Legislature(1999 - 2000)
04/20/1999 07:30 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
GENERAL SUBJECT (S): LONG TERM FISCAL GAP DISCUSSION
The following overview was taken in log note format. Tapes and
handouts will be on file with the House Finance Committee through the
21st Legislative Session, contact 465-2156. After the 21st Legislative
Session they will be available through the Legislative Library at 465-
3808.
Time Meeting Convened: 7:30 p.m.
Tape(s): HFC 99 - 90, Side 1 HFC 99 - 91, Side 1
HFC 99 - 90, Side 1
PRESENT:
X
Representative G. Davis
X
Co-Chair Therriault
X
Representative Foster
X
Co-Chair Mulder
X
Representative Grussendorf
X
Vice Chair Bunde
X
Representative Kohring
X
Representative Austerman
Absent
Representative Moses
X
Representative J. Davies
X
Representative Williams
ALSO PRESENT:
REPRESENTATIVE SHARON CISSNA; REPRESENTATIVE ETHAN BERKOWITZ; PETER
BUSHRE, CHIEF FINANCIAL INVESTMENT OFFICER, ALASKA PERMANENT FUND
CORPORATION, DEPARTMENT OF REVENUE; JIM KELLY, DIRECTOR OF
COMMUNICAITONS, ALASKA PERMANENT FUND CORPORATION, DEPARTMENT OF
REVENUE.
LOG
SPEAKER
DISCUSSION
000
BEGIN TAPE 90, SIDE 1
JIM KELLY, DIRECTOR
OF COMMUNICATIONS,
ALASKA PERMANENT FUND
CORPORATION
Provided members with copies of their
power point slide presentation, Alaska
Permanent Fund: Long-Term Investment
Considerations (copy on file).
287
Mr. Kelly
Observed that the focus of the Alaska
Permanent Fund Corporation (APFC) is
investment management not public policy.
Reviewed charts 5 (growth of the fund
since inception) and 6 (distribution of
the fund income since inception.
CO-CHAIR THERRIAULT
Noted that the Alaska Permanent Fund
Corporation got into the political
problem of making loans.
403
MR. KELLY
Stressed that inflation proofing was
adopted to become more economical.
450
Mr. Kelly
Noted savings for future generations.
Explained that it is not likely that
existing investment and distribution
structures would work as well in the
future due to increased volatility in
capital markets. Discussed volatility in
capital markets.
516
Mr. Kelly
Compared returns over the last 15 years.
540
Vice-Chair Bunde
Noted that the perimeters of investment
have been discussed. Asked how this has
affected returns.
Mr. Kelly
Observed that the fund would have
increased by an additional 10 percent if
legislation had been acted on.
604
Mr. Kelly
Noted that accounting standards have
changed. Discussed the earnings reserve
account on chart 10. Explained that
there are discrepancies with state law
and federal reporting standards.
674
Mr. Kelly
Discussed chart 11. There is an
inconsistency between current generally
accepted accounting principles and state
law. Research by Morrison and Forester
and KPMG showed that the conflict arises
in regards to the definition of income
available for distribution. Concluded
that legislation is needed to resolve
the conflict.
785
Mr. Kelly
Reviewed chart 12. Noted that the lines
have crossed between oil revenue and
fund income.
840
Mr. Kelly
Reviewed objectives listed in chart 13:
maximize long-term total return,
maximize annual spending distributions,
preserve the real value of the Fund and
the distributions, and maximize the
stability and predictability of spending
distributions.
Mr. Kelly
Stressed that if you want to preserve
the real value of the Fund, must not
spend over the real rate of return on
your investments over the long term.
927
Mr. Kelly
Reviewed the change in the capital
market returns and asset allocation. The
state will get a 7.75 percent return
without changes. If HB 156 were passed
then rate of return would be increased
to 7.94 percent. HB 156 was amended in
House State Affairs Committee. If the
State Affairs version passes it would
increase assets to 8.13 percent.
1074
Mr. Kelly
Reviewed chart 19. Concluded that the
Fund would earn between $67 - $73
billion dollars.
1119
Co-Chair Mulder
Asked what would happen if all
restrictions were removed.
1134
Mr. Kelly
Noted that it would not be prudent to
invest 100 percent. He observed that
there are funds that earn upwards of 50
- 60 percent.
1186
Peter Bushre, Chief
Financial Investment
Officer, Department
of Revenue
Noted that trustees would make asset
allocations. They would have flexibility
to better maximize returns.
1273
Mr. Kelly
Concluded that greater options would be
helpful.
1315
Mr. Kelly
Observed that the fund is currently
$26.3 billion dollars.
Co-Chair Therriault
Questioned what is Alaskan CD.
Mr. Bushre
Explained that there are certificates of
deposits in Alaskan banks. It allows
diversification.
Representative G.
Davis
Asked the amount of real estate.
1407
Mr. Bushre
Discussed real estate owned by the
Corporation.
1450
Mr. Bushre
Observed that the value of the fund has
grown by $1 billion dollars in three
months.
Mr. Bushre
Pointed out that the fund is made up of
principle and income. He explained that
the principle comes from a variety of
sources including constitutionally
mandated deposits and legislative
appropriations. Discussed items
recognized by state law. Under today's
accounting standards earnings reserve
would be higher from unrealized gains.
1628
Mr. Bushre
When legislature passes a bill to
appropriate earnings reserve $2.8
billion would be moved.
1660
Mr. Bushre
Reviewed chart 24. He observed that
investments are a mixture of stocks,
bonds and real estate.
1685
Mr. Bushre
Discussed the priority of permanent fund
uses defined by statute (AS 37.12.140
and 145). Dividends are first calculated
and paid then an amount of income
sufficient to offset the effect of
inflation is transferred to the
principle.
1713
Representative
Austerman
If there is not enough cash the
unrealized earnings can not be used.
1739
Vice-Chair Bunde
If earnings reserve were changed would
the dividend be calculated on the entire
amount?
1770
Mr. Bushre
Stressed that unrealized gains create
inflation. A change in the law would put
accounting standards on an even footing.
1804
Mr. Bushre
Best interest in the state to work from
an earnings reserve balance that
conforms to proper accounting standards.
1835
Vice-Chair Bunde
Expressed concern that it would rocket
the permanent fund dividend.
1839
Mr. Bushre
Encouraged the distribution to be based
on percentage of market value to create
a more stable distribution.
1859
Vice-Chair Bunde
Expressed concern that it would open a
Pandora's box.
1878
Representative
Austerman
First option is to cap the permanent
fund then make a change to the earnings
reserve.
1912
Ethan
What is the rate of return for various
components of the fund?
Mr. Kelly
Stocks 9.4 to 10. Bonds 8.6.
1949
Mr. Bushre
Reviewed current law for the calculation
of the permanent fund dividend. Reviewed
calculations for past dividends on chart
27.
1987
Mr. Bushre
Reviewed chart 28 to show the 1998
dividend calculations.
2005
Mr. Bushre
Emphasized the danger if there is a bad
year. Results were shown on charts 29
and 30.
Mr. Bushre
Noted that the second calculation has
not had to be used. They would not be
able to inflation proof.
2122
Mr. Bushre
Discussed inflation proofing on chart
31. The rate is applied to the
principal.
2167
Mr. Kelly
Reviewed chart 24.
2175
Representative
Grussendorf
Questioned what would happen if
inflation proofing was done before the
dividend was paid.
2207
Mr. Bushre
Observed that there would be a very
small dividend.
Representative J.
Davies
Noted that the only part of the dividend
that is inflation proofed is the
principle.
2278
Mr. Bushre
Explained that inflation proofing does
not require movement outside of the
fund. Its purpose is to take money off
the appropriation table and to maintain
the value of the fund.
2343
Mr. Bushre
Reviewed the formula for inflation
proofing, charts 33 and 34.
2375
Representative Foster
Noted that permanent fund dividends have
been lower in some years than in the
previous year.
2400
Mr. Bushre
Explained that the rate of inflation was
greater in some years.
(Tape Change, HFC 99 - 90, Side 2)
048
Co-Chair Mulder
Clarified that they are projecting 3
percent inflation.
099
Representative
Austerman
Is there unrecognized inflation in the
growth of the fund?
134
Mr. Bushre
Appreciation in the market value
includes the impact of inflation but
current law does not allow it to be
recognized.
222
Mr. Bushre
Discussed distribution of income based
on percentage of market value (POMV),
chart 35. Discussed history of POMV.
310
Mr. Kelly
Reviewed changes made in New Mexico,
chart 36.
465
Mr. Kelly
Discussed distribution of income based
on percentage of market value.
534
Mr. Bushre
Stressed that 70 percent of endowment
funds use percentage of market value. It
creates a more stable distribution.
Co-Chair Mulder
Concluded that there would be greater
stability and less volatility.
590
Mr. Kelly
Pointed out advantages of POMV. There is
a connection between distribution and
investment policies.
660
Mr. Kelly
Reviewed the Trustee's Policies:
Alaskans Speak Out on Public Policy
Choices (copy on file).
781
Mr. Kelly
Provided members with Attachment 2,
(copy on file).
790
Mr. Kelly
Discussed charts 1 and 2.
855
Mr. Kelly
Noted that the world provides risks
through volatility.
888
Mr. Kelly
Reviewed chart 10. Noted that the
greatest return offers the greatest
risk.
935
Mr. Kelly
Noted that the permanent fund does not
grow in a straight line. There are times
when the earnings reserve goes away. And
the amount that can be paid out is
reduced.
988
Mr. Kelly
Noted that inflation proofing can not be
paid in years where there are reductions
to dividends.
1010
Mr. Kelly
Problems with current law is that if
there is a bad year inflation proofing
would not be as safe as under
distribution based on percentage of
market value.
1070
Mr. Kelly
Reviewed chart 16, which demonstrates a
range of payouts.
1174
Mr. Kelly
Discussed charts 17 and 18. He noted
that the status quo is used to look at
three scenarios.
1212
Mr. Kelly
He reviewed the three scenarios on
charts 19, 20 and 21.
1286
Mr. Kelly
Discussed distribution based on the
dividend, charts 22 - 25.
1344
Mr. Kelly
Reviewed scenarios in charts 27 - 30.
1369
Co-Chair Mulder
Questioned if the earnings are 8.5, 3
percent would be held for inflation. 5.5
percent would be paid in dividends.
Referred to Chart 29
1430
Mr. Kelly
Reviewed chart 29. Shows the difference
of moving earnings reserve from the
fund.
1469
Mr. Kelly
Stressed that the point is where in the
fund the money is left, principle or
earnings reserve.
1488
Vice-Chair Bunde
All the money is invested at the same
time.
Mr. Bushre
In hard times the POMV would also drop.
1520
Vice-Chair Bunde
The money would be available to fund
state government if there is hard times.
Co-Chair Mulder
Questioned availability of funds.
Assumption is that there is some amount
of discipline.
1628
Discussion occurred regarding the
earnings reserve.
1632
Mr. Kelly
Spoke to inflation proofing. Debated if
it should be 4.5% or 5%. Must check the
medium rate of return. In the fifth
year it could be $29 billion dollars
rate of return. That would be 4.5% pay
off. If it were kept in the earnings
reserve account, more would be paid out
but would be earning more money.
1732
Mr. Kelly
Spoke to the earnings reserve balance
and the base case range of results. It
would improve if the reserve account
were inflation proofed. The earnings
reserve could be available to pay the
dividend.
1791
Mr. Kelly
Reviewed charts 46 - 48.
1888
Mr. Bushre
Explained that the only way POMV will
work is if no more is distributed.
1929
Mr. Bushre
The purpose of inflation proofing is to
make sure that it is not distributed.
1955
Mr. Kelly
Reviewed charts 50 and 51.
1975
Mr. Kelly
Concluded findings on chart 54. The
permanent fund can support its three
objectives under the current
distribution formula across most
markets. A POMV distribution of income
can result in a more stable distribution
stream than the current income based
distribution rule.
2041
Representative Foster
Reviewed the document, Alaskans Speak
Out on Public Policy Choices.
Co-Chair Mulder
There were 585 thousand applications for
permanent fund dividends in 1998. They
are predicting just under than 600
thousand applications in 1999.
Mr. Kelly
Pointed out that 2/3 thirds of the fund
would not be there without legislative
appropriation.
2144
Mr. Bushre
Pointed out that without the legislature
the fund would be only a third of its
current size.
2159
Vice-Chair Bunde
Noted that change is threatening to many
people. Asked what the Corporation can
do to assist public perception.
2184
Mr. Bushre
Observed that the Corporation thinks
that POMV is the best way to protect the
Fund.
2235
Vice-Chair Bunde
Noted that the Corporation is requesting
statutory changes.
2332
Mr. Kelly
Would like to see a structural change
that makes sense.
Representative J.
Davies
Stated that he is convinced that this
would be good structural change.
2364
Representative
Williams
What would be the ideal amount in the
earnings reserve
Mr. Kelly
Noted that $2 billion is too little. At
$6 billion there is not a problem 9
times out of 10.
(Tape Change, HFC 99 - 91, Side 1)
076
Representative J.
Davies
Clarified that the basis is to pay the
inflation proofing.
131
Representative
Austerman
Referred to the All Alaskan Plan. He
noted that the plan would also be a
POMV.
172
Mr. Kelly
Emphasized that the numbers need to be
reviewed to see if the pay averages.
201
Vice-Chair Bunde
Noted that under the All Alaskan Plan
the dividend would not survive.
227
Mr. Kelly
Observed that the percentage of the
dividend would have to be negotiated
under all plans.
273
Co-Chair Mulder
ADJOURNMENT
The meeting adjourned at 9:05 p.m.
HOUSE FINANCE COMMITTEE
LOG NOTES
April 20, 1999
HFC 7 4/20/99
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