.V.
CHAIR THERRIAULT announced SJR 8 to be up for consideration. He
explained that the Alaska Permanent Fund trustees asked him to
bring the idea forward for discussion in the State Affairs
Committee because it's the logical place to hear proposals about
the management of the Permanent Fund.
3:49:23 PM
MIKE BURNS, Chief Executive Officer of the Alaska Permanent Fund
Corporation (APFC), recapped why the trustees believe the
Percent of Market Value (POMV) method is the best way to manage
the fund. He emphasized that the trustees do not view the POMV
as a fiscal plan. It wouldn't allow the Legislature greater
access to the earnings and most years it would reduce the amount
available for appropriation.
Implementation of POMV and the use of earnings are entirely
separate issues. POMV is predictable and understandable, but
most people are confused by the arcane nature of the current
distribution formula of the permanent fund. Most fund trustees
manage their funds on a real return methodology - the total
return of the fund less inflation. Most pension fund and
endowment fund managers view their fiduciary duties in the same
way.
MR. BURNS said the trustees have proposed the POMV method
because the current statutory realized-income based distribution
formula is broken. When the fund was created it was prudent to
restrict its investment authority to a bond only strategy. A
bond portfolio generates income in two ways: interest or coupon
income and capital gains from bonds that are sold at appreciated
prices. This formula made perfect sense at that time for that
portfolio. However, because the fund's asset allocation now
incorporates investments that generate significant unrealized
gains and realized income, the current payout methodology and
protection of principal doesn't serve the fund as well as it did
previously.
Only a POMV payout limited by the sustainable yield from the
fund can provide the necessary protection for the future while
allowing current generations an equitable share of fund
earnings. The only way to ensure full protection of the fund is
to place constitutional limitations.
The POMV proposal allows no more than 5 percent of the average
market value of the fund averaged over the previous 5 years may
be appropriated from the fund. This protects a minimum of 95
percent of the fund from being spent in any given year.
MR. BURNS concluded: "As I noted earlier, POMV is not a fiscal
plan and with oil at $50 plus, your interest in and focus on a
fiscal plan may well be elsewhere. But is this not the opportune
time to modernize and increase the transparency of the fund so
it can, not only be managed in harmony with its distribution
formula, but also be understood by Alaskans when other decisions
must be made?"
He urged committee members to support the trustees' proposal for
reasons of modernization, clarity, and better protection.
3:54:25 PM
SENATOR WAGONER arrived.
3:54:43 PM
CHAIR THERRIAULT asked if the primary motivation is to ensure
that inflation proofing is guaranteed for the future.
MR. BURNS replied inflation proofing is built in. The belief is
that over time a real return of 5 percent in addition to
inflation proofing is attainable. Over time a return of 5
percent allows a distribution to the Legislature, protects the
fund from inflation, and allows the fund to grow.
CHAIR THERRIAULT asked if the inflation proofing is deposited
with an annual appropriation and whether there is concern that
during tight times the appropriation might not be made.
MR. BURNS said the annual appropriation for inflation proofing
is in the province of the Legislature so a question about what a
future Legislature might do is clearly a legitimate question.
CHAIR THERRIAULT said if the goal is for the fund to be multi-
generational, that goal couldn't be achieved if the fund's
purchasing power isn't protected.
MR. BURNS agreed.
SENATOR ELTON said he had two questions. Legislators have
frequently heard that over time a 5 percent withdrawal is
workable. He wondered whether using the "over time argument"
because of language on page 2, line 2. He questioned whether use
of the word "annual" precludes the ability of looking at a
multi-year strategy.
MR. BURNS replied if line 2 were read in conjunction with a 5-
year average, the 5-year average would be the controlling
number. With respect to whether or not 5 percent is attainable
over time he said:
If you take our example of 8 percent and the fund
grows each year, it's 5 percent of the maximum amount
only in one year. And you go back the trailing 5 years
- the actual amount of the fund is smaller. And I
think if you use a straight 8 percent growth on the
balance of the fund, the payout actually is less than
4.7. It's 5 percent but it's 5 percent of a smaller
year - 5 a little bit bigger - year 4 a little bigger
still. So it's only 5 percent of the very last year in
the 5-year formula - if you think of a stair-step.
SENATOR ELTON said he assumed POMV supplants the 5-year rule and
he questioned whether Mr. Burns was saying that the 5-year rule
would still control when the Legislature makes the annual
decision.
MR. BURNS said yes, the formula is based on taking 5 percent of
the average of the last 5 years.
CHAIR THERRIAULT added the 5 percent would turn out to be less
than 5 percent each year because it is based on the 5-year
average of a growing balance.
MR. BURNS said that is correct and the trustees' have estimated
the amount to be 4.65 percent each distribution year.
CHAIR THERRIAULT asked about the average return over the life of
the permanent fund given recent down markets.
MR. BURNS said the return has been about 10 percent over the
life of the fund. Last year, the return was 14.1 percent.
SENATOR ELTON questioned whether the word "predictable" on page
2 would constrain the Legislature from deciding to appropriate
less than 5 percent.
MR. BURNS responded it's what the fund makes available to this
process. Whether the Legislature distributes that amount or not
is a separate issue.
SENATOR ELTON said the annual appropriation would be
predictable, but it isn't if the percentage varies from year to
year. He again questioned whether the word "predictable" would
constrain the Legislature from appropriating a lower percentage.
4:02:52 PM
LAURA ACHEE, Communications and Research Liaison, Alaska
Permanent Fund Corporation, said the Legislature would not be
constrained to take 5 percent. The word "predictable" goes to
two issues. First is knowing that no more than 5 percent of the
market value for the previous five years would be available. The
other side of the issue is that as the Legislature contemplates
use of earnings using a funding source that has a lot of
volatility makes it difficult for the Legislature to know that
in any given year they're going to have 5 percent of the average
market value of the fund available to them.
4:05:20 PM
CHAIR THERRIAULT read from page 2, line 2:
...and limited so the real value of the permanent fund is
preserved over time.
He asked if the trustees would be tracking the value of the fund
and the added inflation-proofing amount. If a protracted down
market occurred and the 5 percent allowed an erosion of the fund
going forward, he questioned whether that would put a limit on
the 5 percent.
MR. BURNS said not as currently proposed. In a down market you
could actually take 5 percent of principal or reserved assets.
MS. ACHEE said keep in mind it would take several years of
protracted down markets before dipping into the fund would
occur. At that point, the same mechanism that stair stepped up
would kick in as well because the annual appropriation would be
5 percent of values that were going down.
Certainly it should be within the Legislature's purview to take
the full 5 percent or to not withdraw any money. She pointed out
that a few years ago - because of market changes - the realized
earnings account was almost dry so paying any dividend was
questionable.
SENATOR ELTON noted the current proposal contains language such
as "predictable" and "real value" that weren't discussed last
year.
4:08:04 PM
MS. ACHEE said that's correct. Both resolutions in the last
Legislature started out reading as SJR 8 does but one body
removed that language in an early committee hearing.
SENATOR ELTON noted it would be instructive for the committee to
find out why those words were removed.
MR. BURNS responded this proposal has been the trustees'
starting point over a number of years.
CHAIR THERRIAULT asked about the dollar amount outside of the
protected principal.
MR. BURNS estimated that about 11 percent isn't protected today,
but that number jumps to about 16 percent if one goes through
the process of realizing the unrealized gains.
CHAIR THERRIAULT calculated that there would be a starting $5
billion cushion above and beyond the protected principal if POMV
is adopted.
MR. BURNS said yes but it would all be protected principal if
the POMV method were adopted.
CHAIR THERRIAULT offered the opinion that many citizens don't
understand that under the Alaska State Constitution, the
Legislature has access to about $5 billion.
MS. ACHEE clarified, "Of that $5 billion some of it is - at this
point - considered principal. However it is unrealized gains so
it's merely the matter of realizing." They're partially
protected because until realized they are part of the principal.
4:11:15 PM
WAYNE STEVENS, President and CEO of the Alaska State Chamber of
Commerce, stated support for SJR 8. The chamber business
advisory committee lists the adoption of a state fiscal plan as
a priority and one part is to statutorily establish the POMV
management tool for the Alaska Permanent Fund.
"Recognizing that SJR 8 speaks to a constitutional percentage of
market value we would support that. But as an intermediate step
perhaps one would consider a statutory percent of market value."
He suggested that had the POMV method been adopted last year,
Alaskans wouldn't have seen a significant change in the dividend
checks. The chamber supports steadying the budget process now
and in the future and SJR 8 would help accomplish that.
CHAIR THERRIAULT noted there was no further testimony and
announced that he would set SJR 8 aside.
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