Legislature(2017 - 2018)BUTROVICH 205

04/13/2018 03:30 PM STATE AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Uniform Rule 23 Waived --
Moved CSHB 136(TRA) Out of Committee
<Bill Hearing Rescheduled from 04/12/18>
-- Public Testimony --
Moved SJR 9 Out of Committee
<Bill Hearing Rescheduled from 04/12/18>
-- Public Testimony --
+ Bills Previously Heard/Scheduled TELECONFERENCED
       SJR 9-CONST. AM.: PERMANENT FUND APPROP; DIVIDEND                                                                    
4:52:51 PM                                                                                                                    
CHAIR  MEYER   announced  the   consideration  of   Senate  Joint                                                               
Resolution 9 (SJR 9).                                                                                                           
4:53:24 PM                                                                                                                    
SENATOR BERT  STEDMAN, Alaska State Legislature,  Juneau, Alaska,                                                               
sponsor of SJR 9, emphasized  that his presentation addresses the                                                               
Alaska Permanent  Fund (Fund) management  and does not  address a                                                               
fiscal system solution for the state;  although, SJR 9 is a major                                                               
portion  of  a  fiscal  solution. He  referenced  his  investment                                                               
background 30  years in the  past where  he worked with  the City                                                               
and Borough of  Sitka regarding changing their  permanent fund to                                                               
a  percentage  of  market  value,  something  that  was  not  too                                                               
dissimilar from  the intent of SJR  9. He conceded that  it takes                                                               
time to  get people  comfortable with the  change and  noted that                                                               
the process  had taken 4  years where the Sitka's  permanent fund                                                               
was changes  from an all-bond  portfolio to a  balanced portfolio                                                               
with 60-percent  equity and stocks  to give more growth,  and 40-                                                               
percent bonds to provide more  income and stability with a 5-year                                                               
lookback to provide "smoothing" to stabilize cash flows.                                                                        
He  referenced slide  2 from  his visual  presentation of  SJR 9,                                                               
"Permanent Fund Protection" as follows:                                                                                         
        • The Permanent Fund can be a budget stabilization                                                                      
          fund with a limited payout method that allows the                                                                     
          fund to continue to save and grow:                                                                                    
             o Budget Stabilization:                                                                                            
                  square4 Alaska Has two "rainy day" accounts:                                                                  
                       • Constitutional  Budget    Reserve                                                                      
                       • Statutory Budget Reserve (SBR).                                                                        
             o Permanent Fund:                                                                                                  
                  square4 The Permanent Fund has two purposes:                                                                  
                       • Save,                                                                                                  
                       • Grow.                                                                                                  
        • The Permanent Fund consists of the Principal and                                                                      
          the Earnings Reserve Account (ERA).  If the ERA is                                                                    
          used to  balance the  budget on  an ad  hoc basis,                                                                    
          the  Permanent Fund's  value will  decrease, which                                                                    
          conflicts with its purpose.                                                                                           
SENATOR STEDMAN summarized slide 2 as follows:                                                                                  
     The  Permanent  Fund is  really  a  composition of  two                                                                    
     major  accounts,  the   Constitutional  Budget  Reserve                                                                    
     (CBR),  the protected  principle  of the  constitution,                                                                    
     and   the   Earning   Reserve   (ERA)   that   is   not                                                                    
     constitutionally  protected,   but  from   the  state's                                                                    
     perspective,  the Constitutional  Budget Reserve  (CBR)                                                                    
     is a "rainy day" account  along with a Statutory Budget                                                                    
     Reserve  (SBR)  and  it's  been  "raining"  financially                                                                    
     speaking   for  several   years  now   and  those   are                                                                    
     diminished relative to their  historic peaks. We are in                                                                    
     a position  now where we  want to restructure,  look at                                                                    
     seriously restructuring the  Permanent Fund (Fund). The                                                                    
     Permanent  Fund  (Fund) is  something  that  is set  in                                                                    
     place  for future  generations and  we are  supposed to                                                                    
     save and grow the assets.                                                                                                  
4:56:53 PM                                                                                                                    
He referenced slide 3: "The Permanent Fund Established" as                                                                      
        • The Permanent Fund was established in 1976 by a                                                                       
          vote of the people to save a portion of Alaska's                                                                      
          oil wealth for future generations and limit                                                                           
          overspending by the Legislature.                                                                                      
SENATOR STEDMAN commented on slide 3  and noted that the Fund was                                                               
created by a  vote of the people for a  storage mechanism for the                                                               
wealth  generated from  the  state's finite  oil,  gas and  other                                                               
resources. He pointed out to the  adult Alaskans in the room that                                                               
the Fund has been in place  for the entirety of their adult lives                                                               
and has grown due to the state's hard work over time.                                                                           
He referenced slide 4: "The  Permanent Fund Is an Alaska Success"                                                               
as follows:                                                                                                                     
        • Graph on the "Historical Values of Principal and                                                                      
          Earnings Reserve" (1976-2016).                                                                                        
        • The Permanent Fund is an Alaska success. Current                                                                      
          value of $65 billion from a total contribution of                                                                     
          $39.9 billion.                                                                                                        
He  commented  on   slide  4  that  the   chart  showed  the                                                                    
constitutionally-protected  principal  and   the  ERA  which                                                                    
represented  the  trading profits  from  the  net gains  and                                                                    
losses along with dividends and  interest income. He pointed                                                                    
out  that the  ERA changes  a lot  due to  constant economic                                                                    
changes that goes on worldwide.                                                                                                 
4:59:22 PM                                                                                                                    
He  referenced  slide  5:  "ERA Is  Variable  and  Uncertain"  as                                                               
        • ERA is variable and uncertain. By its nature it                                                                       
          lacks stability to be relied upon for budget                                                                          
             o 2000:                                                                                                            
                  square4 ERA: $2.973 billion,                                                                                  
              square4 Principal: $23.543 billion.                                                                               
             o 2001:                                                                                                            
                  square4 ERA: $2.384 billion,                                                                                  
              square4 Principal: $22.431 billion.                                                                               
             o 2002:                                                                                                            
                  square4 ERA: $1.136 billion,                                                                                  
              square4 Principal: $22.389 billion.                                                                               
             o 2003:                                                                                                            
                  square4 ERA: $0.100 billion,                                                                                  
              square4 Principal: $24.094 billion.                                                                               
             o 2004:                                                                                                            
                  square4 ERA: $0.859 billion,                                                                                  
                  square4 Principal: $26.541 billion.                                                                           
             o 2005:                                                                                                            
                  square4 ERA: 1.440 billion,                                                                                   
                  square4 Principal: $28.522 billion.                                                                           
             o 2006:                                                                                                            
                  square4 ERA: $2.585 billion,                                                                                  
                  square4 Principal: $30.325 billion.                                                                           
             o 2007:                                                                                                            
                  square4 ERA: $4.132 billion,                                                                                  
                  square4 Principal: $33.695 billion.                                                                           
             o 2008:                                                                                                            
                  square4 ERA: $5.321 billion,                                                                                  
                  square4 Principal: $31.213 billion.                                                                           
             o 2009:                                                                                                            
                  square4 ERA: $0.420 billion,                                                                                  
                  square4 Principal: $29.496 billion.                                                                           
             o 2010:                                                                                                            
                  square4 ERA: $1.210 billion,                                                                                  
                  square4 Principal: $32.045 billion.                                                                           
             o 2011:                                                                                                            
                  square4 ERA: $2.308 billion,                                                                                  
                  square4 Principal: $37.832 billion.                                                                           
             o 2012:                                                                                                            
                  square4 ERA: $2.081 billion,                                                                                  
                  square4 Principal: $38.253 billion.                                                                           
             o 2013:                                                                                                            
                  square4 ERA: $3.994 billion,                                                                                  
                  square4 Principal: $40.909 billion.                                                                           
             o 2014:                                                                                                            
                  square4 ERA: $6.211 billion,                                                                                  
                  square4 Principal: $45.002 billion.                                                                           
             o 2015:                                                                                                            
                  square4 ERA: $7.162 billion,                                                                                  
                  square4 Principal: $45.638 billion.                                                                           
             o 2016:                                                                                                            
                  square4 ERA: $8.570 billion,                                                                                  
                  square4 Principal: $44.200 billion.                                                                           
             o 2017:                                                                                                            
                  square4 ERA: $12.816 billion,                                                                                 
                  square4 Principal: $46.970 billion.                                                                           
SENATOR  STEDMAN commented  on slide  5 and  pointed out  the "no                                                               
bars at  all" for the  ERA for the  years 1996-1998 and  2003. He                                                               
noted  that  the Fund  is  constitutionally  protected where  the                                                               
Legislature  cannot  access the  corpus  without  a vote  of  the                                                               
people. He pointed out that  the trading profits and dividends in                                                               
the ERA  can be  appropriated by the  Legislature. He  added that                                                               
inflation proofing the Fund comes from  the ERA as well. He noted                                                               
that  the Legislature  was presently  talking about  taking funds                                                               
from the  ERA for the  following fiscal  year to pay  the state's                                                               
SENATOR STEDMAN addressed  slide 5 and noted  the years 2003                                                                    
and 2009 as follows:                                                                                                            
     In  2003  we had  $24  billion  in principal  and  $100                                                                    
     million in  the ERA, the  next year a little  less than                                                                    
     $1 billion  in the ERA. If  we jump up to  2009, we see                                                                    
     the  ERA down  to $420  million, next  year it  is $1.2                                                                    
     billion.  So, when  we take  a look  at relying  on the                                                                    
     Permanent  Fund and  pulling money  out of  it, we  all                                                                    
     recognize  that  we can  only  pull  funds out  of  the                                                                    
     lighter colored bar on the  top [ERA]. Well, some years                                                                    
     there isn't  any, and  I would  like to  also highlight                                                                    
     that  we  haven't,  in  the  Legislature,  appropriated                                                                    
     monies out  of the ERA other  than dividends, inflation                                                                    
     proofing just goes into the  other account, we've taken                                                                    
     a little bit every year  off for internal management of                                                                    
     the Permanent  Fund, it  kind of  runs itself,  but for                                                                    
     all  significant  analysis  it's basically  we  haven't                                                                    
     touched it until this year.                                                                                                
He  explained that  the intent  of his  presentation was  to                                                                    
look at the  Fund from several different  angles. He offered                                                                    
that the  state could  look at  the Fund  as either  a "milk                                                                    
cow" for  revenue to  get as much  out without  collapse for                                                                    
budgetary  needs,  or  the strategy,  which  he  recommends,                                                                    
would be  to isolate the  state's needs  and to ask  how the                                                                    
Fund  should be  structured  and managed  for its  long-term                                                                    
viability for  future generations. He said  he was concerned                                                                    
with the  current structure which  relies on draws  from the                                                                    
ERA but noted  that times like 2003 and 2009  when there was                                                                    
virtually  no   earnings  reserve  would  occur   again.  He                                                                    
asserted  the state  needs to  take  a serious  look at  the                                                                    
current structure's constitutionally  protected Fund and the                                                                    
ERA which the Legislature  can appropriate from. He conceded                                                                    
that he  was worried  that the  state was  in peril  of over                                                                    
drawing the Fund.                                                                                                               
5:04:53 PM                                                                                                                    
He referenced slide 6: "Current Principles For The Permanent                                                                    
Fund: Save and Grow" as follows:                                                                                                
   • A "Permanent" Savings Account: The fund should                                                                             
     conserve  part  of  the state's  revenue  from  mineral                                                                    
     resources to  benefit all  generations of  Alaskans. AS                                                                    
   • The Fund's Principle Should Be Protected While                                                                             
     Prudently  Invested  The  fund  should  be  managed  to                                                                    
     protect  the principal  while maximizing  total return.                                                                    
     AS 37.13.020(2).                                                                                                           
   • The Fund's Purchasing Power Over Time Should Be                                                                            
     Preserved While Maximizing Return AS 37.13.120(a).                                                                         
SENATOR STEDMAN commented on slide 6 as follows:                                                                                
     If we take a look at  the Permanent Fund and follow and                                                                    
     not  get  away  from  the guiding  principles,  it's  a                                                                    
     savings account  and we should  conserve it  for future                                                                    
     generations,   there's   no   doubt   about   it.   Our                                                                    
     forefathers  set up  this structure  and it's  held up,                                                                    
     frankly, worldwide  as a  model. Without  going through                                                                    
     the  effects of  purchasing  power, the  "thief of  the                                                                    
     night" of  inflation, we all  understand that,  we want                                                                    
     to come up with something that is going to protect us.                                                                     
5:05:25 PM                                                                                                                    
He referenced slide 7: "SJR 9 Does Not Alter The Fund's                                                                         
Principles: Save and Grow:" as follows:                                                                                         
        • SJR 9 merges the ERA into the principal, which                                                                        
          constitutionally protects the whole Fund from                                                                         
          legislative appropriation:                                                                                            
             o Current Alaskans shouldn't take ad hoc draws                                                                     
               from the Fund that will significantly affect                                                                     
               its value to future Alaskans.                                                                                    
             o Overspending   will   decrease   the   Fund's                                                                    
               benefit to future generations  this is the                                                                       
               opposite of saving.                                                                                              
He commented on  slide 7 and noted that one  of the most critical                                                               
parts  is to  put  the ERA  into  the constitutionally  protected                                                               
corpus of the  Fund, a fund that the Legislature  cannot draw any                                                               
money out unless a  constitutionally-protected mechanism was also                                                               
set up. He continued as follows:                                                                                                
     We should  not have  ad hoc draws.  The adults  today I                                                                    
     don't feel should  have ad hoc draws that  are going to                                                                    
     significantly or  minorly impact the future  balance of                                                                    
     the account. The  monies or the value  of the Permanent                                                                    
     Fund is  possibly to  use a little  bit today  but it's                                                                    
     really  for  future  generations,  our  grandkids,  our                                                                    
     great  grandkids  that  aren't even  born  yet,  future                                                                    
     generations.  When we  have an  oil field  that is  100                                                                    
     years old and  not much future in front of  it, that we                                                                    
     have built  up a  massive amount  of wealth  for future                                                                    
     Alaskans. If we allow the  current needs, today and the                                                                    
     near  distant future,  if we  let our  spending desires                                                                    
     and our  budgetary desires drive  the structure  of the                                                                    
     Permanent  Fund, we  could easily  make a  mistake that                                                                    
     hurts our long-term objectives  and goals of protecting                                                                    
     it for the future of the kids, our future Alaskans.                                                                        
5:07:35 PM                                                                                                                    
SENATOR STEDMAN  referenced slide  8: "SJR 9  Does Not  Alter The                                                               
Fund's Principles: Save and Grow:" as follows:                                                                                  
        • SJR 9 limits any draw from the Permanent Fund to an                                                                   
          annual 4.5 percent of its 5-year average value:                                                                       
             o This draw limit is conservative and sustainable.                                                                 
             o 4.5 percent is well under the Permanent Fund's                                                                   
               growth performance.                                                                                              
        • 1 year (FY2017):                                                                                                      
             o Total growth: 12.89 pct.,                                                                                        
             o Objective (CPI + 5 pct.): 6.63 pct.                                                                              
        • 3 years:                                                                                                              
             o Total growth: 6.21 pct.,                                                                                         
             o Objective (CPI + 5 pct.): 5.92 pct.                                                                              
        • 5 years:                                                                                                              
             o Total growth: 8.85 pct.,                                                                                         
             o Objective (CPI + 5 pct.): 6.32 pct.                                                                              
        • Since inception:                                                                                                      
             o Total growth: 8.79 pct.,                                                                                         
             o Objective (CPI + 5 pct.): 7.67 pct.                                                                              
He  said  based  on  the  information disclosed  on  slide  8  he                                                               
proposes   that   the   ERA   be   combined   with   the   Fund's                                                               
constitutionally-protected principal so that  "The whole thing is                                                               
constitutionally protected." He added that  a draw limit would be                                                               
placed on the Fund that  dictates what annual percentage could be                                                               
taken out. He specified that  the Fund's potential rate of return                                                               
would  be dictated  by its  asset mix,  then the  real rate  less                                                               
inflation.  He  emphasized  that the  Fund's  current  management                                                               
structure would  not be  altered, that  it be  left intact  to do                                                               
their job and manage the Fund.                                                                                                  
SENATOR  STEDMAN explained  that SJR  9's proposes  a 4.5-percent                                                               
draw, a  percentage that takes  into the targeted rate  of return                                                               
with the  historic inflation rate  of 2.5 percent.  He emphasized                                                               
that the  rate of return  must be  north of the  inflation target                                                               
plus the draw, a percentage that  leaves a little bit of room. He                                                               
proposed  that at  the end  of  the fiscal  year the  4.5-percent                                                               
payout of  the Fund be  based on a  5-year average to  smooth out                                                               
the volatility.  He pointed  out that a  5-year average  could be                                                               
calculated using the  first five years out of  a 6-year timeframe                                                               
to make sure  everyone knows how much money would  be drawn up to                                                               
the 4.5 percent. He continued as follows:                                                                                       
     That's  why there's  a five-year  average, you  use the                                                                    
     average  rates   of  return  targeted  by   your  asset                                                                    
     allocation and then  you add in your  inflation and you                                                                    
     basically  have your  structure. So,  some of  the most                                                                    
     important  points when  we  restructure this  Permanent                                                                    
     Fund: first, you got to get  on the road you want to be                                                                    
     on, do you want  to be on a road that  you are going to                                                                    
     just look at it as a  milk cow and strain, which is one                                                                    
     road; or,  you can go down  the other road and  say, "I                                                                    
     don't care  initially what the  fiscal position  of the                                                                    
     state is, I'm not going  to let it drive the management                                                                    
     and structure  of the Permanent  Fund, I want  the best                                                                    
     structure  for the  Permanent Fund  and then  I'll come                                                                    
     over here and work on this other problem."                                                                                 
5:13:13 PM                                                                                                                    
He referenced  slide 9:  "SJR 9 Protects  The Fund:  Mechanics Of                                                               
The Draw and The Split" as follows:                                                                                             
   • $65 billion Permanent Fund:                                                                                                
        o 4.5 pct. draw:                                                                                                        
             square4 2.0 pct. dividends,                                                                                        
             square4 2.5 pct. to remain in the Permanent Fund, augment                                                          
              the dividend, or for state services.                                                                              
He commented  on slide  9 and  noted that  the there  was nothing                                                               
"magical" in  his proposed 4.5  percent draw  for a split  with 2                                                               
percent  for dividends  and 2.5  percent for  state services.  He                                                               
opined that the proposal would be  easy for the public to look at                                                               
and  see where  the  money  is going.  He  pointed  out that  the                                                               
committee  might  through  its   process  decide  to  change  the                                                               
percentages. He noted that the  Legislature could decide in years                                                               
of higher oil  prices to reinvest the  state services' percentage                                                               
back into the  Fund, or to pay a higher  dividend, perhaps due to                                                               
situation  that  occurred  a  few years  ago  to  address  higher                                                               
heating fuel prices.  He said the third option would  be in times                                                               
like today  where the state  needs the  2.5 percent to  come into                                                               
the treasury  to pay for  basic services. He emphasized  that his                                                               
proposal provides flexibility.                                                                                                  
5:16:20 PM                                                                                                                    
SENATOR  STEDMAN  referenced  slide   10:  "SJR  9  Protects  The                                                               
Permanent Fund - 'Let's Talk Dividends'" as follows:                                                                            
   • Since 1982 the dividend has disbursed $22 billion to                                                                       
        o Equitable distribution of resource wealth to those who                                                                
          own the resources.                                                                                                    
        o SJR 9 provides a predictable and transparent dividend                                                                 
          via constitutional formula.                                                                                           
        o Dividends will once again be reliable and linked to                                                                   
          the investment success of the fund.                                                                                   
He commented  on slide 10  and noted  that some people  have said                                                               
the dividend  money should have been  left in the Fund  where the                                                               
state  would have  $100  billion; however,  he  pointed out  that                                                               
Alaska is the  only state where the citizens  own the subsurface.                                                               
He emphasized that  the intent is to share and  continue to share                                                               
the wealth that all Alaskans own.                                                                                               
He referenced slide  11: "SJR 9 - Projected 4.5  Percent Draw and                                                               
Dividend Amounts" as follows:                                                                                                   
   • FY 2020:                                                                                                                   
        o 4.5 pct. draw: $2.513 billion;                                                                                        
        o 2.0 pct. draw for dividends: $1.117 billion,                                                                          
             square4 Dividend: $1,816;                                                                                          
       o 2.5 pct. draw for General Fund: $1.396 billion;                                                                        
        o Total ending Fund value: $67.017 billion.                                                                             
   • FY 2021:                                                                                                                   
        o 4.5 pct. draw: $2.638 billion;                                                                                        
        o 2.0 pct. draw for dividends: $1.172 billion,                                                                          
             square4 Dividend: $1,906;                                                                                          
       o 2.5 pct. draw for General Fund: $1.369 billion;                                                                        
        o Total ending Fund value: $68.984 billion.                                                                             
   • FY 2022:                                                                                                                   
        o 4.5 pct. draw: $2.766 billion;                                                                                        
        o 2.0 pct. draw for dividends: $1.172 billion,                                                                          
             square4 Dividend: $1,998;                                                                                          
       o 2.5 pct. draw for General Fund: $1.537 billion;                                                                        
        o Total ending Fund value: $70.882 billion.                                                                             
   • FY 2023:                                                                                                                   
        o 4.5 pct. draw: $2.911 billion;                                                                                        
        o 2.0 pct. draw for dividends: $1.294 billion,                                                                          
             square4 Dividend: $2,103;                                                                                          
       o 2.5 pct. draw for General Fund: $1.617 billion;                                                                        
        o Total ending Fund value: $72.792 billion.                                                                             
SENATOR STEDMAN commented on slide 11  and noted that if the 4.5-                                                               
percent draw was used, changing  the draw percentage would take a                                                               
vote of  the people. He pointed  out that markets are  not linear                                                               
but  the projections  on slide  11 are  linear. He  admitted that                                                               
some people would say the  projected dividend amounts are ghastly                                                               
but noted that  the state would currently be paying  out a $2,800                                                               
dividend with a picture of the  governor holding a big check like                                                               
previous governors had  done. He said the  state was experiencing                                                               
different economic times but emphasized  that the dividend should                                                               
be based  on the portfolio's  value where Alaskans get  2 percent                                                               
of the  market value  over 5  years. If  the economy  expands the                                                               
dividend goes up, if the  economy shrinks the dividend goes down.                                                               
He added  that new  oil and  gas coming online  would add  to the                                                               
Fund as well.                                                                                                                   
He  summarized that  SJR 9  would take  the politics  out of  the                                                               
dividend where 4.5 percent mechanically  comes out with 2 percent                                                               
for dividends and the remaining  balance for the State of Alaska.                                                               
He conceded  that state services  would require the draw  for the                                                               
foreseeable future but  asserted that the state can  find its way                                                               
out of relying heavily on the Fund going forward.                                                                               
5:20:45 PM                                                                                                                    
He summarized as follows:                                                                                                       
     Let  me recap  because  it's  a different  conversation                                                                    
     that has been  in the press for months.  This is driven                                                                    
     off of how  to manage the Permanent  Fund without being                                                                    
     unduly  influenced  over  our own  financial  position,                                                                    
     good or bad for the State  of Alaska, and how do we set                                                                    
     it up to  split the earnings and  benefit directly with                                                                    
     the people and  have the ability of  the state treasury                                                                    
     and or leave  the monies in the fund to  grow, and then                                                                    
     we can look  at this projection and we  can see roughly                                                                    
     $1.4 billion  this next  year into  our budget.  We all                                                                    
     know sitting  here, we've  all been up  to our  neck in                                                                    
     budget  mess the  last several  years, we  know we  are                                                                    
     going to need a lot more than that.                                                                                        
     What we did 30 years ago  in Sitka is we had a spending                                                                    
     rate of  6 percent.  The financial  markets were  a lot                                                                    
     different then,  they had a lot  higher dividend yields                                                                    
     and the  administrator at the time,  he needed cashflow                                                                    
     because we  lost our  pulp mill.  We on  the investment                                                                    
     committee wanted  a lower payout because  we wanted the                                                                    
     future value for  the community and we settled  in on a                                                                    
     6 percent  payout; that's  run for  years and  that has                                                                    
     been ratcheting back  a quarter percent a  year. We had                                                                    
     political  difficulties in  ratcheting it  back because                                                                    
     it's like, all governments are  the same, they get used                                                                    
     to the cashflow, it's very hard to pull it back.                                                                           
     So, I  would suggest,  and hopefully  we will  over the                                                                    
     next several years, go forward  with a discussion and a                                                                    
     conclusion that we are going  to set the Permanent Fund                                                                    
     up in  isolation regardless of  our needs  and desires,                                                                    
     then overlay that  with a transition from  where we are                                                                    
     at that  given time  to where  we need  to be  with the                                                                    
     Permanent Fund;  in other words,  we may not,  and this                                                                    
     is kind  of getting  kind of one  step further,  we may                                                                    
     not want to  say starting in 2020 we are  going to have                                                                    
     a  4.5-percent  payout, just  bang.  We  might want  to                                                                    
     start,  I think  in the  building now,  we are  talking                                                                    
     about  5.25 percent,  we  might want  to  start with  a                                                                    
     higher  one and  ratchet  ourselves  back over  several                                                                    
     years  like 0.25  percent back  so  we can  get to  the                                                                    
     position where  we want  the Permanent  Fund to  be run                                                                    
     without undo influence,  but we work in  the real world                                                                    
     and we have real bills to  pay, so we have to have some                                                                    
     flexibility.  So,   don't  get  the  impression   I  am                                                                    
     advocating that one day we  come with a number and shut                                                                    
     the door  on the Permanent Fund  and lock it up  and we                                                                    
     can't  put everybody  in a  pickle, we  can work  these                                                                    
     things through.                                                                                                            
     Mr. Chairman,  I waited  30 years  to come  before your                                                                    
     committee  to  talk  about  percent  of  market  value,                                                                    
     that's  how long  I  have been  working  on percent  of                                                                    
     market value. Nothing new to  me, my staff just laughs,                                                                    
     they don't have to prepare  the boss for anything, just                                                                    
     stick him in front of the group, it's very simple.                                                                         
     We  had sent  this  piece of  legislation back  several                                                                    
     times to  the drafters,  they over complicate  it, with                                                                    
     good  intentions.  For the  public  I  think to  become                                                                    
     comfortable  with the  restructuring  of the  Permanent                                                                    
     Fund, it needs to be  very clear, very transparent, "No                                                                    
     bells and whistles of this  arm wiggles money comes out                                                                    
     of this  end," just  straight forward. Under  this plan                                                                    
     we would close the door  for any draws over 4.5 percent                                                                    
     and the Permanent Fund would  manage the fund, it would                                                                    
     be inflation  proofed, we  wouldn't have  any inflation                                                                    
     discussions on the floor of  the Legislature because it                                                                    
     is automatically done. The  Department of Revenue would                                                                    
     get a check coming in,  we would have the discussion on                                                                    
     what  do we  want to  do  with our  share, the  state's                                                                    
     share, the  2.5 percent, the  other 2 percent  goes out                                                                    
     as  a  dividend,  and  then  we  manage  the  financial                                                                    
     affairs of the state with what we have.                                                                                    
5:25:55 PM                                                                                                                    
CHAIR MEYER asked if the forefathers and mothers who put the                                                                    
Permanent Fund and dividend together intended the dividend to go                                                                
into the constitution.                                                                                                          
SENATOR STEDMAN answered as follows:                                                                                            
     I firmly believe that the  Earnings Reserve needs to be                                                                    
     rolled  into the  principal  and  the entire  Permanent                                                                    
     Fund needs  to be  constitutionally protected.  I think                                                                    
     having the  portion, the 2-percent dividend  portion or                                                                    
        the split, in this case we are talking about a 4-                                                                       
     percent  draw, so  the split  of the  draw is  open for                                                                    
     public discussion, I think  the Judiciary Committee has                                                                    
     been working  on that.  My expectation  is it  would be                                                                    
     less than  a 50:50 probability that  that would prevail                                                                    
     in the final  version of this piece  of legislation, it                                                                    
     is  much more  critical  that the  4.5-percent draw  is                                                                    
     protected than the dividend.                                                                                               
CHAIR MEYER asked if the 2.5 percent for the General Fund would                                                                 
used for inflation proofing the Fund.                                                                                           
5:27:56 PM                                                                                                                    
SENATOR STEDMAN answered no and explained as follows:                                                                           
     The inflation  proofing is derived  as a  component off                                                                    
     of your rate  of return; for instance, if you  had a 2-                                                                    
     percent inflation  in this scenario, you  would have to                                                                    
     make at  least 6.5 percent  or more  a year, so  if you                                                                    
     make 6.5 percent and you  took out 2 percent inflation,                                                                    
     that leaves  you with the  4.5 percent. So, if  you run                                                                    
     your draw  up too high  relative to the  performance of                                                                    
     your portfolio,  you will erode your  purchasing power,                                                                    
     that's  why it  is so  critical that  the draw  rate is                                                                    
     less than the targeted  after-inflation rate of return,                                                                    
     if you  make them the same  you have no room  for error                                                                    
     and the probability  is not good that you  will step on                                                                    
     your foot,  most likely.  So, you  draw that  down, you                                                                    
     move that draw  number down to give you  some real rate                                                                    
     of return  after inflation,  after your  withdrawal, so                                                                    
     it's growing beyond the rate of inflation every year.                                                                      
5:29:21 PM                                                                                                                    
CHAIR MEYER asked what would happen if the Fund does not make at                                                                
least 6.5-percent rate of return. He inquired if the dividend or                                                                
the General Fund would be impacted.                                                                                             
SENATOR STEDMAN explained as follows:                                                                                           
     When you  have really robust  markets, we are  going to                                                                    
     payout  4.5  percent  a year  on  a  five-year  average                                                                    
     regardless  of what  the market  does. Market  could go                                                                    
     up,  market  could go  down,  market  could stay  flat,                                                                    
     doesn't matter,  4.5 percent every year.  There will be                                                                    
     times, if fact there will  be more up markets than down                                                                    
     markets, on  average, that's  why economies  get larger                                                                    
     and  larger  on average,  that's  why  the markets  get                                                                    
     bigger.  So, there  will be  more years  when you  make                                                                    
     extra,  you'll make  your 4.5  percent  draw, you  will                                                                    
     make your 2 percent  inflation, whatever your inflation                                                                    
     is at the  time, 2.5 percent, whatever.  You might make                                                                    
     12 percent in  a year or 15 percent in  a year, and all                                                                    
     of that  is great  because you are  jumping up  in your                                                                    
     There will be  years like when you go back  and look at                                                                    
     recessions, 2008 and  2009, 2000, go back  to 1978 with                                                                    
     "Black  Monday," you  can go  back  about every  decade                                                                    
     you'll have a dip. In  those dip years you'll still get                                                                    
     a draw of 4.5 percent  over the 5-year average, but the                                                                    
     5-year average is going to  be coming down because your                                                                    
     market value  is going down.  Some would  argue, "Well,                                                                    
     then  from the  previous  year you  spent  part of  the                                                                    
     principal,"  let's say  you only  made 1  percent in  a                                                                    
     given year and you take  out 4.5 percent as an example,                                                                    
     some would  argue, "Well,  then you  spent some  of the                                                                    
     principal,"  but that's  true in  certain regards,  but                                                                    
     that's  why you  want this  structure so  when we  have                                                                    
     down  years you  have  the smooth  cashflow coming  out                                                                    
     because your  up years  are going  to more  than offset                                                                    
     that.  To  turn it  upside  down  you just  bring  your                                                                    
     payout  rate 6-8  percent, and  then your  down markets                                                                    
     push your value down,  your purchasing power, you can't                                                                    
     afford down  markets, that's why it's  more comfortable                                                                    
     to have  a draw  rate with some  cushion in  it, that's                                                                    
     why it  is not  at 4.75-5.25  percent, but  that's also                                                                    
     the discussion  and the  evolution in  the Legislature.                                                                    
     The  Legislature may  decide  that 4.5  percent is  too                                                                    
     conservative, they  want 4.75 percent to  5.25 percent.                                                                    
     I think  the Permanent Fund will  have some discussions                                                                    
     or  some input  on some  of that,  what rates  they are                                                                    
     comfortable  with, but  there  will be  times when  you                                                                    
     have  a down  market and  it  could last  two to  three                                                                    
5:32:38 PM                                                                                                                    
SENATOR GIESSEL asked how he calculated for population during                                                                   
the four years he portrayed.                                                                                                    
SENATOR STEDMAN answered 1 percent growth.                                                                                      
He continued as follows:                                                                                                        
     I think  what we  did on  these we  took the  amount of                                                                    
     dividends that they paid, the  number, and just divided                                                                    
     it  into the  dollars,  I don't  have  the equation  in                                                                    
     front  of   me,  that's  how  we   derived  the  $1,800                                                                    
     dividend. I  think it was 615,000,  the actual dividend                                                                    
     checks are paying out, trying to  get it as close as we                                                                    
     could,  and  then   population  historically  has  been                                                                    
     growing  at  1 percent,  I  think  lately it  has  been                                                                    
     shrinking,  so if  the population  shrinks, I  think in                                                                    
     this  case  $1.116  billion would  be  divided  amongst                                                                    
     fewer people.                                                                                                              
SENATOR GIESSEL commented as follows:                                                                                           
     I don't  question at all  the mathematical  accuracy of                                                                    
     what your  calculation shows or the  mathematical logic                                                                    
     of it at all, but as  someone who deals in the realm of                                                                    
     people,  if we  had a  dividend that  was growing  like                                                                    
     this,  I  believe  our  population  would  grow  and  I                                                                    
     believe that  our Medicaid costs would  mushroom to say                                                                    
     nothing  of Office  of Children's  Services issues  and                                                                    
     our  substance abuse  issues. Again,  I'm not  thinking                                                                    
     about this  in a  mathematical way, I'm  thinking about                                                                    
     the impact that  this kind of a  dividend, over $2,000,                                                                    
     will have on  people. This is pretty serious  as I look                                                                    
     at it in a serious in a negative way.                                                                                      
5:34:45 PM                                                                                                                    
SENATOR STEDMAN answered as follows:                                                                                            
     The draw rate  was driven off of  the asset allocation,                                                                    
     their  investments  and  then performance,  and  that's                                                                    
     what set  that. The  dollar amounts  are driven  off of                                                                    
     the happenstance of the size  of the fund, $65 billion,                                                                    
     and the  5-year average  just happened  to be  what the                                                                    
     average  was.  If  in  through  the  process  that  the                                                                    
     Legislature felt that  2 percent for a  dividend is too                                                                    
     big, you could take it down  to 1.5 percent and add 3.0                                                                    
     percent on the other side,  add that 0.5 percent to the                                                                    
     general fund.  You could move  those numbers  around to                                                                    
     whatever the Legislature feels  comfortable, but at the                                                                    
     end of  the day we  need, I firmly believe,  the public                                                                    
     support for a constitutional  amendment to restrict and                                                                    
     collapse  the  Earnings  Reserve into  the  corpus  and                                                                    
     block   the  Legislature's   ability  to   do  ad   hoc                                                                    
     withdrawals or we are going to spend the money.                                                                            
SENATOR  COGHILL   said  he  agreed   with  Senator   Stedman  on                                                               
collapsing  the ERA  into the  corpus. He  remarked that  Senator                                                               
Stedman's  proposal  was an  endowment  approach  that takes  out                                                               
volatility.  He  admitted  that   he  struggles  with  putting  a                                                               
constitutional  amendment in  for  the right  of  a dividend.  He                                                               
opined that Senator Stedman's proposal  was an excellent approach                                                               
of managing the  wealth but noted that he would  much rather have                                                               
the wealth go  to a dividend in statute that  could be revisited.                                                               
He explained that  he did not want to put  the dividend alongside                                                               
any other  right in  the Alaska Constitution.  He added  that the                                                               
state must  address how to  determine residency in Alaska  due to                                                               
the state's transitory military population  as well as the act of                                                               
people swearing  that they are  going to move back.  He concurred                                                               
with Senator  Giessel on  the question she  brought up  of people                                                               
moving  into the  state  "just  for the  right."  He opined  that                                                               
Senator Stedman's proposal is the  best management structure that                                                               
he has seen to date.                                                                                                            
5:38:50 PM                                                                                                                    
SENATOR  STEDMAN suggested  that the  resolution be  discussed in                                                               
the Senate Judiciary  Committee. He said he would  not be opposed                                                               
to  the dividend's  constitutional  protection  being removed  or                                                               
adjusted  with a  flexible formula.  He emphasized  that the  key                                                               
point  was  to protect  the  entire  Fund with  a  constitutional                                                               
protection from the Legislature.                                                                                                
SENATOR STEDMAN said  the 4.5 percent draw was  a comfortable and                                                               
safe draw, albeit  a lot people would consider the  draw to be on                                                               
the low side. He opined  that the Legislature would not establish                                                               
a draw rate that was  excessively high because the Permanent Fund                                                               
Corporation would object if they saw an erosion of value.                                                                       
He  said  he  thought  the concerns  that  Senators  Coghill  and                                                               
Giessel brought forward were part  of the process the Legislature                                                               
goes through when each committee works  on a bill and changes it.                                                               
He opined  that how  to control  the size of  the dividend  was a                                                               
legitimate  discussion  because  the  state may  end  up  with  a                                                               
portfolio nest  egg for future  generations that is  large enough                                                               
to run the state on.                                                                                                            
5:41:14 PM                                                                                                                    
SENATOR COHILL  concurred that the  Fund should be  preserved for                                                               
future  generations with  a structure  that was  a tried-and-true                                                               
method. He  agreed that the  resolution should move along  to the                                                               
Senate Judiciary Committee.                                                                                                     
SENATOR STEDMAN commented  that those that think  the proposal is                                                               
concrete, "Thou shalt not change  it, it's perfect," are going to                                                               
be surprised. He emphasized that  he is adamant of constitutional                                                               
protection  of the  corpus, preferably  the ERA  in closing  that                                                               
door.  He reiterated  that  the discussion  on  the dividend  and                                                               
payout structure was just part  of the process. He concurred that                                                               
there is a  downside to constitutionally putting  the dividend in                                                               
as well  as the  growth of  a very  large dividend  that attracts                                                               
some social issues.                                                                                                             
5:42:54 PM                                                                                                                    
CHAIR MEYER opened and closed public testimony.                                                                                 
SENATOR  COGHILL  agreed with  the  resolution's  focus and  said                                                               
legislators'  responsibility was  to bring  as much  stability to                                                               
the Fund  as possible.  He opined  that the  state has  created a                                                               
treasure that needs  to come to the  time of life that  it can go                                                               
on the next generation.                                                                                                         
CHAIR MEYER pointed out that SJR 9 has a zero fiscal note.                                                                      
5:45:12 PM                                                                                                                    
SENATOR GIESSEL moved to report SJR 9, version 30-LS1085\O, from                                                                
committee with individual recommendations and attached zero                                                                     
fiscal note.                                                                                                                    
5:45:24 PM                                                                                                                    
CHAIR MEYER announced there being no objection, the motion                                                                      

Document Name Date/Time Subjects
SJR 9 Sponsor Power Point Presentation.pdf SSTA 4/13/2018 3:30:00 PM