Legislature(2025 - 2026)SENATE FINANCE 532

03/04/2025 09:00 AM House LEGISLATIVE BUDGET & AUDIT

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09:01:24 AM Start
09:02:11 AM Presentation(s): the Impact of the Pomv on Alaska's Budget
09:10:30 AM Presentation(s): Alaska Permanent Fund Corporation's Trustees' Paper 10
10:00:32 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentations: TELECONFERENCED
- The Impact of the Percent of Market Value on
Alaska’s Budget by Alexei Painter, Director,
Legislative Finance Division
- Alaska Permanent Fund Corporation’s Trustees’
Paper #10, titled “A Rules-Based Permanent-
Endowment Model for Alaska” by Jason Brune,
Chair, Board of Trustees and Deven Mitchell,
Executive Director and CEO
                    ALASKA STATE LEGISLATURE                                                                                  
             LEGISLATIVE BUDGET AND AUDIT COMMITTEE                                                                           
                         March 4, 2025                                                                                          
                           9:01 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Elvi Gray-Jackson, Chair                                                                                                
Representative Zack Fields, Vice Chair                                                                                          
Senator Bert Stedman                                                                                                            
Senator Cathy Giessel                                                                                                           
Senator Lyman Hoffman                                                                                                           
Senator Bill Wielechowski                                                                                                       
Representative Neal Foster                                                                                                      
Representative Andy Josephson                                                                                                   
Representative Chuck Kopp                                                                                                       
Representative Cathy Tilton                                                                                                     
Senator Scott Kawasaki (alternate)                                                                                              
Representative Bryce Edgmon (alternate)                                                                                         
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Kelly Merrick                                                                                                           
Senator Gary Stevens                                                                                                            
Senator Mike Cronk                                                                                                              
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION(S):  THE IMPACT OF THE POMV ON ALASKA'S BUDGET                                                                     
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PRESENTATION(S):  ALASKA PERMANENT FUND CORPORATION'S TRUSTEES'                                                                 
PAPER #10                                                                                                                       
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
ALEXEI PAINTER, Director                                                                                                        
Legislative Finance Division                                                                                                    
Legislative Agencies and Offices                                                                                                
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Gave the  Impact of  the POMV  on Alaska's                                                             
Budget presentation.                                                                                                            
                                                                                                                                
JASON BRUNE, Chair                                                                                                              
Board of Trustees                                                                                                               
Alaska Permanent Fund Corporation                                                                                               
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:    Co-offered   the  Alaska  Permanent  Fund                                                             
Corporation's Trustees Paper #10 presentation.                                                                                  
                                                                                                                                
DEVEN MITCHELL, Executive Director                                                                                              
Alaska Permanent Fund Corporation                                                                                               
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:    Co-offered   the  Alaska  Permanent  Fund                                                             
Corporation's Trustees Paper #10 presentation.                                                                                  
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
9:01:24 AM                                                                                                                    
                                                                                                                                
CHAIR ELVI  GRAY-JACKSON called the Legislative  Budget and Audit                                                             
Committee meeting to order at  9:01 a.m.  Representatives Foster,                                                               
Josephson,  Kopp,  Tilton,  Edgmon (alternate),  and  Fields  and                                                               
Senators  Stedman,   Wielechowski,  Hoffman,   Giessel,  Kawasaki                                                               
(alternate), and Gray-Jackson were present  at the call to order.                                                               
Also present were Senators Merrick, Stevens, and Cronk.                                                                         
                                                                                                                                
^PRESENTATION(S):  The Impact of the POMV on Alaska's Budget                                                                    
  PRESENTATION(S):  The Impact of the POMV on Alaska's Budget                                                               
                                                                                                                              
9:02:11 AM                                                                                                                    
                                                                                                                                
CHAIR  GRAY-JACKSON announced  that the  first order  of business                                                               
would be a presentation on the Alaska Permanent Fund.                                                                           
                                                                                                                                
9:03:05 AM                                                                                                                    
                                                                                                                                
ALEXEI  PAINTER, Director,  Legislative  Finance Division  (LFD),                                                               
Legislative  Agencies  and  Offices,   directed  attention  to  a                                                               
PowerPoint presentation,  titled "POMV in Alaska's  Budget" [hard                                                               
copy included  in the  committee packet], that  began with  a bar                                                               
chart on  slide 2, "UGF  Revenue and Budgets, FY  14-25," showing                                                               
how the  percent of market  value (POMV) draw has  influenced the                                                               
state budget.  The adoption of  the POMV draw in Fiscal Year 2019                                                               
(FY 19) significantly changed the  budget picture by reducing the                                                               
average  pre-transfer deficit  from $3  billion to  $250 million,                                                               
which has  been filled  using federal  funding from  the COVID-19                                                               
Pandemic  and  the  remainder of  the  Statutory  Budget  Reserve                                                               
(SBR).  Major draws from  the Constitutional Budget Reserve (CBR)                                                               
have largely  been avoided, as  the legislature works  to rebuild                                                               
that  balance.   He  stated  that  adding  the POMV  draw  helped                                                               
stabilize state revenue despite the existing structural deficit.                                                                
                                                                                                                                
9:05:04 AM                                                                                                                    
                                                                                                                                
MR. PAINTER paraphrased slide 3,  "Earnings Reserve Account (ERA)                                                               
Sufficiency,"  which   read  as  follows   [original  punctuation                                                               
provided]:                                                                                                                      
                                                                                                                                
     • APFC's  Statutory Net Income projection  for FY25+ is                                                                    
     6.25%, compared to inflation of  2.50% and a 5.00% POMV                                                                    
     draw. This leads to a  projected decline in the balance                                                                    
     of the ERA balance.                                                                                                        
     •  APFC's  projections  show   that  the  year-end  ERA                                                                    
     balance will drop below the  following year's POMV draw                                                                    
     amount in  FY32, assuming statutory  inflation proofing                                                                    
     each year.  That means that  when the year  begins, the                                                                    
     ERA won't have enough money  to pay out the entire POMV                                                                    
     draw for  the year  and will have  to rely  on current-                                                                    
     year earnings.                                                                                                             
     • LFD's  probabilistic modeling shows an  46% chance of                                                                    
     having  an insufficient  ERA balance  to make  the full                                                                    
     POMV  draw over  FY26    FY35, assuming  full inflation                                                                    
     proofing  and  statutory   POMV  draws.  If  inflation-                                                                    
     proofing is suspended when the  ERA balance drops below                                                                    
     the following year's POMV draw, that drops to 33%.                                                                         
                                                                                                                                
9:08:34 AM                                                                                                                    
                                                                                                                                
MR. PAINTER  paraphrased slide  4, "Policy  Levers to  Reduce ERA                                                               
Sufficiency Risk,"  which read  as follows  [original punctuation                                                               
provided]:                                                                                                                      
                                                                                                                                
     • Failure  rate reflects the percentage  of simulations                                                                    
     where the ERA  balance is insufficient to  pay the full                                                                    
     POMV draw at least once during the ten-year period                                                                         
      •  "Statutory  Inflation   Proofing"  refers  to  full                                                                    
     statutory   inflation   proofing  occurring   annually.                                                                    
     "Partial Inflation Proofing"  means that full statutory                                                                    
     inflation  proofing   occurs,  except  the   amount  is                                                                    
     reduced if  the FY-end  ERA balance is  insufficient to                                                                    
     pay the  following years POMV. "No  Inflation Proofing"                                                                    
     means  that there  is zero  inflation  proofing in  any                                                                    
     year from FY26-FY35.                                                                                                       
                                                                                                                                
MR.  PAINTER described  the chart  on slide  4, which  showed ERA                                                               
failure  rates with  different levels  of inflation  proofing and                                                               
POMV  draw percentages.   He  noted that  even with  no inflation                                                               
proofing,  the  probabilistic modeling  shows  that  the ERA  may                                                               
still be  insufficient to  fully fund  the POMV  draw.   The far-                                                               
right column  reflected the impact  of changing the draw  rate on                                                               
the FY  26 deficit.  He  explained that decreasing the  POMV draw                                                               
to  4  percent would  increase  the  deficit by  $759.7  million,                                                               
thereby solving one problem and creating another.                                                                               
                                                                                                                                
^PRESENTATION(S):  Alaska  Permanent Fund Corporation's Trustees'                                                               
Paper #10                                                                                                                       
PRESENTATION(S):  Alaska Permanent Fund Corporation's Trustees'                                                             
                           Paper #10                                                                                        
                                                                                                                              
9:10:30 AM                                                                                                                    
                                                                                                                                
CHAIR  GRAY-JACKSON announced  that the  final order  of business                                                               
would be the Alaska Permanent  Fund Corporation's Trustees' Paper                                                               
#10 presentation.                                                                                                               
                                                                                                                                
9:10:50 AM                                                                                                                    
                                                                                                                                
JASON  BRUNE, Chair,  Alaska Permanent  Fund Corporation  (APFC),                                                               
co-presented  a PowerPoint,  titled  "Trustees'  Paper Volume  10                                                               
Modernizing the  Alaska Permanent  Fund: A  Single-Fund Endowment                                                               
Model"  [hard  copy  included  in  the  committee  packet].    In                                                               
reflecting on Mr.  Painter's statement that there's  a 46 percent                                                               
chance that the ERA balance would  be insufficient to make a full                                                               
POMV  draw,  he  said  combining   the  Alaska  Permanent  Fund's                                                               
accounts, as  proposed in the  trustees' paper volume  10, titled                                                               
"A  Rules-Based Permanent-Endowment  Model for  Alaska" [included                                                               
in the committee packet], would bring predictability.                                                                           
                                                                                                                                
9:12:16 AM                                                                                                                    
                                                                                                                                
DEVEN  MITCHELL,   Executive  Director,  Alaska   Permanent  Fund                                                               
Corporation (APFC),  directed attention  to a  PowerPoint, titled                                                               
"Trustees'  Paper  Volume  10 Modernizing  the  Alaska  Permanent                                                               
Fund: A  Single-Fund Endowment Model."   He began on slide  2, "A                                                               
Legacy  of Intergenerational  Resource Contribution,"  which read                                                               
as follows [original punctuation provided]:                                                                                     
                                                                                                                                
     In 1976                                                                                                                    
     Alaskans chose  to permanently  forgo immediate  use of                                                                    
     at  least  25%  of  oil and  mineral  revenues,  saving                                                                    
     instead to  create a  renewable financial  resource for                                                                    
     generations the Alaska Permanent Fund.                                                                                     
                                                                                                                                
     Today, the Fund -                                                                                                          
        • Leads the Nation                                                                                                      
          The largest  U.S. sovereign wealth  fund, globally                                                                    
          recognized  as  a   model  for  converting  finite                                                                    
          natural resources into lasting wealth.                                                                                
        • Supports Alaska                                                                                                       
          Provides  over  50%  of the  state's  unrestricted                                                                    
          general fund  revenue for dividends  and essential                                                                    
          services  through  the  annual Percent  of  Market                                                                    
          Value (POMV) draw.                                                                                                    
                                                                                                                                
9:13:39 AM                                                                                                                    
                                                                                                                                
MR.   MITCHELL    paraphrased   slide   3,   "To    Benefit   All                                                               
Generations...,"  which  read  as follows  [original  punctuation                                                               
provided]:                                                                                                                      
                                                                                                                                
        • the fund should provide a means of conserving a                                                                       
          portion  of  the   state's  revenue  from  mineral                                                                    
          resources to benefit all generations of Alaskans;                                                                     
        • the fund's goal should be to maintain safety of                                                                       
          principal while maximizing total return;                                                                              
        • the fund should be used as a savings device                                                                           
          managed  to allow  the maximum  use of  disposable                                                                    
          income from  the fund  for purposes  designated by                                                                    
          law.                                                                                                                  
                                                                                                                                
MR. MITCHELL  added that the  fund is invested for  total return,                                                               
which doesn't  always align with  statutory net income  (SNI) and                                                               
has resulted in some of the stresses pointed out by Mr. Painter.                                                                
                                                                                                                                
9:15:11 AM                                                                                                                    
                                                                                                                                
MR.  MITCHELL moved  to  slide 4,  which  illustrated the  fund's                                                               
current two-account structure.   The Principal provides permanent                                                               
savings to  be used only  for income-producing  investments, with                                                               
realized  earnings deposited  into the  ERA for  appropriation by                                                               
the  legislature.   Realized  earnings,  which  are rents,  stock                                                               
dividends,  interest payments  on  fixed  income securities,  and                                                               
sales  from  assets  that  have   increased  in  value,  are  the                                                               
spendable portion.   Unrealized earnings  do not flow to  the ERA                                                               
and are not spendable under  the current construct; however, they                                                               
are allocated on a pro rata  basis between the Principal and ERA.                                                               
Inflation  proofing  is  the intergenerational  component  and  a                                                               
lever that's controlled by the  legislature when the ERA is under                                                               
stress.   Any  amount can  be drawn  from the  ERA with  a simple                                                               
majority of the legislature and the governor's concurrence.                                                                     
                                                                                                                                
9:17:26 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL  turned to slide  5, which illustrated  the proposed                                                               
single-fun  endowment construct.   In  this model,  contributions                                                               
would enter  the Alaska Permanent  Fund with one  payout, thereby                                                               
eliminating the  ability for one  generation to overuse  the fund                                                               
and the mismatch between total return and SNI.                                                                                  
                                                                                                                                
9:18:31 AM                                                                                                                    
                                                                                                                                
SENATOR STEDMAN recalled prior testimony  from a sovereign wealth                                                               
advisor  who  named the  Alaska  Permanent  Fund  as one  of  the                                                               
largest  sovereign wealth  funds  in the  world  relative to  the                                                               
state's budget and its population.   He commented on the vastness                                                               
of the wealth that Alaska's forefathers created.                                                                                
                                                                                                                                
MR.  MITCHELL acknowledged  that there  are larger  international                                                               
sovereign wealth funds that exist;  however, they're smaller than                                                               
the Alaska Permanent Fund on a per capita basis.                                                                                
                                                                                                                                
9:19:47 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL  paraphrased slide 7, "Global  Investment - maximize                                                               
a  risk-adjusted   return,"  which  read  as   follows  [original                                                               
punctuation provided]:                                                                                                          
                                                                                                                                
     Through   prudent   asset  allocation   and   strategic                                                                    
     decision-making,  APFC  has robust  performance  across                                                                    
     asset  classes, reinforcing  our commitment  to deliver                                                                    
     sustainable  value for  our stakeholdersthe   people of                                                                    
     Alaska.                                                                                                                    
                                                                                                                                
     1980                                                                                                                       
     Investments: Bonds  Fixed Income                                                                                           
     Payout method: Based on realized income                                                                                    
                                                                                                                                
     Today                                                                                                                      
     Investments: Diversified - Public & Private Markets                                                                        
     Payout method: Based on % of the Fund's total value                                                                        
                                                                                                                                
9:22:12 AM                                                                                                                    
                                                                                                                                
MR.  MITCHELL,  paraphrased slide  8,  "Investing  for the  Longe                                                               
Term," which read as follows [original punctuation provided]:                                                                   
                                                                                                                                
     Real Return                                                                                                                
      Annual investment performance adjusted for inflation                                                                      
     indicates sustained value and purchasing power.                                                                            
                                                                                                                                
     The Board's objective for the Fund:                                                                                        
        • Investment Performance                                                                                                
          Ability to generate an annualized return of                                                                           
          inflation (CPI) + 5% over a 10-year period.                                                                           
        • Investment Risk                                                                                                       
          Ability of the Fund to achieve the long-term                                                                          
          target while conforming to the Board's approved                                                                       
          risk appetite metric.                                                                                                 
                                                                                                                                
MR.  MITCHELL referenced  the bar  chart on  slide 8  that showed                                                               
total  return,  real  return,  and  return  objective,  which  is                                                               
Consumer Price Index  (CPI) plus 5 percent.   Mr. Mitchell stated                                                               
that 5 percent is a difficult target to hit on an ongoing basis.                                                                
                                                                                                                                
9:23:06 AM                                                                                                                    
                                                                                                                                
SENATOR STEDMAN asked whether the  5 percent draw rate pushes the                                                               
asset allocation  more aggressively  than a  4.25 or  4.5 percent                                                               
draw would.                                                                                                                     
                                                                                                                                
MR.  MITCHELL  said  Callan's Capital  Market  Assumptions  (CMA)                                                               
diminished  expectations  for equity  markets  over  the next  10                                                               
years.  With the updated  capital market assumptions, the fund is                                                               
slightly below  CPI plus 5 percent  at 4.8 percent, so  risk must                                                               
be  added to  the portfolio's  asset allocation  to increase  the                                                               
probability of achieving 5 percent.                                                                                             
                                                                                                                                
9:24:14 AM                                                                                                                    
                                                                                                                                
MR. BRUNE  added that  the 5  percent draw  has not  impacted the                                                               
Board of Trustees' aggressivity.                                                                                                
                                                                                                                                
9:24:45 AM                                                                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI  shared his  understanding that the  S&P 500                                                               
returned 40 percent  over the past two years.   He asked how that                                                               
compares to the fund's performance.                                                                                             
                                                                                                                                
MR. MITCHELL  did not know the  answer.  Over the  past 10 years,                                                               
however, a passive asset allocation  would have cost the fund $14                                                               
billion.                                                                                                                        
                                                                                                                                
SENATOR WIELECHOWSKI  pointed out that  the S&P 500  averaged 8.9                                                               
percent over  the past 100 years.   He sought to  verify that the                                                               
fund has not averaged that same amount.                                                                                         
                                                                                                                                
MR.  MITCHELL cited  an analysis  by APFC's  chief risk  officer,                                                               
which found that in a draw  scenario, the internal rate of return                                                               
diminishes in a 100 percent S&P 500 model.                                                                                      
                                                                                                                                
9:27:57 AM                                                                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI  asked how  much the fund  has paid  in fees                                                               
over the past two years.                                                                                                        
                                                                                                                                
MR. MITCHELL  said the fee structure  is high due to  the private                                                               
market  exposure.   He explained  that  in private  markets, a  2                                                               
percent annual fee  is required to participate  in a partnership.                                                               
Nonetheless,  the   private  equity   portfolio  is   the  fund's                                                               
strongest performing  asset class over  the past 10  years, which                                                               
has outperformed  the S&P 500.   He indicated that the  high fees                                                               
are paid in exchange for outsized returns.                                                                                      
                                                                                                                                
SENATOR WIELECHOWSKI pointed out that  in the past several years,                                                               
the fund  has underperformed the market  and paid extraordinarily                                                               
high fees.                                                                                                                      
                                                                                                                                
MR. MITCHELL  said a broader  conversation on the issue  would be                                                               
beneficial.  He  acknowledged that private equity is  in a trough                                                               
relative to investment in public equities.                                                                                      
                                                                                                                                
9:30:26 AM                                                                                                                    
                                                                                                                                
MR.  MITCHELL  resumed  the  presentation  on  slide  9,  "Saving                                                               
Wealth,  Investing, &  Providing Income,"  which read  as follows                                                               
[original punctuation provided]:                                                                                                
                                                                                                                                
       From the first deposit of $734,000 of Trans-Alaska                                                                       
     pipeline royalties the Alaska Permanent Fund has                                                                           
                                                                                                                                
       Grown to over $80.8 billion, as of Jan. 31, 2025                                                                         
      An annualized total return of 8.71%, as of Dec. 31,                                                                       
     2024                                                                                                                       
        Generated  more  than   $91.0  billion  in  realized                                                                    
     earnings as  of Dec.  31, 2024,  that have  supported -                                                                    
     the dividend, the  General Fund, and inflation-proofing                                                                    
     for intergenerational benefit.                                                                                             
                                                                                                                                
9:31:58 AM                                                                                                                    
                                                                                                                                
VICE CHAIR  FIELDS asked what  the size of  the fund would  be if                                                               
dividends had never  been paid and, instead,  reinvested into the                                                               
fund.                                                                                                                           
                                                                                                                                
MR. MITCHELL said  if all the earnings had flowed  to the general                                                               
fund and been spent, the fund would  be at $20 billion.  He added                                                               
that  including  unrealized  gains, earnings  total  around  $106                                                               
billion  for the  life of  the fund,  of which  an estimated  $40                                                               
billion were  expended on  the POMV  or Permanent  Fund Dividends                                                               
(PFDs).                                                                                                                         
                                                                                                                                
VICE  CHAIR   FIELDS  requested  a  follow-up   response  on  the                                                               
compounded returns had the money not been spent on dividends.                                                                   
                                                                                                                                
9:33:17 AM                                                                                                                    
                                                                                                                                
MR.  MITCHELL  resumed  the  presentation   on  slide  10,  which                                                               
highlighted the  volatility of Alaska's  revenue on  a historical                                                               
basis since  the discovery of oil  on the North Slope.   He noted                                                               
the creation of the CBR after  the 1980s acted as a natural shock                                                               
absorber until the price dropped  in late 2014 and didn't recover                                                               
for 5  or 6 years.   In 2019, the  creation of the  POMV transfer                                                               
created  a  huge  stabilizing  factor for  state  revenue  on  an                                                               
annualized  basis  despite  volatility with  the  underlying  oil                                                               
revenue.                                                                                                                        
                                                                                                                                
9:35:22 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL turned to slide 11,  which showed the nuances of the                                                               
two-account structure.  The fund's  total value as of January 31,                                                               
2025is  $80.8 billion  with $71.4  billion in  the Principal,  of                                                               
which $12.8  billion is  unrealized gains  that are  allocated to                                                               
Principal in  the aforementioned pro  rata basis.  To  the extent                                                               
those earnings are  realized, that money shifts over  to the ERA.                                                               
Consequently,  $58.6 billion  is  truly  protected as  Principal.                                                               
The ERA  totals $9.4 billion  of which $3.8 billion  is committed                                                               
to the  FY 26  POMV transfer,  $1 billion is  committed to  FY 25                                                               
inflation  proofing, and  $1.7 billion  is  a pro  rata share  of                                                               
total unrealized  gains.  Consequently,  as of January  31, 2025,                                                               
there is $2.9  billion of spendable realized earnings  in the ERA                                                               
available for FY 26 inflation proofing and FY 27 POMV.                                                                          
                                                                                                                                
9:37:28 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL turned to slide 12,  "Key Drivers in the ERA," which                                                               
read as follows [original punctuation provided]:                                                                                
                                                                                                                                
     ERA's Decreasing Availability                                                                                              
                                                                                                                                
     The ERA  AS 37.13.145 (a) is  available for Legislative                                                                    
     appropriation through a simple majority vote.                                                                              
     It grows  through the  realized investment  income that                                                                    
     is defined  as Statutory Net Income  (SNI) AS 37.13.140                                                                    
     (a).                                                                                                                       
                                                                                                                                
     Looking Forward                                                                                                            
     FY27 POMV Draw = $4.0B                                                                                                     
     (to be committed in FY26 financials)                                                                                       
                                                                                                                                
     Inflation Proofing for FY26 = $1.5B est.                                                                                   
     (to  be committed  based on  appropriation, with  final                                                                    
     calculation at the close of FY26)                                                                                          
     ----------------------------------------------                                                                             
     Total Commitments in FY26 = $5.5B                                                                                          
     ERA Realized Avail  FYTD 25= $2.9B as  of Jan Statutory                                                                    
     Net Income FY25 = $4.2B projected                                                                                          
                                                                                                                                
MR. MITCHELL explained that at the  start of FY 25, for the first                                                               
time ever there was a shortfall  of $400 million in the ERA after                                                               
providing  for FY  25  inflation  proofing and  POMV,  and FY  26                                                               
commitments.                                                                                                                    
                                                                                                                                
9:38:09 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL continued  to slide 13, "Spending is  Limited to the                                                               
ERA," which read as follows [original punctuation provided]:                                                                    
                                                                                                                                
     The  Earnings   Reserve  Account  faces  the   risk  of                                                                    
     depletion due to annual  withdrawals for state revenues                                                                    
     and the need for  inflation protection of the Principal                                                                    
     for future benefits to Alaskans.                                                                                           
                                                                                                                                
     Long-Term Investment Focus                                                                                                 
     •  Realized   earnings  generated   through  investment                                                                    
     activity  are prioritized  by maximum  long-term return                                                                    
     mandates, not realized gains.                                                                                              
     • The  ERA grows through the  realization of investment                                                                    
     income,    which    is    inherently    volatile    and                                                                    
     unpredictable.                                                                                                             
                                                                                                                                
     Limited Realized Earnings Availability                                                                                     
     • Due  to the two-account structure,  spendable amounts                                                                    
     are limited  to what's available  in the ERA,  which is                                                                    
     subject  to  commitments  based on  appropriations  and                                                                    
     known obligation at the beginning  of each fiscal year.                                                                    
       Inflation-proofing  has been inconsistent,  given the                                                                    
     state's  need for  predictable revenue  to provide  for                                                                    
     general fund services and programs.                                                                                        
                                                                                                                                
9:39:01 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE EDGMON asked whether the legislature has the                                                                     
authority to appropriate the fund's unrealized earnings.                                                                        
                                                                                                                                
MR. MITCHELL said the appropriation of unrealized gains would be                                                                
a legal question and potentially litigable.                                                                                     
                                                                                                                                
MR. BRUNE pointed out that a simple majority of each body would                                                                 
allow access to those funds.                                                                                                    
                                                                                                                                
SENATOR STEDMAN cautioned against overlooking the benefit of the                                                                
endowment concept, which would restrict the ability to                                                                          
appropriate over the limit of the POMV draw.                                                                                    
                                                                                                                                
9:41:27 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL paraphrased slide 14, "Manual Inflation Proofing,"                                                                 
which read as follows [original punctuation provided]:                                                                          
                                                                                                                                
     FY  16: Inflation  proofing not  funded  for the  first                                                                    
     time                                                                                                                       
                                                                                                                                
     FY 20:  Special $4B appropriation with  intent language                                                                    
     for inflation proofing the Principal                                                                                       
     Ch 1  FSSLA 2019  amended. ?  It is  the intent  of the                                                                    
     legislature  that  the   amount  appropriated  in  this                                                                    
     subsection  not  include associated  unrealized  gains;                                                                    
     and  be   used  to   satisfy  the   inflation  proofing                                                                    
     requirement  under AS  37.13.145(c) for  the next  four                                                                    
     fiscal years.                                                                                                              
                                                                                                                                
     FY   22:  Special   $4B  appropriation.   Deposited  to                                                                    
     Principal                                                                                                                  
     Ch  1 SSSLA  2021. ?(f)  The sum  of $4,000,000,000  is                                                                    
     appropriated  from  the  earnings reserve  account  (AS                                                                    
     37.13.145)  to the  principal of  the Alaska  permanent                                                                    
     fund.                                                                                                                      
                                                                                                                                
9:42:46 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL paraphrased slide 16, "The Need for Reform," which                                                                 
read as follows [original punctuation provided]:                                                                                
                                                                                                                                
     Consolidation  to a  Single-Fund endowment  model would                                                                    
     align  the  Permanent  Fund  with  best  practices  for                                                                    
     intergenerational wealth funds.                                                                                            
                                                                                                                                
     For the Present                                                                                                            
        • Ensure the option of an annual payout to support                                                                      
          dividends and government services.                                                                                    
        • Maintain stable payouts from year to year.                                                                            
        • Make payout method compatible with investment                                                                         
          strategy.                                                                                                             
     For the Future                                                                                                             
        • Prevent overspending in the good years.                                                                               
        • Maintain purchasing power for the entire Fund.                                                                        
                                                                                                                                
     The  two-account structure  is  outdated and  conflicts                                                                    
     with   best   practices   in  sovereign   wealth   fund                                                                    
     management.                                                                                                                
                                                                                                                                
     The ERA is at risk  of depletion given the annual draws                                                                    
     to   support  government   services  and   the  divided                                                                    
     program, as  well as  inflation proofing  the Principal                                                                    
     for intergenerational Alaskan benefit.                                                                                     
                                                                                                                                
9:44:09 AM                                                                                                                    
                                                                                                                                
MR. BRUNE paraphrased slide 17, "Constitutional Amendment,"                                                                     
which read as follows [original punctuation provided]:                                                                          
                                                                                                                                
     The Board of Trustees has  been on record for more than                                                                    
     twenty  years supporting  the transition  to a  Single-                                                                    
     Fund   endowment  to   protect  its   intergenerational                                                                    
     sustainability  and ensure  that  it  provides for  all                                                                    
     generations.                                                                                                               
                                                                                                                                
     Board Resolutions 2000-13, 2003-05, 2004-09                                                                                
                                                                                                                                
        • Supporting a constitutional amendment to limit                                                                        
          the annual Fund payout to not more than a 5% POMV                                                                     
          averaged over a period of 5 years.                                                                                    
        • Implementing a constitutional POMV spending limit                                                                     
          has   the   accompanying   benefit   of   assuring                                                                    
          permanent inflation-proofing of the Fund.                                                                             
                                                                                                                                
MR. BRUNE added that the endowment model would resolve the                                                                      
inflation proofing issue.                                                                                                       
                                                                                                                                
9:45:19 AM                                                                                                                    
                                                                                                                                
MR. BRUNE summarized the Trustees' Paper Volume 10 on slide 18,                                                                 
which proposes a change from the two-account structure  The                                                                     
Principal and the ERA  to one account.                                                                                          
                                                                                                                                
9:46:03 AM                                                                                                                    
                                                                                                                                
MR BRUNE turned to slide 19, "Proposed Single-Fund Endowment                                                                    
Model," which read as follows [original punctuation provided]:                                                                  
                                                                                                                                
     Adopting   this   model,    which   would   include   a                                                                    
     Constitutionally  established   spending  limit,  would                                                                    
     strengthen   the   Fund's   long-term   stability   and                                                                    
     purchasing power for future generations.                                                                                   
                                                                                                                                
   • Merge the Principal and the ERA into a Single-Fund.                                                                        
   • Limit annual distributions through a Constitutional                                                                        
     Percent of Market Value Rule.                                                                                              
   • Ensure automatic inflation proofing by adhering to a                                                                       
     long-term sustainable withdrawal rate.                                                                                     
   •                                                                                                                            
     The  change  to  a  Single-Fund would  ensure  that  an                                                                    
     annual POMV  transfer would be available  each year but                                                                    
     would  not affect  the discretion  in  deciding how  to                                                                    
     spend the money.                                                                                                           
                                                                                                                                
     The   power   of   appropriation   remains   with   the                                                                    
     Legislature, while the annual  draw from the Fund would                                                                    
     be limited.                                                                                                                
                                                                                                                                
9:46:49 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL paraphrased slide 20, "Benefits of the Single-Fund                                                                 
Model," which read as follows [original punctuation provided]:                                                                  
                                                                                                                                
     Aligned  with  global   best  practices,  strengthening                                                                    
     Alaska's   financial   position   through   sustainable                                                                    
     withdrawals  & limited  to  the  Fund's long-term  real                                                                    
     return                                                                                                                     
                                                                                                                                
     Total-Return Investing:                                                                                                    
     Maximizes    long-term    growth   without    liquidity                                                                    
     constraints.                                                                                                               
                                                                                                                                
     Predictable & Sustainable Spending:                                                                                        
     A maximum draw POMV rule prevents overspending.                                                                            
                                                                                                                                
     Automatic Inflation Proofing:                                                                                              
     Eliminates  need  for  manual and  ad  hoc  legislative                                                                    
     adjustments.                                                                                                               
                                                                                                                                
     Alignment with Prudent Investor Standards:                                                                                 
     Follows best practices for endowments and trusts.                                                                          
                                                                                                                                
     A  Single-Fund  Endowment   is  permanently  inflation-                                                                    
     proofed   and  ensures   the  Fund's   real  value   is                                                                    
     maintained  over  time  while supporting  its  intended                                                                    
     beneficiaries.                                                                                                             
                                                                                                                                
     The key principles behind this are:                                                                                        
        • Growth in the Fund's value keeps pace with or                                                                         
          exceeds inflation.                                                                                                    
        • A prudent spending rule/limited draw rate ensures                                                                     
          sustainability.                                                                                                       
        • Returns above the draw rate are reinvested.                                                                           
                                                                                                                                
9:47:31 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL paraphrased slide 21, "Comparing Fund Structures,"                                                                 
which read as follows [original punctuation provided]:                                                                          
                                                                                                                                
     The  Endowment Model  is not  constrained in  providing                                                                    
     the  set  annual  POMV   draw,  while  the  two-account                                                                    
     structure is limited to the ERA's available balance.                                                                       
                                                                                                                                
     Endowment Retains Earnings                                                                                                 
        • Under the Single-Fund Endowment Structure, income                                                                     
          would be calculated according to generally                                                                            
          accepted accounting principles, meaning all                                                                           
          earnings (realized and unrealized) would be                                                                           
          retained within the Fund.                                                                                             
        • All earnings are retained and reinvested in the                                                                       
          Single-Fund, thus eliminating the need for                                                                            
          inflation proofing.                                                                                                   
                                                                                                                                
MR.  MITCHELL  explained  that   under  the  current  two-account                                                               
structure, 73 percent of the  fund is constitutionally protected,                                                               
whereas  95 percent  of the  fund  would be  protected under  the                                                               
proposed endowment model.  He refuted  the idea that the shift to                                                               
one  account  would  add  additional  risk  to  the  invasion  of                                                               
Principal.                                                                                                                      
                                                                                                                                
9:48:38 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL paraphrased slide 22, "Policy Recommendations,"                                                                    
which read as follows [original punctuation provided]:                                                                          
                                                                                                                                
     The  Board  of  Trustees recognizes  that  implementing                                                                    
     policy   reform   requires   legislative   action   and                                                                    
     widespread public support.                                                                                                 
                                                                                                                                
     Constitutional Amendment (Preferred Approach)                                                                              
     •  Enshrine  a  Single-Fund permanent  endowment  model                                                                    
     with a limited  POMV spending rule in  the Alaska State                                                                    
     Constitution     Ensures long-term  sustainability  and                                                                    
     intergenerational equity.                                                                                                  
                                                                                                                                
     Statutory Reforms                                                                                                          
     • Combine the two  accounts and establish the permanent                                                                    
     endowment model in statute                                                                                                 
              Rules-based   mechanisms  require   consistent                                                                    
     discipline.                                                                                                                
        Suspend  inflation  proofing when  the  ERA  balance                                                                    
     approaches minimum levels                                                                                                  
            Impacts intergenerational benefit.                                                                                  
     • Force  realization of capital gains  to stabilize ERA                                                                    
     balances                                                                                                                   
            Impacts  APFC's ability to manage  the portfolio                                                                    
          to a  maximum risk-adjusted  return over  the long                                                                    
          term and erodes intergenerational benefit.                                                                            
                                                                                                                                
     A constitutional  amendment to establish  a Single-Fund                                                                    
     endowment  the ultimate solution                                                                                           
                                                                                                                                
     "The combination  of a  single-account structure  and a                                                                    
     Constitutional  limit  on  POMV  draws  linked  to  the                                                                    
         Fund's long-term real return?will complete the                                                                         
      transition to a permanent-endowment model, with the                                                                       
     following attractive features and characteristics:                                                                         
     • Total return investing                                                                                                   
     • POMV spending and automatic inflation proofing                                                                           
       • Alignment with the Prudent Investor Law and best                                                                       
     practices.                                                                                                                 
     • Fit for purpose"                                                                                                         
         - Trustees' Paper Volume 10 Dr. Malan Rietveld                                                                         
     Sovereign Wealth Fund Expert                                                                                               
                                                                                                                                
9:51:23 AM                                                                                                                    
                                                                                                                                
MR. MITCHELL  concluded on slide  23, which featured  the graphic                                                               
from  slide 5  showing  the  flow of  funds  in  the single  fund                                                               
endowment model.                                                                                                                
                                                                                                                                
MR. BRUNE explained that APFC's  statutory mandate is to maximize                                                               
risk adjusted  returns for the  people of Alaska.   Consequently,                                                               
the focus is  on diversification rather than going all  in on the                                                               
stock market,  which in a down  year, would not have  allowed the                                                               
legislature to fund  state services or the PFD.   He acknowledged                                                               
that some  private equity  funds have  large fee  structures, but                                                               
the overall  cost of  the Alaska Permanent  Fund is  much smaller                                                               
than  most funds.    He concluded  that  a single-fund  endowment                                                               
would  bring more  predictability  than  the current  two-account                                                               
structure.                                                                                                                      
                                                                                                                                
9:53:16 AM                                                                                                                    
                                                                                                                                
VICE  CHAIR  FIELDS questioned  the  best  way to  describe  this                                                               
proposal to the public.                                                                                                         
                                                                                                                                
MR. MITCHELL described  it as the protection of  the state's most                                                               
important revenue source for future  residents of the state while                                                               
recognizing past  sacrifices.  He  compared the fund to  fish and                                                               
wildlife resources,  explaining that those resources  are managed                                                               
in a way that ensures their longevity for future Alaskans.                                                                      
                                                                                                                                
MR.  BRUNE quoted  a past  mentor  who said,  "It must  fit on  a                                                               
bumper  sticker."   He said  the focus  should be  on two  words:                                                               
predictability and sustainability.                                                                                              
                                                                                                                                
9:55:35 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON   asked  how   many  years   the  extra                                                               
contributions would suspend inflation proofing.                                                                                 
                                                                                                                                
MR.  MITCHELL  said the  additional  $1.95  billion of  inflation                                                               
proofing would cover the coming year.                                                                                           
                                                                                                                                
9:56:31 AM                                                                                                                    
                                                                                                                                
SENATOR STEDMAN  emphasized the importance of  inflation proofing                                                               
the fund for  future generations of Alaskans.   He suspected that                                                               
a discussion  would be had during  this budget cycle on  how much                                                               
to inflation proof.                                                                                                             
                                                                                                                                
9:57:14 AM                                                                                                                    
                                                                                                                                
VICE CHAIR FIELDS  considered whether the public  should be given                                                               
the option to  go beyond inflation proofing and grow  the fund to                                                               
sustain  state operations  in  a post-oil  environment.   If  the                                                               
legislature  were to  assume long-term  declines  in oil  revenue                                                               
over the next 30 years, he  asked what draw percentage would grow                                                               
the fund while simultaneously funding operations.                                                                               
                                                                                                                                
MR. MITCHELL said that calculation  would require an identifiable                                                               
target.   He  explained that  drawing  less from  the fund  would                                                               
create  an expectation  of growth,  adding  that annual  deposits                                                               
from royalty revenue  are still being made in the  amount of $400                                                               
million.  He  stated that the question would need  to be answered                                                               
from  a policy  perspective and  offered  to follow  up with  the                                                               
requested information.                                                                                                          
                                                                                                                                
MR. BRUNE  returned to  slide 8  and reiterated  that CPI  plus 5                                                               
percent is  a difficult objective; however,  endowments typically                                                               
target a  4 to 5 percent  threshold.  He reiterated  that smaller                                                               
draws leave more to be grown for future years.                                                                                  
                                                                                                                                
9:59:47 AM                                                                                                                    
                                                                                                                                
SENATOR  STEDMAN  pointed  out  that  the  Alaska  Mental  Health                                                               
Trust's target of  4.25 percent has been  predictable and stable.                                                               
He   recommended  that   the   legislature   consider  that   for                                                               
comparison.                                                                                                                     
                                                                                                                                
10:00:32 AM                                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There  being  no  further  business  before  the  committee,  the                                                               
Legislative Budget  and Audit Committee meeting  was adjourned at                                                               
10:00 a.m.                                                                                                                      

Document Name Date/Time Subjects
LBAC Agenda 03.04.25.pdf JBUD 3/4/2025 9:00:00 AM
POMV in Alaska's Budget by LegFi 03.04.25.pdf JBUD 3/4/2025 9:00:00 AM
Trustees Paper 10_ A Rules Based Endowment by APFC 03.04.25.pdf JBUD 3/4/2025 9:00:00 AM
APFC Trustees Paper 10.pdf JBUD 3/4/2025 9:00:00 AM
202503_APFC Follow Up_LB&A Committee on March 4.pdf JBUD 3/4/2025 9:00:00 AM