Legislature(2019 - 2020)Anch LIO Lg Conf Rm


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Audio Topic
10:07:35 AM Start
10:09:10 AM Bicameral Permanent Fund Working Group Presentations
10:12:15 AM Permanent Fund Corporation Mission and History
12:59:08 PM Fiscal Models
02:12:32 PM Revenue Models
04:12:12 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ - Angela Rodell, AK Permanent Fund Corp: Mission, TELECONFERENCED
history, roles and responsibilities of trustees
- Presentations by working group teams
- David Teal, Div. of Legislature Finance: Fiscal
- Commissioner Bruce Tangeman, Dept. of Revenue:
Revenue models
**Streamed live on AKL.tv**
                    ALASKA STATE LEGISLATURE                                                                                  
             BICAMERAL PERMANENT FUND WORKING GROUP                                                                           
                         ANCHORAGE LIO                                                                                        
                         June 28, 2019                                                                                          
                           10:07 a.m.                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Jennifer Johnston, Co-Chair                                                                                      
Senator Shelley Hughes                                                                                                          
Senator Donald Olson                                                                                                            
Representative Adam Wool                                                                                                        
Representative Jonathan Kreiss-Tomkins                                                                                          
Representative Kelly Merrick                                                                                                    
MEMBERS ABSENT                                                                                                                
Senator Click Bishop, Co-Chair                                                                                                  
Senator Bert Stedman                                                                                                            
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Cathy Gissel                                                                                                            
Senator Chris Birch                                                                                                             
Senator Jesse Kiehl                                                                                                             
Representative Matt Claman                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Sara Hannan                                                                                                      
Representative Louise Stutes                                                                                                    
Representative Geran Tarr                                                                                                       
COMMITTEE CALENDAR                                                                                                            
BICAMERAL PERMANENT FUND WORKING GROUP PRESENTATIONS                                                                            
- Permanent Fund Corporation Mission and History - Angela Rodell                                                                
- Fiscal Models - David Teal                                                                                                    
- Revenue Models - Bruce Tangeman                                                                                               
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
ANGELA RODELL, Executive Director                                                                                               
Alaska Permanent Fund Corporation                                                                                               
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT: Discussed  the  mission,  history, roles  and                                                            
responsibilities of the trustees of the Permanent Fund.                                                                         
DAVID TEAL, Legislative Fiscal Analyst                                                                                          
Legislative Finance Division                                                                                                    
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT: Presented  fiscal  models  for the  permanent                                                            
BRUCE TANGEMAN, Commissioner                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT: Presented  revenue models  for the  permanent                                                            
ACTION NARRATIVE                                                                                                              
10:07:35 AM                                                                                                                   
CO-CHAIR  JENNIFER JOHNSTON  called the  Bicameral Permanent  Fund                                                            
Working Group meeting  to order at 10:07 a.m. Present  at the call                                                              
to  order were  Senators  Olson  and Hughes;  and  Representatives                                                              
Merrick,  Wool, Kreiss-Tomkins,  and  Co-Chair Johnston.  Co-Chair                                                              
Johnston  announced that  Co-Chair Bishop  had a family  emergency                                                              
and  would  not  be  in  attendance   and  Senator  Stedman  would                                                              
participate via teleconference.                                                                                                 
^Bicameral Permanent Fund Working Group Presentations                                                                           
      Bicameral Permanent Fund Working Group Presentations                                                                  
10:09:10 AM                                                                                                                   
CO-CHAIR   JOHNSTON  reviewed   the  agenda   for  the   Bicameral                                                              
Permanent Fund Working  Group (PFG). She said that  Angela Rodell,                                                              
Executive Director,  Alaska Permanent  Fund Corporation  will give                                                              
a PowerPoint, followed  by fiscal and revenue  model presentations                                                              
by David  Teal,  Legislative Fiscal  Analyst, Legislative  Finance                                                              
Division,   and  Bruce  Tangeman,   Commissioner,  Department   of                                                              
Revenue. She advised  that she had conferred with  Co-Chair Bishop                                                              
and the  presentations by the three  working group teams  would be                                                              
removed from  today's agenda.  [The three  teams were  assigned to                                                              
evaluate  the impacts  of  a $3,000  dividend,  a $1,600  dividend                                                              
and, a surplus permanent fund dividend amount.]                                                                                 
10:09:41 AM                                                                                                                   
SENATOR HUGHES  said that a substantial  amount of work  went into                                                              
the working group  team reports. She asked that  the working group                                                              
reports  be  published  and  available even  if  the  teams  would                                                              
continue to work towards reaching agreement.                                                                                    
CO-CHAIR  JOHNSTON said  she would  discuss her  request with  Co-                                                              
Chair Bishop. She  envisioned the three working  group teams would                                                              
work  similar to  the  legislative conference  committee  process.                                                              
She  related  her  understanding  that  the  conference  committee                                                              
process  takes   considerable  time  and  the  committee   does  a                                                              
substantial amount  of work before  it can come to  any agreement.                                                              
Although   she  offered   to  speak   to   Co-Chair  Bishop,   she                                                              
anticipated  that  as co-chairs,  they  would expect  the  working                                                              
group teams to  produce reports similar to ones  that a conference                                                              
committee would prepare.                                                                                                        
SENATOR  HUGHES said  that as the  Chair of  the Senate  Judiciary                                                              
Standing Committee,  she would  make her  report available  to the                                                              
public. The  committee heard [SJR  5, proposing amendments  to the                                                              
Constitution  of  the  State  of Alaska  relating  to  the  Alaska                                                              
permanent fund  and the permanent  fund dividend], so  she planned                                                              
on  uploading  her  report  and   would  also  make  it  available                                                              
^Permanent Fund Corporation Mission and History                                                                                 
         Permanent Fund Corporation Mission and History                                                                     
10:12:15 AM                                                                                                                   
ANGELA   RODELL,  Executive   Director,   Alaska  Permanent   Fund                                                              
Corporation,  Department  of Revenue  (DOR),  Juneau, stated  that                                                              
she would begin  by referring to the Constitution of  the State of                                                              
Alaska, which is how she begins every presentation. She read:                                                                   
      In 1976, Alaskans voted 75,588 to 38,518 in favor to                                                                      
       amend the Constitution of the State of Alaska and                                                                        
     created the Alaska Permanent Fund.                                                                                         
       Alaska Constitution Article IX Section 15. Alaska                                                                        
     Permanent Fund:                                                                                                            
     At  least  twenty-five  percent  of  all  mineral  lease                                                                   
     rentals,  royalties,  royalty   sale  proceeds,  federal                                                                   
     mineral  revenue sharing payments  and bonuses  received                                                                   
     by the  state shall be placed  in a permanent  fund, the                                                                   
     principal  of  which  shall   be  used  only  for  those                                                                   
     income-producing  investments   specifically  designated                                                                   
     by law as  eligible for permanent fund  investments. All                                                                   
     income  from the permanent  fund shall  be deposited  in                                                                   
     the general fund unless otherwise provided by law.                                                                         
She  noted  that the  Constitution  of  the  State of  Alaska  has                                                              
simple, straight-forward language.                                                                                              
10:13:45 AM                                                                                                                   
MS. RODELL turned to slide 3, "Legislative Findings 37.13.020."                                                                 
          The   people  of  the   state,  by   constitutional                                                                   
          amendment,  have  required   the  placement  of  at                                                                   
          least  25% of  all  mineral royalties  received  by                                                                   
          the  state into a  permanent fund. The  legislature                                                                   
          finds with respect to the fund that:                                                                                  
          • The Fund should provide a means of conserving a                                                                     
             portion of the state's revenue from mineral                                                                        
             resources to benefit all generations of                                                                            
          • 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 the purposes                                                                              
             designated by law.                                                                                                 
She said  that once the decision  to establish the  permanent fund                                                              
was passed  by initiative, it took  another four years  before the                                                              
Alaska  Permanent   Fund  Corporation  (PFC)  was   created.  This                                                              
created the  foundation for  how the PFC  manages and  invests the                                                              
fund. The  permanent fund  was originally managed  in 1977  by the                                                              
Department  of Revenue. In  1980, when  the Alaska Permanent  Fund                                                              
Corporation was established, it took over that role.                                                                            
10:15:21 AM                                                                                                                   
MS.  RODELL   turned  to  slide   4,  "1980  The   Corporation  AS                                                              
       The Alaska State Legislature passed SB 161 in 1980                                                                       
     establishing the Alaska Permanent Fund Corporation.                                                                        
     The purpose  of the Corporation is to manage  and invest                                                                   
     the  assets  of  the  permanent  fund  and  other  funds                                                                   
     designated  by  law  in accordance  with  AS  37.13.010-                                                                   
     APFC  operates  as a  separate  state entity  under  the                                                                   
     oversight  of  an  independent  Board  of  Trustees  who                                                                   
     serve as fiduciaries of the Alaska Permanent Fund.                                                                         
          A  fiduciary responsibility  is a legal  obligation                                                                   
          of  one  party  to  act in  the  best  interest  of                                                                   
          When a  party knowingly accepts the  fiduciary duty                                                                   
          on behalf  of another  party, they are  required to                                                                   
          act  in the  best interest  of  the principal,  the                                                                   
          party whose assets they are managing.                                                                                 
MS. RODELL  said that  [the above]  statement captures  the Alaska                                                              
Permanent  Fund Corporation's  mission.  It is  what  the PFC  has                                                              
been  set up  to  do  and all  that  it  does. She  also  included                                                              
several definitions [shown in italics above.]                                                                                   
MS. RODELL said that it is the job of the Board of Trustees to                                                                  
act in this manner, in the best interest of the principal of the                                                                
10:16:32 AM                                                                                                                   
MS. RODELL turned to slide 5, "The Board of Trustees AS                                                                         
     The  Board consists  of  six  members appointed  by  the                                                                   
             Two of the  members must  be heads of  principal                                                                   
          departments,   one  seat  is  designated   for  the                                                                   
          Commissioner of Revenue.                                                                                              
            The  four public members  of the board  must have                                                                   
          recognized   competence  and  wide   experience  in                                                                   
          finance,    investments,    or    other    business                                                                   
          management-related fields.                                                                                            
     The   Board   sets  investment   policy,   reviews   the                                                                   
     portfolio's   performance,  and   works  together   with                                                                   
     management  to  determine  the  Corporation's  strategic                                                                   
     As fiduciaries,  the  Trustees have  a duty to  Alaskans                                                                   
     in  assuring  that the  Permanent  Fund is  managed  and                                                                   
     invested  in   a  manner  consistent   with  legislative                                                                   
10:17:31 AM                                                                                                                   
MS.  RODELL   turned  to  slide   6,  "History"   and  "Investment                                                              
Responsibilities."  One of the  things members  will notice  as we                                                              
review the  statutory changes  is that over  the course of  the 39                                                              
years  of the  corporation's  existence is  that  the process  has                                                              
been one  of allowing  the corporation  the time  to take  on more                                                              
risk, being very  prudent in taking on that risk,  and having more                                                              
and more direct management of the fund.                                                                                         
10:18:12 AM                                                                                                                   
MS.  RODELL  turned  to  slide   7,  "1980  Original  Language  AS                                                              
     (a) The prudent-man  rule shall be applied  by the board                                                                   
     in  the management  and investment  of Alaska  permanent                                                                   
     fund  assets.   The  prudent-man  rule  as   applied  to                                                                   
     investments  of the  corporation  means  that in  making                                                                   
     investments  the board shall  exercise the judgment  and                                                                   
     care under  the circumstances  then prevailing  which an                                                                   
     institutional    investor    of    ordinary    prudence,                                                                   
     discretion,   and   intelligence    exercises   in   the                                                                   
     management  of large  investments entrusted  to it,  not                                                                   
     in  regard   to  speculation   but  in  regard   to  the                                                                   
     permanent  disposition  of funds,  considering  probable                                                                   
     safety of capital as well as probable income.                                                                              
     (b)  The  corporation  assets  shall only  be  used  for                                                                   
     income-producing investments.                                                                                              
     (c)    The   board   shall    maintain   a    reasonable                                                                   
     diversification  among  investments  unless,  under  the                                                                   
     circumstances, it is clearly prudent not to do so.                                                                         
     (d)  The board  shall  submit long-range  and  quarterly                                                                   
     investment reports  to the Legislative Budget  and Audit                                                                   
     (e) The  corporation may not  borrow funds or  guarantee                                                                   
     from  principal   of  the  Alaska  permanent   fund  the                                                                   
     obligations of others.                                                                                                     
     (f) The board may enter into and enforce all contracts                                                                     
     necessary, convenient or desirable for purposes of the                                                                     
MS. RODELL  said it was interesting  to note that  the prudent-man                                                              
rule  has been  in  existence since  the  [fund's] inception.  She                                                              
noted  that some  people thought  it was  a newer  version of  the                                                              
investment  responsibility.  She  added that  the  Permanent  Fund                                                              
Corporation  also   still  complies   with  the  rule   to  submit                                                              
quarterly investment  reports to the Legislative  Budget and Audit                                                              
10:19:18 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS referenced  her statement  that the                                                              
PFC  has taken  on  more direct  management  of  assets in  recent                                                              
times. He asked  her to elaborate on how the  percentage of assets                                                              
managed directly  by the PFC has  changed in recent years  and her                                                              
MS. RODELL responded that slide 8 will address that question.                                                                   
10:19:51 AM                                                                                                                   
MS.  RODELL   turned  to  slide   8,  "1980  Original   Investment                                                              
Vehicles."  She  said that  considering  the  original  investment                                                              
vehicles  at the time,  members might  notice that  it was  a very                                                              
conservative list of vehicles. She reviewed the list.                                                                           
     AS 37.13.120 (g)  (i)                                                                                                      
      • Obligations insured or guaranteed by the United                                                                         
     • Certificates of Deposit (CDs) issued by US Banks                                                                         
     • Shares & CDs issued by chartered savings and loans                                                                       
        in Alaska                                                                                                               
     • CDs issued by Alaska banks                                                                                               
     • Corporate debt and notes rated AA or higher                                                                              
    • Residential  mortgages    and   commercial    loans,                                                                      
        containing federal guarantees                                                                                           
     • Futures contracts for the purpose of hedging                                                                             
     • Asset allocation limits:                                                                                                 
        25% corporate debt, 15% residential mortgages                                                                           
MS. RODELL  said that  a balance  of 60  percent of the  portfolio                                                              
needed to  be in obligations  that were  insured or  guaranteed by                                                              
the United  States, Alaska bank  CDs and similar items,  which was                                                              
a very conservative  allocation. She noted that this  point is the                                                              
first mention of investing in Alaska.                                                                                           
     AS 37.13.120 (l)                                                                                                           
    • The board shall invest the assets of the corporation                                                                      
        in in-state investments to the extent in-state                                                                          
        investments   are    available   if   the    in-state                                                                   
          1. Have a risk level and expected yield                                                                               
          comparable to alternate investment opportunities;                                                                     
          2. Are included in the list of permissible                                                                            
          investments in (g) of this section.                                                                                   
10:21:43 AM                                                                                                                   
REPRESENTATIVE WOOL  asked whether the  interest rates at  the two                                                              
Alaskan banks were  preferential. He recalled reading  material in                                                              
members' binders  that Governor Hammond  had mentioned one  of the                                                              
incentives  to   create  the  permanent   fund  dividend   in  the                                                              
beginning  was because  only a  few people  were benefitting  from                                                              
certain loan  programs in the state,  so he wanted to  spread that                                                              
benefit to  the average person  who did  not receive any  loan. He                                                              
asked  whether  any  of  the  investments   received  preferential                                                              
MS. RODELL  answered no. She  said the Permanent  Fund Corporation                                                              
does not  believe that any of  the investments were  subsidized or                                                              
given preferential  treatment. She pointed out that  what happened                                                              
in  the  banking community  at  the  time  with lots  of  building                                                              
occurring, resulted in  the need for a lot of  liquidity. This was                                                              
an  effort to  keep a  robust  banking system  in  the state,  she                                                              
10:23:03 AM                                                                                                                   
REPRESENTATIVE WOOL  asked what  the balance and  average earnings                                                              
of the Alaska Permanent Fund were at that time.                                                                                 
MS.  RODELL  answered  that  in  1980 the  balance  was  about  $1                                                              
billion and interest rates were in the high teens.                                                                              
10:23:29 AM                                                                                                                   
SENATOR  OLSON,  in  reviewing   the  portfolio,  recognized  that                                                              
investing in  CDs may be safe, but  they currently do  not bring a                                                              
significant return.  He assumed it was  the same in the  1980s. He                                                              
asked whether the  reason the Alaska Permanent Fund  balance is so                                                              
robust is  that the  fund was  free from  the shackles  of placing                                                              
too much emphasis on security.                                                                                                  
MS. RODELL  responded  that he raises  a really  good point.  When                                                              
the  fund was  new, the  state was  focused on  ensuring that  the                                                              
permanent  fund was  going to  be available  for generations.  She                                                              
referred to  the findings,  which stated  that the permanent  fund                                                              
needed to  be present for all  future generations of  Alaskans. It                                                              
needed  to be  available in  2019 and  beyond, she  said. As  with                                                              
most  new things,  [the  corporation]  tended  to be  risk  averse                                                              
until it got  comfortable with how the investments  would work. In                                                              
addition, size matters  so once [the fund] reached  a certain size                                                              
[the managers]  realized they could  afford to take on  more risk.                                                              
Over time,  the stability of the  fund was maintained in  terms of                                                              
constitutional  protection,  since  annual royalty  deposits  were                                                              
made,  as required,  and the  oil  continued to  flow through  the                                                              
Trans-Alaska Pipeline  System (TAPS). This  gave comfort to  a lot                                                              
of people that this  could continue over time, she  said. She said                                                              
that as  she walks through the  timeline, members can  notice that                                                              
changes  were made  on a  regular,  robust basis,  because it  was                                                              
important  to  Alaskans  to  make sure  that  the  permanent  fund                                                              
continued to do all the things it needed to do.                                                                                 
10:25:55 AM                                                                                                                   
CO-CHAIR  JOHNSTON  stated  that  Senator  Kiehl  had  joined  the                                                              
REPRESENTATIVE  WOOL  asked  for   further  clarification  on  her                                                              
earlier comment  that the  permanent fund  balance was  $1 billion                                                              
and the  interest rate  in 1980  was in the  high teens.  He asked                                                              
whether  she was  speaking  to the  returns  and  if the  interest                                                              
rates were in the high teens.                                                                                                   
MS. RODELL  responded  that in 1980  or 1982,  the interest  rates                                                              
were in excess of 15 percent due to high inflation.                                                                             
10:26:41 AM                                                                                                                   
MS. RODELL turned  to slide 9, "Changes Over Time."  She said that                                                              
the changes came  on a fairly regular basis. In  1982, the savings                                                              
and loan crisis  started to work its way through  the country. She                                                              
added that  in 1982, the  types of stocks  that could  be invested                                                              
in are  called "value  stocks" today  rather than "growth  stocks"                                                              
that  generate  regular  payments  and income.  She  reviewed  the                                                              
remaining  1982 statutory  changes, adding  that there  was not  a                                                              
recognition  between debt and  equity at  the time, just  exposure                                                              
to U.S. Corporations, in general.                                                                                               
     1982 Amended Allowable Investments:                                                                                        
       • Added collateral requirements for illiquid CDs                                                                         
        • Added dividend yielding equities (foreign &                                                                           
        • Changed definitions of federal guarantees to                                                                          
          match revised security requirements                                                                                   
        • Changed asset allocation limits to 15% mortgages;                                                                     
          15% real estate; 10% foreign equities; 20%                                                                            
         foreign CDs; 50% US corporate debt & equities                                                                          
     1986 Added rating requirement of "A" to collateral for                                                                     
           illiquid CDs 1989                                                                                                    
     1989 Added language:                                                                                                       
        • Allowing for foreign corporate debt rated "AA" or                                                                     
        • Allowing for foreign government debt and CDs                                                                          
        • Broadening the definition of allowable foreign                                                                        
        • Broadening the definition of allowable future                                                                         
     Repealed and replaced asset allocation limits to:                                                                          
          15% mortgages                                                                                                         
          15% real estate                                                                                                       
          20% CDs and 50% corporate stocks & debt                                                                               
          securities (foreign & domestic)                                                                                       
 MS. RODELL said that in 1986, there was a recognition that the                                                                 
 corporation could take more risk and as a result, increase                                                                     
 returns. She turned to 1989.                                                                                                   
MS. RODELL  said removing the 10  percent limit on  foreign equity                                                              
and the 20  percent for foreign  CDs by changing it to  20 percent                                                              
CDs of  U.S. and foreign  combined made  things much  simpler. The                                                              
Board of  Trustees and  the PFC would  determine the  optional mix                                                              
of  foreign and  U.S.  stocks so  long  as it  did  not exceed  50                                                              
percent of the fund, she said.                                                                                                  
10:29:38 AM                                                                                                                   
REPRESENTATIVE  WOOL referred to  the 1982 allowable  investments.                                                              
He said the asset allocations adds up to 110 percent.                                                                           
MS.  RODELL  clarified that  these  refer  to  limits and  not  an                                                              
allocation  pie.  The board  was  still  entrusted to  create  the                                                              
actual allocation,  but limits were placed on  specific exposures,                                                              
so if  the board went in  one direction, it  would need to  cut it                                                              
from another.                                                                                                                   
10:30:15 AM                                                                                                                   
MS.  RODELL turned  to slide  10,  "Changes Over  Time 1992."  She                                                              
said  that  the  changes  in statute  in  1992  made  some  bigger                                                              
changes. She  said these  changes redefined  CDs and also  removed                                                              
the secondary  market liquidity  requirements, so the  corporation                                                              
no longer had to hold the collateral.                                                                                           
     Changes Over Time 1992 ?                                                                                                   
        • Redefined  CDs,   removing    secondary    market                                                                     
          liquidity requirements                                                                                                
        • Reduced rating requirement for corporate debt to                                                                      
               rom "AA"                                                                                                         
      • Removed certain mortgage insurance requirements                                                                         
        • Added permission for Board to establish/modify                                                                        
          investment guidelines, subject to review and                                                                          
          comment by Legislative Budget and Audit Committee                                                                     
          prior to adoption                                                                                                     
        • Amended collateral requirements                                                                                       
        • Changed asset allocation limits to 15% mortgages,                                                                     
          15% real estate, 20% CDs, 50% equities, 5%                                                                            
          corporate,    domestic,    foreign   and    taxable                                                                   
          municipal debt                                                                                                        
She said  she mentioned  earlier that  the corporation  could only                                                              
invest in  mortgages on the  portion that had federal  guarantees,                                                              
and this  removed some  of those  limits. She  emphasized  that it                                                              
added  permission for  the  board to  actually  establish its  own                                                              
investment  guidelines.  This  was  the  first time  that  a  real                                                              
relinquishing of  some of the  investment responsibilities  to the                                                              
Board of Trustees occurred, she said.                                                                                           
10:32:05 AM                                                                                                                   
MS. RODELL turned to slide 10, "Changes Over Time."                                                                             
    1994      Amended    real    estate   limits,    raising                                                                    
     investment amount from $20,000,000 to $150,000,000                                                                         
        • Total value of investment can exceed $150,000,000                                                                     
          if 33% of investment property is owned by other                                                                       
          institutional investors                                                                                               
     1996      Rating requirements changed to "investment                                                                       
        Asset allocation limits changed to:                                                                                     
        55% Stocks, 15% Real Estate, 20% CDs, 15% Mortgages,                                                                    
        5% other types of investments, subject to prudent                                                                       
        investor rule                                                                                                           
        • Recognized 'other' may cause aggregate investment                                                                     
          to exceed applicable limits                                                                                           
MS. RODELL  said that prior  to 1994, the  PFC was limited  to $20                                                              
million  for  investment  amount   and  the  total  value  of  the                                                              
investments  could not exceed  $150 million.  This meant  that the                                                              
PFC could  only be a  partner in an  investment if 33  percent was                                                              
owned  by other  institutional investors.  This  also limited  the                                                              
PFC to a  majority owner, but not  a 100 percent owner,  she said.                                                              
The rating  requirements  changed to investment  grade, the  asset                                                              
allocation limits  changed, and  public equities were  raised from                                                              
50 to 55 percent.                                                                                                               
She  said that  another  big change  was to  add  a new  category,                                                              
"other  types of  investment," which  allowed  the corporation  to                                                              
invest  in  other  types  of investments  so  long  as  they  were                                                              
subject to the  prudent-investor rule. This meant that  as long as                                                              
other institutional  investors of similar type and  quality of the                                                              
permanent fund made  investments, that the corporation  could also                                                              
invest.  There was  the recognition  that this  other vehicle  may                                                              
look for  another type  of allocation limit.  For example,  with a                                                              
Real   Estate   Investment  Trust   (REIT),   some   institutional                                                              
investors  group  those  investments   with  their  public  equity                                                              
portfolio  because   it  would  be  listed  in   a  public  equity                                                              
exchange. In those  instances, [the corporation]  could exceed the                                                              
55  percent limitation  on  its stocks.  There  was a  recognition                                                              
that some  of those limits might  be exceeded, which was  fine, so                                                              
long as  the corporation  was in  compliance  with the 55  percent                                                              
stocks or five percent of "other" investments, she said.                                                                        
10:34:18 AM                                                                                                                   
MS. RODELL reviewed slide 12, "Changes Over Time ?"                                                                             
     1999 Amendments:                                                                                                           
        • Allowed to borrow money with respect to real                                                                          
          property investments provided no recourse to APFC                                                                     
          or Fund                                                                                                               
        • Updated collateral and rating thresholds for debt                                                                     
        • Added real estate investment trusts (REITs) to                                                                        
          allowable investments list                                                                                            
        • Allowed the Fund to wholly own institutional                                                                          
          sized real estate (no longer limited to 67%                                                                           
      • Changed asset allocation limits: 55% Stocks, 15%                                                                        
          Real Estate, 20% CDs, 15% Mortgages 5% Other                                                                          
          types of investments, subject to prudent investor                                                                     
          rule 2004 Amended Language:                                                                                           
        • Borrowing for any investment vehicle (not just                                                                        
          real estate) nonrecourse to APFC or the Fund                                                                          
      • Increased asset allocation limit for the "Other"                                                                        
          category from 5% to 10%                                                                                               
10:35:25 AM                                                                                                                   
REPRESENTATIVE  WOOL asked  her  to elaborate  on  the reason  the                                                              
Permanent Fund Corporation (PFC) can borrow money.                                                                              
MS. RODELL  responded  that when  the Permanent  Fund Corporation                                                               
invests in real estate,  it sometimes makes sense to leverage the                                                               
investment to allow for  capital improvements rather than to hold                                                               
it with  cash. For  example, the  corporation has held  some real                                                               
estate holdings  since 1985  but these properties  have increased                                                               
in  value.  In  order to  capture  some  of  that  value  to make                                                               
additional real  estate investments,  the PFC  can borrow against                                                               
the value  of that property  and take cash out  of the underlying                                                               
value. However,  the Alaska PFC limits the  amount of leverage on                                                               
its individual  real estate to 50 percent  of the value. Further,                                                               
the corporation  cannot do multiples of  the value, especially in                                                               
joint venture  properties. Sometimes it is  important for the PFC                                                               
to allow its partner to  use the value for cash, as well, thereby                                                               
using  it  as a  partnership  tool.  It  is  limited because  the                                                               
vehicle  that  is  buying  the  property  is a  "limited  special                                                               
purpose vehicle" that the  corporation invests in, which only has                                                               
rights  to  the  property  itself.  Thus,  the  lender  can  only                                                               
foreclose on  the underlying  property and cannot  come after the                                                               
permanent fund  or the  Permanent Fund Corporation  for repayment                                                               
of any kind.                                                                                                                    
10:37:33 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS  referred  to  the  1999  statutory                                                              
changes [slide  12]. He  asked how many  wholly owned  real estate                                                              
properties the corporation owned at that point.                                                                                 
MS.  RODELL  pointed out  that  the  listings  are posted  to  the                                                              
corporation's website.  She did not recall offhand  but offered to                                                              
report back to the group with the figures.                                                                                      
10:38:08 AM                                                                                                                   
REPRESENTATIVE    KREISS-TOMKINS    referred    to   the    phrase                                                              
"nonrecourse  to APFC" on  the same slide.  He asked  whether that                                                              
term was also  the one she just explained to  Representative Wool,                                                              
that when leveraging  a real estate investment,  the lender cannot                                                              
come after the APFC for repayment.                                                                                              
MS. RODELL said yes.                                                                                                            
10:38:45 AM                                                                                                                   
SENATOR  HUGHES asked  whether  the  amendments to  statutes  [on                                                               
slides 9-12] were recommended by the board or if some changes                                                                   
were initiated by the legislature.                                                                                              
MS. RODELL offered to double  check, but it was her understanding                                                               
that they came  from the Board of Trustees.  She reminded members                                                               
that the board's recommendations  also go through the Legislative                                                               
Budget and Audit Committee,  so it was possible that some changes                                                               
came from the committee. She was unsure of the specifics.                                                                       
SENATOR  HUGHES  related  her  understanding  that  the Board  of                                                               
Trustees  was  intimately  involved  in  the  process. She  asked                                                               
whether  there  were  any  cases  in  which  the  board  was  not                                                               
comfortable with something that was adopted.                                                                                    
MS. RODELL answered no, not to her knowledge.                                                                                   
10:40:00 AM                                                                                                                   
MS. RODELL reviewed  slide 13, "2005 Current  Language Adopted AS                                                               
37.13.120." She  said this is law the  Permanent Fund Corporation                                                               
currently uses  to manage  the permanent  fund. She  said she has                                                               
included  the language in  its entirety  for the  working group's                                                               
benefit.  Members will  notice that  many  of the  provisions are                                                               
very  similar  to the  language  adopted  in  1980. For  example,                                                               
subsection (a)  still has the prudent investor  rule. In 1980, it                                                               
was the prudent  man rule, but it has  the same meaning and power                                                               
as the prudent investor rule.                                                                                                   
     (a)  The  board  shall  adopt  regulations  specifically                                                                   
     designating  the types  of income-producing  investments                                                                   
     eligible  for investment of  fund assets. When  adopting                                                                   
     regulations authorized  by this section or  managing and                                                                   
     investing fund  assets, the prudent-investor  rule shall                                                                   
     be  applied  by the  corporation.  The  prudent-investor                                                                   
     rule  as applied  to  investment  activity of  the  fund                                                                   
     means that  the corporation shall exercise  the judgment                                                                   
     and care  under the  circumstances then prevailing  that                                                                   
     an   institutional   investor  of   ordinary   prudence,                                                                   
     discretion,   and   intelligence    exercises   in   the                                                                   
     designation   and   management  of   large   investments                                                                   
     entrusted to  it, not in  regard to speculation,  but in                                                                   
     regard   to   the  permanent   disposition   of   funds,                                                                   
     considering  preservation  of  the purchasing  power  of                                                                   
     the fund over  time while maximizing the  expected total                                                                   
     return  from   both  income  and  the   appreciation  of                                                                   
     b) The  corporation  may not borrow  money or  guarantee                                                                   
     from principal  of the fund  the obligations  of others,                                                                   
     except as provided  in this subsection. With  respect to                                                                   
     investments  of the  fund, the  corporation may,  either                                                                   
     directly or  through an entity  in which the  investment                                                                   
     is made,  borrow money if  the borrowing is  nonrecourse                                                                   
     to the corporation and the fund.                                                                                           
     (c)    The   board   shall    maintain   a    reasonable                                                                   
     diversification  among  investments  unless,  under  the                                                                   
     circumstances, it  is clearly prudent not to  do so. The                                                                   
     board shall  invest the assets  of the fund  in in-state                                                                   
     investments  to  the extent  that  in-state  investments                                                                   
     are available and if the in-state investments                                                                              
     (1)  have a risk  level and  expected return  comparable                                                                   
     to  alternate  investment  opportunities;  and  (2)  are                                                                   
     eligible  for investment  of  fund assets  under (a)  of                                                                   
     this section                                                                                                               
     (d)  The corporation  may  enter  into and  enforce  all                                                                   
     contracts  necessary,   convenient,  or   desirable  for                                                                   
     managing  the fund's  assets  and corporate  operations,                                                                   
     including  contracts for  future  delivery to  implement                                                                   
     asset  allocation strategies  or  to  hedge an  existing                                                                   
     equivalent ownership position in an investment.                                                                            
     (e) Before  adoption of a  regulation under (a)  of this                                                                   
     section,  the regulation,  in  electronic format,  shall                                                                   
     be  provided   to  the  Legislative  Budget   and  Audit                                                                   
     Committee  for  review  and  comment.  The  board  shall                                                                   
     submit  investment  reports to  the committee  at  least                                                                   
MS.  RODELL  referred  to  subsection  (e).  She  noted  that  the                                                              
language  is still included,  but now  the "allowable  permissible                                                              
list" is not  used, only the prudent-investor rule.  The allowable                                                              
investments are done  through the regulatory process  and prior to                                                              
adoption of a regulation,  it goes before the LB&A  for review and                                                              
comment, she said.                                                                                                              
10:41:29 AM                                                                                                                   
SENATOR  OLSON pointed  out  the  U.S. has  been  enjoying a  bull                                                              
market that  has outlasted  what many  people had anticipated.  He                                                              
asked  whether  the PFC  has  any plan  in  place  to protect  its                                                              
assets if a financial crisis occurs, like the one in 2008.                                                                      
MS.  RODELL   said  she  would   talk  about  risk  and   how  the                                                              
corporation manages  its risk later  in the presentation,  but the                                                              
diversification  of the portfolio  helps to  protect the  fund and                                                              
the corporation is  always monitoring how the market  is changing.                                                              
The PFC  works to  identify any  concerns and  makes decisions  on                                                              
where it needs to be more prudent or take measured risk.                                                                        
10:42:39 AM                                                                                                                   
MS.  RODELL turned  to slide  14,  "Historical Asset  Allocation,"                                                              
that  consists of  a  series of  pie charts  based  on the  actual                                                              
portfolio, including  bonds, stocks, real estate,  private equity,                                                              
absolute return,  infrastructure, and  asset allocation.  She said                                                              
she  included this  slide to  visually demonstrate  how broad  the                                                              
allocation has become  since 1980. This allows  the corporation to                                                              
manage  its  risk through  diversification,  which  Senator  Olson                                                              
asked about earlier.                                                                                                            
10:43:25 AM                                                                                                                   
REPRESENTATIVE  WOOL  asked  for   further  clarification  on  the                                                              
meaning  of  "absolute  return" and  if  "infrastructure"  differs                                                              
from real estate.                                                                                                               
MS.  RODELL  answered  that "absolute  return"  relates  to  hedge                                                              
funds  that use  a  specific non-correlation  in  their design  to                                                              
counter what  one thinks the market  might be in order  to provide                                                              
risk  diversification.  Infrastructure   includes  investments  in                                                              
assets that  have term  contracts or  take-or-pay contracts,  such                                                              
as  utilities,  toll roads,  airports,  fee-for-service  types  of                                                              
large assets.                                                                                                                   
10:44:21 AM                                                                                                                   
REPRESENTATIVE   KREISS-TOMKINS   asked  about   the   portfolio's                                                              
current real  estate holdings.  He wondered  which of  those asset                                                              
classes are predominantly managed in-house by the corporation                                                                   
and those that are primarily managed externally.                                                                                
MS. RODELL reviewed the list on the left side of slide 14:                                                                      
Bonds have been  almost 100 percent managed  internally since                                                                   
1980,  and currently  less than  five  percent is  externally                                                                   
managed.  The   Department  of   Revenue  managed  the   bond                                                                   
portfolio  in  house   before  it  was  moved   over  to  the                                                                   
Stocks  are almost  exclusively managed  externally. The  PFC                                                                   
has  approximately  a  $2 billion  portfolio  that  is  being                                                                   
managed internally, she said.                                                                                                   
Real estate  is internally  managed, with  the assistance  of                                                                   
external managers.                                                                                                              
Private  Equity has  both internal  and external  management.                                                                   
They   make  some   direct  investments   but  also   perform                                                                   
substantial due diligence.                                                                                                      
The  PFC defines  internal management  as the  responsibility                                                                   
for  performing   due  diligence,  by  using   an  investment                                                                   
decision rather  than using  a fund  to make that  investment                                                                   
Absolute Return  is externally managed.  The PFC  selects the                                                                   
funds, but the funds do the investing.                                                                                          
Infrastructure is both internal and external.                                                                                   
Asset Allocation  is the treasury  function of the  funds, so                                                                   
it  means managing  the  daily cash  and  working with  fixed                                                                   
income. The corporation  uses a cash overlay program  to keep                                                                   
the money invested  until cash is needed. It  also includes a                                                                   
Risk Parity  Program. These are  multi assets that  invest in                                                                   
the same assets  that the PFC does, but differently  than the                                                                   
corporation  in  order  to  generate   a  different  type  of                                                                   
return. They  also have  a foreign  currency overlay  program                                                                   
to   help  manage   the   foreign  currency   exposure.   She                                                                   
characterized  Asset   Allocation  as  a  strange   catch-all                                                                   
grouping  that has  a  treasury  function. It  is  internally                                                                   
managed,  but  also  has  some  pieces  that  are  externally                                                                   
10:47:54 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS  recapped  the asset  classes  that                                                              
the  PFC  internally  manages include  bonds,  real  estate,  some                                                              
private  equity and  infrastructure.  The  PFC externally  manages                                                              
most of its  stocks, some private equity, some  infrastructure and                                                              
hedge funds. He  said maybe it is in the quarterly  reports of the                                                              
LB&A, but he recalled  that line item in the operating  budget for                                                              
the PFC  is approximately  $15 million. He  remarked that  this is                                                              
an  incredible  value  given  the  massive  wealth  her  team  has                                                              
control  over.   Given  the  current  division  of   internal  and                                                              
external  management,  he  asked  whether  she  is  interested  in                                                              
bringing  more  assets  into  internal   management  and  also  to                                                              
identify any limiting factors.                                                                                                  
MS. RODELL  answered that it continues  to be a priority  to build                                                              
up  the  PFC's internal  management  capability.  The  corporation                                                              
would  never  want  to  internally   manage  100  percent  of  its                                                              
portfolio given the  sophistication and change of  the assets, but                                                              
having  internal managers  touch  every asset  class,  as the  PFC                                                              
currently  does, creates  a much  better alignment  of goals  with                                                              
its investments.                                                                                                                
She  said  that  in  terms of  private  equity,  real  estate,  or                                                              
investing in  a real estate  fund, there is  often a need  to turn                                                              
investments  on  a  much  tighter timeframe,  perhaps  a  five  to                                                              
seven-year timeframe  due to the need for liquidity.  However, the                                                              
PFC can also  hold its investments  for a longer time  period. For                                                              
example, as  previously mentioned, the  PFC has owned some  of its                                                              
real  estate since  1985,  which has  allowed  the corporation  to                                                              
continue  to generate  income  from those  assets.  The desire  to                                                              
hold these  assets is, in part,  because the PFC is not  forced to                                                              
sell its  assets when the  investors have other  demands. However,                                                              
she   acknowledged  that   creating  that   alignment  is   really                                                              
important  to the overall  success of  the corporation.  Secondly,                                                              
it is  less costly  to manage internally  than externally.  If the                                                              
bond portfolio were  externally managed, fees would  easily exceed                                                              
$15  million per  year,  which is  about the  same  as the  entire                                                              
PFC's budget of $17 million for FY2020.                                                                                         
She identified  the biggest  challenge as  the uncertainty  of the                                                              
annual budget  and obtaining sufficient  salaries for  staff. Just                                                              
like the  rest of  state government,  the PFC's  employees  do not                                                              
receive  any  merit  or retention  increases.  She  reported  that                                                              
about  85  percent of  public  funds  in  the U.S.  pay  incentive                                                              
compensation  to  their investment  personnel.  The  PFC does  not                                                              
have  an  incentive  compensation  program, which  is  a  limiting                                                              
factor to  recruiting and retaining  talent. Based on  surveys she                                                              
has reviewed  the number  one reason  people  turn down offers  at                                                              
the PFC is due to inadequate compensation.                                                                                      
10:51:43 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS asked  how  much the  PFC pays  for                                                              
external management including net of fee payments.                                                                              
MS. RODELL  answered that including  the net of  fee arrangements,                                                              
the  cost  is  in  excess  of  $350   million  on  a  $65  billion                                                              
REPRESENTATIVE  KREISS-TOMKINS   offered  his  belief   that  this                                                              
represents a huge  opportunity for Alaska, given that  the PFC has                                                              
done  an   incredible  job   managing  the   state's  assets.   He                                                              
acknowledged  that the  PFC continues  to explore  ways to  reduce                                                              
costs  in a  prudent manner,  in  consultation with  the Board  of                                                              
Trustees, so  its assets  can be  managed in-house. He  identified                                                              
the benefits  of in-house management,  such that when  the payroll                                                              
stays  in Alaska,  it also  will  build a  class of  sophisticated                                                              
asset managers.                                                                                                                 
10:53:22 AM                                                                                                                   
REPRESENTATIVE  MERRICK asked  whether the  fees paid to  external                                                              
managers are  negotiated fees  based on  investment returns  or if                                                              
they are based on a flat rate.                                                                                                  
MS.  RODELL answered  that  it is  both.  The  contracts that  are                                                              
negotiated  with  the  external  managers  tend  to  have  a  flat                                                              
management  fee, with  a fee for  performance,  as well. They  are                                                              
obviously  all different  depending on  the contract  and when  it                                                              
was entered into,  but there is generally a  performance-based fee                                                              
component. They  must reach  certain rates of  return in  order to                                                              
earn the fees.                                                                                                                  
10:54:12 AM                                                                                                                   
REPRESENTATIVE  MERRICK  asked  whether  external  management  has                                                              
ever had negative results.                                                                                                      
MS. RODELL  answered yes; at  one point the  PFC had to  claw back                                                              
fees and trying  to collect was really painful. The  PFC has moved                                                              
away from  that to alternative  fee structures. However,  during a                                                              
down market  the hope is  that the manager  does not lose  as much                                                              
as the  market loses.  However, negative  performance will  occur,                                                              
she said.                                                                                                                       
10:54:48 AM                                                                                                                   
REPRESENTATIVE  WOOL  asked  whether  all the  fees  in-house  are                                                              
deducted  from  the  earnings,   which  would  be  a  pre-dividend                                                              
MS. RODELL answered yes.                                                                                                        
REPRESENTATIVE  WOOL asked  whether the  asset allocation  changes                                                              
or is shaped by any incentive, such as offering a bonus.                                                                        
MS. RODELL  answered that it  is not affected  by the size  of the                                                              
REPRESENTATIVE  WOOL calculated  that  the $350  million cost  for                                                              
external managers on  $65 billion results in a little  more than a                                                              
half  of one  percent.  He  acknowledged  that the  retention  and                                                              
recruitment  of staff sounds  challenging. It  seemed to  him that                                                              
people  would  want   to  work  where  they   receive  performance                                                              
MS.   RODELL  answered   that   if   the  [legislature   and   the                                                              
administration]   would   like    to   increase   in-house   asset                                                              
management, they  need to recognize that asset  managers and other                                                              
PFC staff  do not fit the  traditional state employee  definition.                                                              
The state needs  to think about  what it will take to  recruit and                                                              
retain  that type  of  talent  and be  willing  to  invest in  it.                                                              
Otherwise, the  state needs  to recognize it  is not  possible "to                                                              
have it  both ways."  It is not  possible to  build up  the talent                                                              
and expect  people to move  to Alaska when  the market  demand for                                                              
this  talent in  the Lower  48 and worldwide  is  high. It is  not                                                              
possible to  expect them to provide  these services for  free, she                                                              
REPRESENTATIVE WOOL  asked whether in-house and  external managers                                                              
have a portion of assets to compare performance.                                                                                
MS.  RODELL   answered  that  typically   the  decision   to  have                                                              
portfolios  allocated  outside   is  because  the  PFC  lacks  the                                                              
necessary expertise to manage it in-house.                                                                                      
10:57:59 AM                                                                                                                   
SENATOR  HUGHES mentioned  the  comment that  "You  can't have  it                                                              
both ways." She  asked whether the board has  considered trying to                                                              
retain some  of the $350  million in fees  by using  more in-house                                                              
managers  or  if  it  is  better   to  continue  to  use  external                                                              
managers. She  further asked  if any  internal managers  are based                                                              
in New York or London or if everyone is located in Juneau.                                                                      
MS.  RODELL  answered  that the  PFC  has  looked  at it.  If  the                                                              
corporation  is to  be successful  in  making a  change, it  would                                                              
take a lot of  buy-in by the legislature. It will  be difficult to                                                              
change the recruitment  and compensation structure as  long as the                                                              
PFC's  budget  is   subject  to  the  annual   legislative  budget                                                              
appropriation  process.  First,  uncertainty  as  to  its  overall                                                              
budget exists.  Second, it  becomes difficult  to distinguish  the                                                              
corporation's  staff from  those  of other  state agencies  during                                                              
the budget process.                                                                                                             
In  2018,  the board  worked  very  hard  to build  an  acceptable                                                              
incentive compensation  structure to bring to the  legislature and                                                              
the  governor. Ultimately,  given  the  messages  coming from  the                                                              
governor and  the legislature, the  board decided it was  not time                                                              
to bring  that proposal  forward. In fact,  the FY2020  budget cut                                                              
salaries  to  the  FY2019 level  without  including  the  standard                                                              
three  percent merit  increase or  cost of  living adjustment.  In                                                              
addition, the  board had  requested four  new positions  that were                                                              
not funded.                                                                                                                     
MS. RODELL  stated that  its only  office and  100 percent  of its                                                              
staff is located in Juneau.                                                                                                     
11:01:00 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS  expressed interested  in  learning                                                              
the budget  process used  by other sovereign  wealth funds  in the                                                              
world.  He  would  like  to  strike  a  balance  and  provide  the                                                              
corporation  with greater  certainty, but  still have some  degree                                                              
of  public accountability.  He  said  he would  defer  to the  Co-                                                              
Chairs to  decide if considering all  aspects of the fund  and the                                                              
dividend is  appropriate. He wondered  if there was  a possibility                                                              
of pursuing that question.                                                                                                      
11:02:01 AM                                                                                                                   
MS. RODELL turned to slide 15, Fund Value and Returns in                                                                        
     1977 The Permanent Fund receives its first deposit of                                                                      
          dedicated oil revenues totaling $734,000. Initial                                                                     
         Legislation permitted an investment list that                                                                          
         included only fixed income securities such as                                                                          
          treasury bonds.                                                                                                       
     1983 Following changes to the statutory investment                                                                         
          list, the Fund makes its first investment in the                                                                      
         stock market, and later that year, in directly                                                                         
          held real estate.                                                                                                     
     1990 After the Legislature expands the statutory                                                                           
         investment list, the Fund begins to invest in                                                                          
          stock and bond markets outside the United States.                                                                     
     2005 The Legislature makes a significant change in how                                                                     
          Permanent Fund investments are determined by                                                                          
          removing the allowed investment list from state                                                                       
          law. The Trustees will make investment decisions                                                                      
          under the guidelines of the prudent investor                                                                          
MS. RODELL  directed attention  to a  graph on  the right  side of                                                              
the slide. She pointed  out two red bars that illustrate  that the                                                              
returns  have stayed  within  0.0 percent  and  15 percent.  There                                                              
were a couple  of outliers on the  graph in 2008 and  2009, during                                                              
the financial crisis  and the Great Recession.  The returns spiked                                                              
in 1984,  she said. She  emphasized that  this also shows  that as                                                              
the risk profile  grew and the PFC was able to  take on additional                                                              
asset  classes, it  changed  limits  and took  more  risks on  the                                                              
portfolio on  a measured basis. In  doing so the fund  was allowed                                                              
to really  grow and  it is now  at historical  highs in  excess of                                                              
$60 billion in assets under management.                                                                                         
11:03:12 AM                                                                                                                   
CO-CHAIR  JOHNSTON  asked  how  far out  the  board  projects  its                                                              
investment returns.                                                                                                             
MS.  RODELL answered  that  every  year Callan  Associates,  Inc.,                                                              
consultants provide  a capital market forecast and  review each of                                                              
the  asset classes.  The consultants  set an  expectation for  the                                                              
average  return   over  a  ten-year   period.  They   analyze  the                                                              
deviation  with a plus  or minus  variation on  the expected  ten-                                                              
year return for  the fund. The consultants provide  a low case and                                                              
high case  benchmark, in  part, at the  request of the  Department                                                              
of  Revenue  for  its spring  and  fall  revenue  forecast.  These                                                              
figures are on  the PFC's projection worksheet on  its website. It                                                              
shows how  the fund  is projected  to grow  using a high,  middle,                                                              
and  low case  scenario.  Currently,  the  fund is  projecting  an                                                              
average 10-year  return of 6.65  percent. This means  looking back                                                              
that the  fund might  earn minus  20 percent in  some years  and a                                                              
plus 20 percent  in other years,  but over the ten-year  period it                                                              
will have earned an average of 6.65 percent.                                                                                    
11:05:12 AM                                                                                                                   
CO-CHAIR JOHNSTON asked whether 10-year projections are usually                                                                 
the maximum amount or if some projections go to 20 years.                                                                       
MS.  RODELL  said  that  she was  not  aware  of  any  projections                                                              
greater  than  ten  years.  She  said that  the  PFC  watches  the                                                              
markets  move  and market  volatility.  She  said looking  at  the                                                              
months  of  May and  June  and  observing  how much  markets  have                                                              
swung,  that  the  farther  out  the  projection  goes,  the  less                                                              
validity  they  have. She  said  that  she would  caution  against                                                              
using any forecast  beyond ten years because it  would have little                                                              
to no value.                                                                                                                    
11:06:06 AM                                                                                                                   
SENATOR  HUGHES  asked  for  an estimated  timeframe  of  when  to                                                              
expect the $65 billion fund would double.                                                                                       
MS.  RODELL asked  whether  this  would be  based  on 6.5  percent                                                              
return and all  things being equal, that the  legislature was also                                                              
not drawing from the fund.                                                                                                      
SENATOR HUGHES  asked when she thought  the fund would  reach $130                                                              
MS. RODELL  answered that the  chart [on  page 15] shows  that the                                                              
fund doubles  in value  about every  ten years.  She would  expect                                                              
the  fund to  double about  20 years  from  now, but  she was  not                                                              
CO-CHAIR JOHNSTON  said she  thinks it would  put Ms. Rodell  at a                                                              
disadvantage  [to  provide an  accurate  projection  for the  fund                                                              
balance] due to the structured draw in place.                                                                                   
MS. RODELL responded  that her estimate assumed there  was not any                                                              
structured  draw  since  there  is  not any  draw  for  this  time                                                              
11:07:57 AM                                                                                                                   
CO-CHAIR  JOHNSTON   asked  the  record  to  be   clear  that  the                                                              
assumption was based on no structured draws.                                                                                    
11:08:13 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS asked how  assets were  managed the                                                              
first few years. He was looking at the period 1977 to 1980.                                                                     
MS. RODELL  answered that  the Department  of Revenue  managed the                                                              
assets during that time.                                                                                                        
11:08:35 AM                                                                                                                   
REPRESENTATIVE WOOL  said that it was interesting to  note that in                                                              
1986 and  2014 the  fund did  really well,  but those  spikes were                                                              
also ones in  which the Alaska economy  had a very tough  time. He                                                              
said it seemed  as though the fund  does well when oil  prices are                                                              
MS.  RODELL said  that  is correct  and it  speaks  to the  global                                                              
exposure  of the  portfolio and  the  non-Alaska concentration  of                                                              
the portfolio. She  described it as very counter  cyclical to what                                                              
is happening in the state.                                                                                                      
11:09:49 AM                                                                                                                   
MS. RODELL said she was not going to read slide 17, "Today:                                                                     
Investment Responsibilities AS 37.13.120."                                                                                      
     When  adopting  regulations  or managing  and  investing                                                                   
     fund  assets,   the  prudent  investor  rule   shall  be                                                                   
     applied  by  the  corporation.   The  corporation  shall                                                                   
     exercise  the judgment  and care  that an  institutional                                                                   
     investor   of   ordinary   prudence,   discretion,   and                                                                   
     intelligence   exercises    in   the   designation   and                                                                   
     management  of large  investments entrusted  to it,  not                                                                   
     in  regard   to  speculation,  but  in  regard   to  the                                                                   
     permanent    disposition     of    funds,    considering                                                                   
     preservation  of the purchasing  power of the  fund over                                                                   
     time  while maximizing  the expected  total return  from                                                                   
     both income and the appreciation of capital.                                                                               
     The corporation  may not borrow money or  guarantee from                                                                   
     principal  of  the  fund  the   obligations  of  others.                                                                   
     Except the  corporation may, either directly  or through                                                                   
     an  entity  in  which the  investment  is  made,  borrow                                                                   
     money   if  the   borrowing   is  nonrecourse   to   the                                                                   
     corporation and the fund.                                                                                                  
     The board  shall maintain  a reasonable  diversification                                                                   
     among  investments unless,  under the circumstances,  it                                                                   
     is  clearly  prudent  not  to do  so.  The  board  shall                                                                   
     invest the  assets of the  fund in in-state  investments                                                                   
     to the  extent that  in-state investments are  available                                                                   
     and if the  in-state investment provides the  same risk-                                                                   
     reward benefit as other investment opportunities.                                                                          
11:09:59 AM                                                                                                                   
MS. RODELL  reviewed slide  18, "Allocation  Structure."  She said                                                              
that  the structure  that  the board  currently  has  in place  is                                                              
basically organized in two ways.                                                                                                
     The asset allocation structure is organized by growth                                                                      
    and   income   strategies,    as   well   as   liquidity                                                                    
     This strategic categorization provides a framework for                                                                     
    ensuring    that   investment    return   targets    are                                                                    
     commensurate with the risks undertaken.                                                                                    
       The Board of Trustees reviews the Asset Allocation                                                                       
MS.  RODELL reviewed  the Asset  Allocation Structure  shown  on a                                                              
table in the  slide. She said that within "growth,"  liquid assets                                                              
are known  as public equities  that can  be sold very  easily. She                                                              
said that  illiquid  means it can  take between  three months  and                                                              
two  years to  get  the full  investment  back.  The portfolio  in                                                              
income has  a very liquid allocation  in terms of bonds  and cash.                                                              
The illiquid assets  include real estate and  infrastructure. Each                                                              
asset  class contributes  to the  total fund  return and  provides                                                              
quality and diversity of the portfolio's investments.                                                                           
11:12:22 AM                                                                                                                   
MS.  RODELL   turned  to   slide  19,  "Diversification:   Benefit                                                              
Reflected  in  VaR  Contribution."  The  slide  contains  a  graph                                                              
showing  the ratio  of "Contribution  VaR"  to "Stand-alone  VaR."                                                              
She said that  she included some  slides that the board  sees on a                                                              
quarterly basis.  These slides are sent to Legislative  Budget and                                                              
Audit  since they  get the  entire  board packet  each quarter  as                                                              
part of the reporting.  She said this slide relates  to an earlier                                                              
question Senator Olson had.                                                                                                     
She  said that  the  easiest  way to  think  about  the reason  to                                                              
diversify is  not to have all of  the eggs in one basket.  The PFC                                                              
wants  to ensure  that if  one asset  class is  losing, not  every                                                              
asset  class is losing.  She emphasized  that  it is important  to                                                              
observe  how markets  move,  either together  or  apart from  each                                                              
other, which  is called correlation.  Sometimes asset  classes are                                                              
very  tightly  correlated.  Public  equity,  stocks,  and  private                                                              
equity,  which  is  private investment  into  companies,  is  very                                                              
highly  correlated. In  other  words, the  things  in the  economy                                                              
that are causing  stocks to go up are also causing  private equity                                                              
valuations to go up.                                                                                                            
11:12:57 AM                                                                                                                   
MS. RODELL  said, in  converse though,  some  assets will  move in                                                              
the  opposite  direction,  so  holding   bonds  that  are  not  as                                                              
correlated  will  lose value  as  growth occurs  because  interest                                                              
rates are  staying low. One  way to measure  the portfolio  in its                                                              
entirety is to  look at Value at  Risk (VaR). VaR is  a measure of                                                              
the risk of loss  for investments. It estimates how  much a set of                                                              
investments  might  lose,  with  the  given  probability  of  97.5                                                              
percent and given normal market conditions.                                                                                     
        • Private equity continues to have the highest                                                                          
          proportionate  stand-alone  VaR  (45.1%),  followed                                                                   
          by public equity (24.8%)                                                                                              
        • Given the high correlation between these two,                                                                         
          their  respective  contribution   to  overall  risk                                                                   
          (VaR) is also high.                                                                                                   
        • On the other hand, the fixed income and real                                                                          
          estate    exposures     increase    diversification                                                                   
          benefit,     with    much    lower     contribution                                                                   
          proportions.  Total  Fund   Asset  Alloc.  Absolute                                                                   
          Return  FI  Plus  Infra  &  Pvt  Crdt.  Pvt  Equity                                                                   
          Public  Equity Real  Estate $65.7  $3.7 $3.7  $15.5                                                                   
          $5.2  $8.4 $25.1  $4.0 17.4% 3.4%  4.6% 6.2%  14.3%                                                                   
          45.1% 24.8%  13.5% Asset Allocation  $bn Standalone                                                                   
          VaR as  % of respective  portfolio NAV 40%  50% 60%                                                                   
          70%  80% 90% 100%  Ratio of  "Contribution VaR"  to                                                                   
          "Stand-alone VaR" V                                                                                                   
MS.  RODELL   said  that  sometimes   asset  classes   are  highly                                                              
correlated. She  referred to  the ratio in  the chart on  the left                                                              
that  shows the  ration  of contribution  to  VaR to  Stand-alone-                                                              
VaR. For example,  with public equity the PFC can  lose up to 24.8                                                              
percent of the value  of the public equity portfolio  based on the                                                              
risk  it   is  taking.  Private   equity  has  the   highest  risk                                                              
association with it,  so the PFC could lose up to  45.1 percent of                                                              
the portfolio  with 97.5 confidence  in normal market  conditions.                                                              
These  are the  greatest contributors  to risk  in the  portfolio.                                                              
That is the reason  the PFC has this counter risk,  which is fixed                                                              
income in real estate.                                                                                                          
11:14:33 AM                                                                                                                   
MS.  RODELL  turned   to  slide  20,  "Asset  allocation   &  VaR:                                                              
Breakdowns"  depicting  two pie  charts  labeled  "Asset Mix"  and                                                              
"VaR Mix," not shown below.                                                                                                     
     Risks are more concentrated                                                                                                
      ? The Asset mix 'seems' more diversified than actual                                                                      
     underlying risks.                                                                                                          
      ? Of the total risk pie, approximately 85% is equity                                                                      
     risk (private & public equity).                                                                                            
       ? Equity (related) risk is likely to exist within                                                                        
       Absolute Return and Asset Allocation portfolios as                                                                       
     ? Diversifiers (away from equity risk), which include                                                                      
      interest rates/spreads and real estate, aggregate to                                                                      
     only about 10% - 13%, in risk terms                                                                                        
She  referred to  the  Asset Mix,  shown on  the  left pie  chart,                                                              
which shows  the dollar value  of each  of the asset  classes. For                                                              
example,  with public  equity 38  percent of  the dollar value  of                                                              
the portfolio  is exposed  to stocks.  However,  if one thinks  of                                                              
that same group  in terms of risk,  the VaR Mix, shown  on the pie                                                              
chart at  the right,  the public  equity is actually  contributing                                                              
54 percent of overall  risk of the portfolio. While  the asset mix                                                              
looks  like  a   highly  diversified  dollar  mix,   from  a  risk                                                              
perspective  it is  actually not  as diversified  as others  might                                                              
want or  how other  portfolios might  look. This  is a  deliberate                                                              
choice  by the  PFC  to  take on  this  risk because  it  delivers                                                              
returns,  and  the  board  is  comfortable   with  the  risk  this                                                              
portfolio  is generating.  This  analysis  provides  a measure  to                                                              
understand  exactly where  the risk  lies and  to ensure that  the                                                              
board  continues to  be comfortable  because as  markets move,  as                                                              
allocations on  the dollar  side change, this  risk mix  will also                                                              
11:16:03 AM                                                                                                                   
MS.  RODELL turned  to slide,  21, "Tail  Risk: Current  Portfolio                                                              
During Extreme Events."                                                                                                         
Tail risk  is the risk  (or probability) of  the chance of  a loss                                                              
occurring  due to  a rare  event,  as predicted  by a  probability                                                              
distribution.  Tail  risks  include   events  that  have  a  small                                                              
probability  of occurring  and  occur  at both  ends  of a  normal                                                              
distribution curve.                                                                                                             
 Scenario                         Definition                                                                                  
 2007 Credit Crisis               Credit & liquidity crisis                                                                     
                                  stemming from a severe slowdown                                                               
                                  in the housing market causing                                                                 
                                  significant widening of credit                                                                
                                  spreads and increased implied                                                               
 2008 Market Crash                S&P 500 down 20% (2000 bps).                                                                
 US Downgrade 2011                The period starts with 50%                                                                    
                                  chance US downgrade indication                                                                
                                  from S&P standards and ends with                                                              
                                  Operational Twist announcement                                                                
                                  from the Fed (stock market                                                                    
                                  losses and bond market gains)                                                               
 Fed Tapering Talk 2013           Equity & bond markets sold off.                                                               
                                  EM suffered badly due to hot                                                                  
                                  money flight back to U.S.                                                                   
 Chinese Market Crash             Chinese stock market crash                                                                    
                                  beginning with the popping of                                                                 
                                  the stock market bubble on June                                                               
                                  12, 2015.                                                                                   
 Rapid Deflation                  Oil down 60% (6000 bps); ST                                                                   
                                  Inflation down 350 bps; Mortgage                                                              
                                  spreads tighten 25 bps.                                                                     
 Slow Deflation                   LT deflation down 200 bps; LT                                                                 
                                  Treasury Rates down 100 bps;                                                                  
                                  Mortgage spreads tighten 25 bps.                                                            
MS. RODELL  reviewed  a variety  of historical  events as  if they                                                              
happen to the portfolio today.                                                                                                  
In  2008 and  2009 the  market crashed  and  the S&P  was down  20                                                              
percent.  The  fund would  lose  a  little  over 20  percent,  but                                                              
that's  less  than  the benchmark  that  performance  is  measured                                                              
against.  On the other  hand, in  a period  of slow deflation  the                                                              
fund would  lose more  than the  benchmark. This  is due  to where                                                              
the fixed-income portfolio is invested, she said.                                                                               
MS. RODELL  said this  gives a  sense of  the magnitude  of losses                                                              
that   the  portfolio   made  with   certain  market   conditions,                                                              
especially  the   market  crises  that  occurred   and  are  often                                                              
11:17:54 AM                                                                                                                   
MS.  RODELL turned  to  slide 22,  "Performance  as  of March  31,                                                              
2019." She reviewed the table.                                                                                                  
                          FY 19        3 Years        5                                                                         
                          9 mos.                      Years                                                                   
 Total Fund               3.07%        9.33%          7.24%                                                                   
 Passive Index            2.39%        7.43%                                                                                  
 (60 Stocks|20 Bonds                                                                                                            
 |10RE|10 TIPs)                                                                                                                 
 Performance Benchmark    3.50%        8.31%          6.03%                                                                     
 Total Fund Return        4.60%        7.20%          6.47%                                                                   
 Objective | CPI+5%                                                                                                             
MS.  RODELL reviewed  the  permanent  fund performance.  She  said                                                              
that this  chart compares  the performance  based  on the  first 9                                                              
months of  FY2019, over three  and five-year periods.  She pointed                                                              
out that  FY2018 will  end on  Sunday, June  30, 2019.  The FY2019                                                              
annual figures will  be available in about a month.  Thus far, the                                                              
earnings  are 3.07  percent  and the  passive  index benchmark  is                                                              
2.39 percent.  She said the  passive benchmark considers  earnings                                                              
without any  active management  of the  fund, as  if the  fund was                                                              
invested  in  a  computer-driven   index  model  with  60  percent                                                              
allocation  to stocks,  20 percent  to bonds,  10 percent  to real                                                              
estate,  and  10 percent  to  TIPs  [Treasury  Inflation-Protected                                                              
Security]. This  replicates a passive index benchmark  as compared                                                              
to the PFC's asset allocation mix.                                                                                              
She said  that the performance benchmark  came in at  3.5 percent,                                                              
which  is a little  better than  the total  fund performance.  The                                                              
[performance benchmark]  is for  the most part investable  indices                                                              
that managers  are held  to, such  as the  S&P 500. She  described                                                              
the calculation.  The board has  its long-term objective  of CPI+5                                                              
percent,  which is  equated to  4.6  percent, she  said. She  said                                                              
that right now the PFC is not keeping  up with the CPI+5 percent.                                                               
11:19:35 AM                                                                                                                   
REPRESENTATIVE KREISS-TOMKINS  referred to slide 21,  "Tail Risk."                                                              
He asked whether  the board or the corporation  intentionally made                                                              
a decision  in allocating risk to  provide more protection  for an                                                              
event similar  to the  2008 market crash  versus a Chinese  market                                                              
crash scenario in which the PFC would be more exposed.                                                                          
MS. RODELL  answered that it  is intentional  in the sense  of the                                                              
board's decision  to focus on creating growth.  She explained that                                                              
this  allocation   dates   back  to  2016,   which  explains   the                                                              
directionality   into   alternatives   and  private   equity,   in                                                              
particular. Further,  this is a more U.S. weighted  portfolio on a                                                              
total  fund  basis.  This  is  countered   by  the  public  equity                                                              
portfolio, which  consists of more  of an international  tilt than                                                              
the   benchmark.  These   are   tactical   decisions  and   active                                                              
management. The board  defines the risk budget  and allocation, so                                                              
when the  board indicates  it wants 38  percent public  equity, it                                                              
is  by  definition  saying  that   it  wants  a  50  percent  risk                                                              
allocation  bucket.   It  is  then  within  this   framework  that                                                              
managers  are  investing.  For example,  the  director  of  public                                                              
equities  makes the  tactical tilt  when Brexit  happened and  the                                                              
market  plummeted,  by  leaning  in  to  put  more  money  in  the                                                              
European  markets  because the  director  thought  the market  was                                                              
overreacting and would  be coming back up. She  cautioned that the                                                              
table shows  a spot in  time on March  31. However, each  day will                                                              
look slightly different based on market conditions.                                                                             
11:22:43 AM                                                                                                                   
REPRESENTATIVE MERRICK  asked her to briefly comment  on how taxes                                                              
are  paid   under  the   fund  and   how  management   takes  into                                                              
consideration any changes to tax structure.                                                                                     
MS. RODELL  responded that  the permanent fund  is not  subject to                                                              
U.S.  tax  code.   The  PFC  does  not  pay  any   taxes  on  U.S.                                                              
investments.  Further,  the  corporation  is not  subject  to  any                                                              
corporate  tax requirements.  However,  the  corporation does  pay                                                              
foreign taxes to  foreign jurisdictions because the  PFC is viewed                                                              
as  a  taxable  entity in  some  foreign  jurisdictions.  The  PFC                                                              
relies on the  tax treaties that the U.S. negotiates  with foreign                                                              
governments to get  tax relief in various jurisdictions,  which is                                                              
done country-by-country.                                                                                                        
11:23:40 AM                                                                                                                   
REPRESENTATIVE   MERRICK  asked  about   taxes  paid   to  foreign                                                              
entities on the portfolio's foreign assets.                                                                                     
MS.  RODELL  said  that these  figures  are  normally  netted  out                                                              
before the  PFC sees the returns,  and the returns will  be net of                                                              
that  payment.  She offered  to  check  with the  Chief  Financial                                                              
Officer and  report back. She said  there may be something  in the                                                              
notes of financial statements that she is not recollecting.                                                                     
11:24:14 AM                                                                                                                   
SENATOR  OLSON  referred  to  the  performance  of  the  fund.  He                                                              
expressed concern  over the  lag time  in changing direction.  For                                                              
example, during  a downturn,  when it was  obvious there  would be                                                              
losses, there was  a delay in moving money into  safer investments                                                              
to incur less loss.  He asked whether the PFC is  still plagued by                                                              
an inability to move money faster.                                                                                              
MS. RODELL  responded that  nothing prevents  the PFC  from moving                                                              
money if the PFC  thinks it is necessary to do  so. Currently part                                                              
of the reason  to hold larger cash balances than  historically, is                                                              
the sense  that "we're topping  up on the  market." The  PFC wants                                                              
to have  cash available to  plow into the  market when  the market                                                              
falls,  since you  want to  be able to  buy on  a downswing.  When                                                              
reviewing  2009,  of  course  we  have  the  perfection  of  20-20                                                              
hindsight,  she said.  If the permanent  fund  had ridden  out the                                                              
downswing, it  would be in  better shape today.  Unfortunately, it                                                              
was not possible  to know that at the time; the  PFC just uses its                                                              
best  judgment  and  knowledge  that a  downturn  can  extend  for                                                              
years.  The   permanent  fund's   purpose  is   to  be   there  in                                                              
11:27:37 AM                                                                                                                   
CO-CHAIR JOHNSTON  commented that former  PFC CEO Mike  Burns said                                                              
that the fund  is invested for the  long term and this  was a very                                                              
long day.                                                                                                                       
11:28:10 AM                                                                                                                   
REPRESENTATIVE WOOL  asked for further clarification  on the table                                                              
showing the  CPI+5 percent equals  4.60 percent. He  asked whether                                                              
that is because the year is not over.                                                                                           
MS. RODELL confirmed that the figure represents just 9 months.                                                                  
11:28:33 AM                                                                                                                   
MS. RODELL turned to slide 23, "Awards and Accomplishments."                                                                    
     Marcus  Frampton,  CIO,  named  one  of  Private  Equity                                                                   
     International's  40 under 40  Future Leaders of  Private                                                                   
     Equity and  Trusted Insight's Sovereign Wealth  Fund CIO                                                                   
     of the Year for 2019.                                                                                                      
        • Jared Brimberry, Senior Portfolio Manager was                                                                         
          selected as one of Private Debt Investor's (PDI)                                                                      
          Rising Stars 2019                                                                                                     
        • Selected as North American Limited Partner of the                                                                     
         Year for 2018 by Private Equity International                                                                          
        • APFC received    dual   nominations    for   2018                                                                     
          Partnership of the Year for Institutional                                                                             
          Investor's  Allocators' Choice  Awards and won  the                                                                   
          award for our Capital  Constellation Partnership:                                                                     
             o Private     Market    Partnership,     Capital                                                                   
               Constellation - won                                                                                              
             o Public Market Partnership, Middle East                                                                           
               Africa South Asia (MEASA) Fund with McKinley                                                                     
               Capital - nominated                                                                                              
        • PEI's Private Debt Magazine recognized APFC in                                                                        
          their inaugural 30 Most Influential Investors in                                                                      
          Private Credit                                                                                                        
        • Recognized as North American Private Equity                                                                           
          Institutional Limited Partner Investor of the                                                                         
         Year for 2017 by Private Equity International                                                                          
        • Awarded Institutional Investor's Sovereign Wealth                                                                     
          Fund of the Year in Hedge Fund Investments in                                                                         
MS. RODELL  characterized this  as her  "brag page."  She said it                                                               
speaks to  the internal  management questions raised  earlier and                                                               
the  talent  that the  PFC  has  been able  to  retain  in Juneau                                                               
because  people  who  are  very  good  at  this and  are  mission                                                               
focused, yet want a lifestyle that Alaska offers.                                                                               
She said  it is important for  Alaskans to realize  that when the                                                               
PFC wins these awards,  they are nice individually, but they also                                                               
raise the  corporation's profile internationally.  This creates a                                                               
"halo effect"  and the  PFC becomes  a preferred  partner because                                                               
the awards  demonstrate skill  and success. The  PFC continues to                                                               
see a lot  of private market flow and  offers the corporation the                                                               
advantage of  selecting what  it wants and  not what  it can get.                                                               
She  said  the PFC  can  be  really  selective,  which  keeps the                                                               
returns up.                                                                                                                     
11:30:22 AM                                                                                                                   
MS. RODELL  turned to slides  24-25, "Structure of  the Fund" and                                                               
"The Fund."                                                                                                                     
          The Fund is comprised of two accounts which are                                                                       
          invested    together   under    the   same    asset                                                                   
          •  The Principal is constitutionally established                                                                      
             and shall only be used for income-producing                                                                        
             investments specifically designated by law                                                                         
             under AS 37.13.120.                                                                                                
          • The  Earnings   Reserve   Account    (ERA)   is                                                                     
             statutorily  established under  AS  37.13.145(a)                                                                   
             to hold  the income  of  the Fund  and shall  be                                                                   
             invested  in  investments  authorized  under  AS                                                                   
11:31:40 AM                                                                                                                   
MS.  RODELL   reminded  members   that  when   she  reviewed   the                                                              
legislative  findings   and  mission   of  the  corporation,   she                                                              
indicated  that the PFC  is mandated  to manage  its funds  and to                                                              
manage risk.  She reviewed  the specific  language, including  the                                                              
permanent  fund's  goal  to maintain  safety  of  principal  while                                                              
maximizing  total return and  that the  fund should  be used  as a                                                              
saving  device managed  to  allow the  maximum  use of  disposable                                                              
income from  the fund  for the purposes  designated by  law. There                                                              
is no liability  attached and the  corporation is not told  to hit                                                              
a certain bogey of any kind and it never has been told to do so.                                                                
MS. RODELL  said this  explains the mechanics  of how  money moves                                                              
through   the  permanent   fund,   which  is   important  to   the                                                              
discussion.   She   said   the    principal   of   the   fund   is                                                              
constitutionally  established and  may  only be  used for  income-                                                              
producing  investments.  The  Earnings Reserve  Account  (ERA)  is                                                              
statutorily established  under AS 37.13.145(a) to  hold the income                                                              
of the  fund and may be  invested in investments  authorized under                                                              
the  same statutes  as the  principal of  the fund.  Historically,                                                              
what the  corporation has done  is put  the accounts side  by side                                                              
and  give it  a  pro rata  piece  of each  investment  to the  ERA                                                              
11:32:24 AM                                                                                                                   
MS. RODELL turned to slide 26, "Principal as of May 31, 2019."                                                                  
     The Alaska  Constitution articulates that  the Principal                                                                   
     shall  only be  used for  income producing  investments.                                                                   
     It  is  permanently  protected for  all  generations  of                                                                   
     Contributions to the Principal since Inception:                                                                          
     $17.2 Billion in Royalties                                                                                               
     The  State Constitution  directs "at  least 25% of  all"                                                                   
     Alaska's  mineral   royalties  be  deposited   into  the                                                                   
     Principal  AS   37.13.010  (a)(1).  Alaska   Statute  AS                                                                   
     37.13.010  (a)(2) directs an  additional 25% for  leases                                                                   
     after 1979.                                                                                                                
     $16.2 Billion in Inflation Proofing                                                                                      
     Protects the  purchasing power of the Principal  for all                                                                   
     generations of  Alaskans. The statutory  calculation, as                                                                   
     set forth in  AS 37.13.145(c), is based  on the Consumer                                                                   
     Price Index  applied to the  total Principal  amount. It                                                                   
     is calculated  at the end of  each fiscal year  based on                                                                   
     those  two numbers and  is subject  to appropriation  by                                                                   
     the Legislature.                                                                                                           
     $7.1  +  9.4  = $16.5  Billion  in  Special  Legislative                                                                   
     Appropriations    Based    on    legislative    actions,                                                                   
     appropriations  have  been made  to the  Principal  from                                                                   
     the  Earnings  Reserve  Account $4.3B  and  the  General                                                                   
     Fund $2.7B.  For FY20 the 31st Alaska  State Legislature                                                                   
     has  also authorized  a special appropriation  of up  to                                                                   
     $9.4 Billion from  the ERA to the Principal  of the Fund                                                                   
     to   preserve  these   resources   for  generations   of                                                                   
     $4.8 Billion in Unrealized Capital Gains/Losses                                                                          
     The Principal  holds a pro-rata share of  the cumulative                                                                   
     unrealized  gains/losses on  investment assets from  the                                                                   
     time they  are purchased  to present.  Once an asset  is                                                                   
     sold,  the  realized gains/losses  from  the  investment                                                                   
     are directed to the ERA.                                                                                                   
MS.  RODELL   referred  to   the  principal   of  the   fund.  The                                                              
Constitution of  the State of Alaska  directs at least  25 percent                                                              
of all  Alaska's mineral royalties  be deposited to  the principal                                                              
of the  fund. As  of May  31, 2019,  the PFC  has collected  $17.2                                                              
billion  in royalties  over the  42-year  period since  inception.                                                              
She said  that $7.1  billion has  been added  to the principal  in                                                              
the  form  of   inflation  proofing.  She  said   the  legislature                                                              
authorized a  special appropriation of  up to $9.4 billion  in the                                                              
FY2020 budget from  the ERA to the principal of the  fund, but she                                                              
was unsure  of the  status. Finally, the  principal holds  a share                                                              
of its  unrealized capital gains  and losses of $4.8  billion. She                                                              
said that summarizes the principal or corpus of the fund.                                                                       
11:34:08 AM                                                                                                                   
MS.  RODELL reviewed  the  chart on  slide  27, "Contributions  to                                                              
Principal  in millions."  This  bar  graph gives  a  sense of  the                                                              
contributions   over   time.   She   noted   that   in   2004,   a                                                              
reclassification  of  an  appropriation  is  the  reason  for  the                                                              
negative  "out" of  the ERA.  With  that exception,  it shows  how                                                              
royalties  have been  straight-forward  throughout  the years  and                                                              
how  oil prices  increased the  royalties  even though  production                                                              
was less. It  also demonstrates the effects  of inflation-proofing                                                              
to the principal of the fund.                                                                                                   
11:35:08 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS   commented  that  it  is  a  great                                                              
chart. He  offered his belief that  the actual transfer  in FY2020                                                              
is now $5 billion.                                                                                                              
MS.  RODELL thanked  him  for  the update.  She  said  that it  is                                                              
really  great that  a portion  of  the earnings  reserve is  being                                                              
used for  future generations of  Alaskans. She offered  her belief                                                              
that the  chart shows  how important  it has  been to  continue to                                                              
build the  principal of  the account over  time. It  really speaks                                                              
to the care that has been given to the fund.                                                                                    
11:36:07 AM                                                                                                                   
MS. RODELL reviewed slide 28, "Statutory Net Income AS                                                                          
          • The Constitution requires all "income" be                                                                           
             deposited into the General Fund, unless                                                                            
             otherwise provided by law.                                                                                         
          • AS 37.13.140(a) Statutory Net Income defines                                                                        
             what "income" to the General Fund is, excluding                                                                    
             unrealized gains and losses, and directs it to                                                                     
             the ERA.                                                                                                           
          • Net realized gains and investment income are                                                                        
             the funds in the ERA that are subject to                                                                           
             appropriation by a simple majority of the                                                                          
             Alaska Legislature.                                                                                                
          • Net realized gains = realized gains accumulated                                                                     
             during the fiscal year (-) minus realized                                                                          
             losses accounted for during the year                                                                               
MS. RODELL said  the Constitution of the State  of Alaska requires                                                              
all income  be deposited into  the general fund,  unless otherwise                                                              
provided  by law.  AS 37.13.140(a)  statutory  net income  defines                                                              
what "income" to  the general fund is, excluding  unrealized gains                                                              
and losses, and directs it to the ERA.                                                                                          
MS. RODELL,  in speaking to statutory  net income, stated  that it                                                              
is  really hard  to spend  an unrealized  gain  "because when  the                                                              
market is  moving intra-day  and between days  - one day  you have                                                              
it, the next you  don't - the third day you have  three times what                                                              
you had."  She said there  is the sense  that you can  really only                                                              
spend  what you  have  realized.  The net  realized  gains or  the                                                              
realized  gains  that  have accumulated  during  the  fiscal  year                                                              
minus the realized  losses are trued  up at the end of  the fiscal                                                              
year. When constitutional  language was passed, income  was simple                                                              
income and it was  not the fair market value of  an investment. In                                                              
1997, generally  accepted accounting  principles changed,  and the                                                              
definition   of  accounting   income   was   changed  to   require                                                              
investments be the  value of all of the PFC's  investments at fair                                                              
market value.  The change in value  year after year would  be seen                                                              
as  net income,  she  said.  That is  how  the concept  of  having                                                              
unrealized  losses  was  embedded  in the  definition  of  income,                                                              
requiring  the  legislature  to  back  that  out  and  create  the                                                              
definition of statutory net income.                                                                                             
11:38:00 AM                                                                                                                   
MS. RODELL reviewed slide 29, "Accounting Net Income."                                                                          
        • Accounting Net Income includes unrealized gains                                                                       
          and  thus differs from  Statutory Net Income  which                                                                   
          does not.                                                                                                             
        • In 1997, Generally Accepted Accounting Principals                                                                     
          (GAAP)   changed  the   definition  of   accounting                                                                   
          income,   thus   requiring   APFC  to   value   all                                                                   
          investments at fair market value.                                                                                     
        • Fund values must include unrealized gains and                                                                         
          losses  based on this  GAAP rule. This  information                                                                   
          is  provided on  our monthly  financial  statements                                                                   
          and in the Annual Report.                                                                                             
        • Unrealized gains earned by Principal are part of                                                                      
          Principal,   upon   realization   the   gains   are                                                                   
          transferred  to  the   ERA  adding  to  the  amount                                                                   
          "realized for future appropriation."                                                                                  
11:38:51 AM                                                                                                                   
MS.  RODELL  reviewed the  chart  on  slide  30, "Net  Income  and                                                              
Return [chart not shown]."                                                                                                      
MS. RODELL  said that looking  over the  last ten fiscal  years as                                                              
how that income  has reflected versus the returns  shows that they                                                              
tend  to  trend  in  the same  direction,  but  they  can  diverge                                                              
wildly.  In 2011,  the accounting  net  income was  very big,  but                                                              
statutory net  income was not. In  2018, it was just  the reverse,                                                              
with  more  statutory  net  income  than  accounting  net  income.                                                              
Statutory  net   income  reflects  the  investment   activity  and                                                              
investment  decisions being  made  by staff  and it  is not  being                                                              
driven  by  any  particular  return  objective.  She  said,  "It's                                                              
really being  driven by it's  time to sell  and if there's  a gain                                                              
we  have  to  recognize it  into  the  Earnings  Reserve  Account;                                                              
therefore,  it increases  statutory net  income." Those  decisions                                                              
are investment  in nature and not  driven by a  particular agenda,                                                              
she said.                                                                                                                       
11:39:16 AM                                                                                                                   
REPRESENTATIVE WOOL  related his understanding that  statutory net                                                              
income is  the actual realized  gains, which determines  the value                                                              
of the  permanent fund dividend.  He said if  the PFC holds  on to                                                              
stocks, but they  do not cash them in, there would  be no realized                                                              
gain and it would not affect the statutory net income.                                                                          
MS. RODELL answered that is correct.                                                                                            
REPRESENTATIVE  WOOL  asked  for   further  clarification  on  the                                                              
MS. RODELL answered  that the return is the percent.  She referred                                                              
to the chart [on  slide 22 related to performance],  in which 3.07                                                              
percent was  the 9-month return.  This would be the  annual return                                                              
for each of those years shown on the right axis.                                                                                
11:40:22 AM                                                                                                                   
REPRESENTATIVE  KREISS-TOMKINS,  continuing  where  Representative                                                              
Wool was going,  said statutory net income does  not seem entirely                                                              
divorced  from what  the  market is  doing,  but it  seems like  a                                                              
quasi-arbitrary metric on which to base dividends.                                                                              
MS. RODELL answered  that the other thing to  note about statutory                                                              
net income  is that  it is  the regularized  cash flow,  including                                                              
bond  interest  payments  or  rentals   from  real  estate.  Asset                                                              
allocation  in 1980  was  clipping  coupons and  collecting  rent,                                                              
which  was cash  income to  be deposited  into the  ERA. She  said                                                              
that made sense  in 1982 because the concept of  fair market value                                                              
did  not  exist  to  affect  income.  Over  time  the  concept  of                                                              
dividend  based on earnings  never changed  but everything  around                                                              
it did since the accounting rules and investments changed.                                                                      
REPRESENTATIVE  KREISS-TOMKINS asked  whether it  was fair  to say                                                              
that as  the permanent  fund has  invested in  more and  different                                                              
assets,  including private  equities  and  other conservative  and                                                              
traditional assets  in 1982, that it widened the  gap or potential                                                              
gap between how  the market is doing, the value of  the fund, what                                                              
savings and interest is, and the size of the PFD.                                                                               
MS. RODELL answered that is a fair assessment                                                                                   
11:42:33 AM                                                                                                                   
REPRESENTATIVE WOOL  said she previously  mentioned rent  and real                                                              
estate.  He asked  if rent  would be  a realized  gain, since  she                                                              
previously  mentioned  rent coming  in  during  the 80s  was  cash                                                              
deposited to  the ERA. He  also asked if  rent typically  would be                                                              
used to  pay off the  loan. He wondered  if the property  would be                                                              
devalued or if the rent coming in would still be a cash gain.                                                                   
MS.  RODELL related  a scenario,  if she  had a  real estate  mall                                                              
valued at  $10 million, and collected  $1,000 in rent,  net of all                                                              
the  expenses   for  mall   operations,   that  $1,000  would   be                                                              
considered income  deposited to the ERA.  At the end of  the year,                                                              
she receives  an annual  appraisal and the  mall is  now appraised                                                              
at $11 million.  According to GAAP [Generally  Accepted Accounting                                                              
Principles],  the $1 million  increase is  an unrealized  gain and                                                              
is income.  However, since  she cannot pay  anything on it,  it is                                                              
allocated to the  principal and the ERA pro rata  as an unrealized                                                              
gain.  If she  kept collecting  rent and  sells the  mall for  $11                                                              
million,  the cost  basis was  $10 million  so the  $1 million  in                                                              
gain becomes realized gain in its entirety in the ERA.                                                                          
REPRESENTATIVE  WOOL said the  owner is always  going to  get rent                                                              
on the property even  if it not a gain. He was unsure  if the rent                                                              
automatically would go into ?.                                                                                                  
MS.  RODELL  interjected  that  regular  cash  flow  dividends  on                                                              
stocks  results  in $1.2  million  per  year in  regularized  cash                                                              
11:45:08 AM                                                                                                                   
MS. RODELL turned to slide 31, "POMV AS 37.13.140(b)."                                                                          
          The  Board  of  Trustees  has  long  supported  the                                                                   
          percent of  market value (POMV) concept,  including                                                                   
          a  constitutional amendment  that  would ensure  no                                                                   
          more than  a sustainable amount was taken  from the                                                                   
          annual earnings of the Permanent Fund.                                                                                
             • Resolutions 18-04, 04-09, 03-05 and 00-13.                                                                       
          This  methodology  is designed  to  create a  known                                                                   
          and manageable  withdrawal structure from  the Fund                                                                   
          to  provide benefits  for both  current and  future                                                                   
          generations of Alaskans.                                                                                              
          In  2018,   the  POMV  structure  was   created  in                                                                   
          statute  (SB 26, CH16  SLA 18)    it allows  for an                                                                   
          annual draw  from the Fund of 5.25%  (stepping down                                                                   
          to 5%  in FY22) based  on the average  market value                                                                   
          of  the Fund for  the first  five of the  preceding                                                                   
          six fiscal years.                                                                                                     
             • This draw is subject to annual appropriation                                                                     
               by the Legislature and can be used for any                                                                       
               state    government   service   or    program,                                                                   
               including the dividend program.                                                                                  
             • The POMV draw for FY19 was $2.7 billion and                                                                      
               for FY20 is $2.9 billion. It is estimated to                                                                     
               be $3.1 billion for FY21.                                                                                        
MS.  RODELL   said  that  in   2018  the  legislature   passed  AS                                                              
11:45:29 AM                                                                                                                   
SENATOR  HUGHES  asked  if  the  $2  billion  she  said  comes  in                                                              
annually is affected by the market since it is from rentals                                                                     
MS.  RODELL  responded  that  the PFC  would  reinvest  that  cash                                                              
rather than  sit on  it. It is  used for  new investments,  to pay                                                              
for  operating expenses,  or  to  transfer to  the  state for  the                                                              
draws. She said that it can be affected by the market.                                                                          
SENATOR HUGHES clarified  that the $2 billion coming  in is fairly                                                              
MS. RODELL agreed it was fairly reliable.                                                                                       
11:46:18 AM                                                                                                                   
REPRESENTATIVE  WOOL clarified  that  it is  $1.2  billion not  $2                                                              
MS. RODELL agreed.                                                                                                              
CO-CHAIR JOHNSTON  related her  understanding that permanent  fund                                                              
dividends can be affected by the market.                                                                                        
MS. RODELL  agreed they can be.  She explained that the  figure is                                                              
between  $1.2 and $1.4  billion,  that interest  rates go  up over                                                              
time and  the market rises,  but it is  a pretty regularized  cash                                                              
SENATOR HUGHES asked  for further clarification on  the amount for                                                              
rentals. She asked whether that was $2 billion.                                                                                 
MS. RODELL said  the figure was $1.2 billion.  In further response                                                              
to Senator  Hughes, she said  she was unsure  of what  Senator von                                                              
Imhof had mentioned.                                                                                                            
11:47:30 AM                                                                                                                   
MS.  RODELL  reviewed  slide  31.  She  said  that  the  Board  of                                                              
Trustees  has  supported  the  percent   of  market  value  (POMV)                                                              
concept  since  2003  when  the  board passed  its  first  set  of                                                              
resolutions. In  fact, the board  had a resolution dating  back to                                                              
2000 related  to POMV. The board  is very supportive  because this                                                              
methodology  is   designed  to  create  a  known   and  manageable                                                              
withdrawal structure  from the fund  to provide benefits  for both                                                              
current and future generations of Alaskans.                                                                                     
She said that in  2018, the POMV structure was  created in statute                                                              
that allows  for an  annual draw  from the  fund of 5.25  percent,                                                              
stepping  down  to 5  percent  in  FY2022,  based on  the  average                                                              
market value of  the fund for the first five of  the preceding six                                                              
fiscal years. There  is a lag in the calculation  and a known draw                                                              
amount prior  to the appropriation  of this  amount and it  is not                                                              
an estimated amount that is to be included in a budget.                                                                         
MS. RODELL  said that in FY2019  the amount was $2.7  million, for                                                              
FY2020 it is $2.9  million, and the PFC is currently  estimating a                                                              
$3.1 billion draw for FY2021.                                                                                                   
11:48:43 AM                                                                                                                   
REPRESENTATIVE  MERRICK  referred   to  the  5.25  percent  and  5                                                              
percent  POMV, based  on market  value for five  of the  preceding                                                              
fiscal  years. She  asked whether  there would  be any benefit  to                                                              
reducing the five years to three years to reduce the lag.                                                                       
MS. RODELL  answered that the reason  for the longer  timeframe is                                                              
to  smooth out  volatility  in the  market.  If  the timeframe  is                                                              
shortened it  could create  more volatility  in that time  period.                                                              
She  referred  to the  chart  on  slide  30,  for net  income  and                                                              
return, to  the three  years from  2009 to  2011, versus  the five                                                              
years  between 2009  and  2013. The  loss would  have  had a  much                                                              
bigger impact on  the draw in three years, but it  tends to smooth                                                              
out with  a five  year period. She  said it  would result  in much                                                              
more volatility in the draws by shortening the time period.                                                                     
11:50:18 AM                                                                                                                   
MS.  RODELL reviewed  the chart  on slide  32, "Illustrative  POMV                                                              
Calculation & Distribution" [not shown here].                                                                                   
MS. RODELL  said the  PFD did a  look back  to illustrate  the two                                                              
different calculations  since they are based on  different things.                                                              
One is based on  the percent of market value (POMV)  and the other                                                              
is  based on  earnings [or  net  income]. She  wondered what  that                                                              
would look  like in previous years.  She pointed out that  in 2009                                                              
the   permanent  fund   dividend  transfer   under  the   earnings                                                              
calculation  and time  period caused  the low  dividend. She  said                                                              
members  may  recall  an $800  and  $900  PFD  in 2012  and  2013,                                                              
respectively  reflected  the reduced  earnings  in 2009.  However,                                                              
the  lag  time  in  the  POMV  creates  a  smoother  and  steadier                                                              
increase over the time period, she said.                                                                                        
11:51:34 AM                                                                                                                   
MS. RODELL reviewed slide 33, "POMV Draws."                                                                                     
              Fund         Nominal POMV         Effective                                                                       
             Value                             POMV                                                                           
 FY           $64.9B       5.25 percent         4.20 percent                                                                  
 FY           $66.1        5.25 percent         4.44 percent                                                                  
 FY           $67.6        5.25 percent         4.57 percent                                                                  
     POMV is calculated on the average market value of the                                                                      
      Fund for the first five of the preceding six fiscal                                                                       
     Effective value is based on the projected fiscal year                                                                      
     six Fund value at the time of the draw.                                                                                    
MS. RODELL  said looking  forward, the nominal  POMV draw  of 5.25                                                              
percent  is  an  effective  draw  of 4.20  percent,  but  it  will                                                              
increase  over  time due  to  the  slower  increase of  the  total                                                              
permanent fund  value. She  said that if  fund values are  flat or                                                              
declining,  the  effective  percent  of  market draw  of  that  is                                                              
closer to  the actual  nominal POMV  draw, or  it could  exceed in                                                              
some years.                                                                                                                     
11:52:21 AM                                                                                                                   
REPRESENTATIVE  WOOL related  his understanding  that the  POMV is                                                              
calculated on the first five of the preceding six fiscal years.                                                                 
MS.  RODELL referred  to the  chart on  slide [32],  and said  the                                                              
POMV calculation  in  2015, would  be based on  2013, 2012,  2011,                                                              
2010,  and 2009. She  clarified  that for the  FY2021 amount,  the                                                              
PFC will  close out FY2019,  and will know  the fund value  by the                                                              
end  of the  year.  The  corporation  will consider  fiscal  years                                                              
2019,  2018,  2017,  2016,  and   2015  to  calculate  the  amount                                                              
available for  FY2021. When the  legislature convenes  in January,                                                              
legislators  will   know  exactly  how  much  is   available.  The                                                              
earnings  are for five  years so  the fifth  year is an  estimated                                                              
amount  since the  final year  is not  available at  the time  the                                                              
appropriation happens for a dividend transfer.                                                                                  
REPRESENTATIVE   WOOL  asked  whether   the  POMV  is   calculated                                                              
differently  than the earnings.  He asked  whether earnings  could                                                              
also be calculated in that way by using a sixth gap year.                                                                       
MS. RODELL explained  that the year gap creates  certainty for the                                                              
PFC.  If the  state did  not  need cash  from  the permanent  fund                                                              
until  the last  quarter of  the  fiscal year,  arguably it  would                                                              
provide  a  couple of  years  to  plan  and allow  investing  more                                                              
fully.  But  with  the  earnings  you don't  know,  and  it  would                                                              
require a  statutory change to remedy  it, she said. In  2016, the                                                              
legislature estimated the amount to be transferred.                                                                             
11:55:23 AM                                                                                                                   
MS. RODELL turned to slide 34, "Earnings Reserve Account."                                                                      
     The ERA is established under AS 37.13.145(a) as an                                                                         
     account to hold the net realized earnings from the                                                                         
     Permanent Fund's investment portfolio.                                                                                     
          This   includes  monthly   income  such  as   stock                                                                   
          dividends,   interest  from  bond   holdings,  real                                                                   
          estate   rental   fees,   as   well   as   realized                                                                   
          gains/losses   from  investments  that   have  been                                                                   
     Monthly financial statements posted on APFC's website                                                                      
      provide information as to the value of the Fund and                                                                       
     the ERA at the end of each month.                                                                                          
          As  of May 31,  2019, the value  of the ERA  totals                                                                   
          $19.0  billion.  This  includes  $17.0  billion  of                                                                   
          accumulated   realized  earnings   of  which   $3.9                                                                   
          billion      is      recognized       as      being                                                                   
          committed/appropriated  to the  FY20 POMV draw  and                                                                   
          to  Inflation  Proofing  the Principal.  There  are                                                                   
          also  $2.0 billion in  unrealized gains  attributed                                                                   
          to  the ERA's  pro-rata share  of Fund  investments                                                                   
          that have not been sold.                                                                                              
     On  June  30, at  the  end  of each  fiscal  year,  Fund                                                                   
     values  are "trued up"  and closed  in conjunction  with                                                                   
     the  completion  of  an  annual,  independent  financial                                                                   
     The ERA does not have its own investment mandate.                                                                          
     The ERA is subject to legislative appropriation.                                                                           
MS. RODELL  sad the ERA was  established to hold the  net realized                                                              
earnings  from the  permanent fund's  investment portfolio,  which                                                              
includes monthly  income. It  is posted  every month as  unaudited                                                              
monthly financial statements.  This gives a sense of  how both the                                                              
principal and  ERA are doing. She  reviewed the figures  as of May                                                              
31, 2019, as reported on the slide.                                                                                             
She  emphasized that  the ERA  does  not have  its own  investment                                                              
mandate or  set of trust principles  that it has deemed  the board                                                              
to consider when  investing the ERA. It is subject  to legislative                                                              
11:56:52 AM                                                                                                                   
MS.  RODELL reviewed  slide 35,  "Use  of Fund  Earnings from  ERA                                                              
Since Inception."                                                                                                               
     Paid out of ERA = $30.8 B                                                                                                  
     • Dividend Transfers = $24.4B                                                                                              
         • POMV (FY19-20) & GF Appropriations = $6.1B                                                                           
         • Alaska Capital Income Transfers = $367.9 m                                                                           
     • Transfers from ERA to Principal = $21.4 B                                                                                
          • Inflation Proofing                                                                                                  
          • Special Appropriations                                                                                              
     • Unspent Realized Earnings in ERA = $13.7 B                                                                               
MS. RODELL  said the  capital income  transfers of $367.9  million                                                              
is money associated with State v. Amerada Hess.                                                                                 
She then reviewed the chart on the right.                                                                                       
Total $66.1 billion                                                                                                             
                       Transfers to                                                                                             
                       Principal- Saved                                                                                         
 Paid out to           for Future            Unspent Realized                                                                   
 current               Generations           Earnings                                                                         
 Earnings Spent $30.8 Billion                                                                                                   
 Earnings Saved 35.8 Billion                                                                                                  
11:57:48 AM                                                                                                                   
REPRESENTATIVE WOOL  asked for the definition of  unspent realized                                                              
earnings  since  he assumed  all  of the  funds  in  the ERA  were                                                              
MS. RODELL answered  that the balance of $13.7  billion recognizes                                                              
these transfers  that are expected  to happen, so  the legislature                                                              
has spent portions  of it, the POMV. It also does  not include the                                                              
unrealized earnings, only the realized earnings.                                                                                
11:58:51 AM                                                                                                                   
MS. RODELL reviewed slide 36, "Annual Use of ERA."                                                                              
        • POMV rules-based structure for Fund withdrawals                                                                       
          maintains the long term sustainability of the                                                                         
        • Inflation Proofing AS 37.13.145(c) protects the                                                                       
          future value of the Principal.                                                                                        
        • APFC's operations and investment management of                                                                        
          the Fund's assets are supported by the ERA.                                                                           
        • Agencies working on the collection of royalties                                                                       
          also receive appropriations from the ERA.                                                                             
 Operating Budget                    FY 2019           FY 2020                                                                
 Percent of Market Value -      2,722,600,000     2,933,084,100                                                               
 Inflation Proofing the           942,000,000       943,000,000                                                               
 APFC Operations                   18,074,600       17,800,400                                                                
 APFC Investment Management       150,498,700       155,795,000                                                               
 Department of Law                  2,619,100        2,617,700                                                                
 Department of Natural              6,044,800        6,132,600                                                                
 Department of Revenue                94,500            97,900                                                                
She pointed  out that the investment  management fees are  tied to                                                              
the  performance   of  the  fund,   so  the  corporation   has  an                                                              
expectation   of  fund  growth   in  calculating   the  class   IV                                                              
management  investment fees.  The  corporation also  pays fees  to                                                              
the  departments  of  Law,  Natural  Resources,  and  Revenue  for                                                              
services,  mostly  for collection  of  royalty  on behalf  of  the                                                              
11:59:47 AM                                                                                                                   
REPRESENTATIVE  WOOL  related  his  understanding  that  the  POMV                                                              
model would  only take a set  percentage every year  and inflation                                                              
proofing   was  not   necessary.   He  recalled   the   investment                                                              
management  fees were $350  million, but  these figures  are about                                                              
half that  amount.  He asked if  these figures  were for  in-house                                                              
investment management fees.                                                                                                     
12:00:08 PM                                                                                                                   
MS. RODELL  said the $350 million  also referred to their  net fee                                                              
arrangements. For  example, property managers receive  a fee prior                                                              
to  remitting  rentals.  The  $155   million  refers  to  the  PFC                                                              
actually writing a  check and they need an appropriation  to write                                                              
the check.  Many of the external  public equity managers  are paid                                                              
in  this  manner for  gross  performance.  In  terms of  POMV  and                                                              
inflation-proofing,  she said so  long as  there are two  accounts                                                              
exist and  the principal  account does not  get any  benefit other                                                              
than through  appropriation  from the investments  that it  makes,                                                              
it will  not keep pace  with inflation.  This is because  there is                                                              
no way  for the  principal account  to capture  that benefit,  she                                                              
said. The corporation  still needs inflation-proofing,  even under                                                              
the  statutory  POMV,  in  order  to  ensure  that  the  principal                                                              
maintains its purchasing power for future generations.                                                                          
12:01:33 PM                                                                                                                   
CO-CHAIR JOHNSTON  related her  understanding that the  investment                                                              
management fees  are negotiated  fees for outside  management. She                                                              
asked  whether  the fund  has  control of  them  as  they go  from                                                              
FY2019  to  FY2020, since  this  represents  an estimate  of  $5.3                                                              
MS. RODELL agreed  the $5.3 million is an estimate.  She said that                                                              
in some years, such  as in 2017, the PFC requested  a supplemental                                                              
appropriation because  the market was really booming,  and the PFC                                                              
needed  to be  certain it  had enough  authority  to expend  these                                                              
CO-CHAIR  JOHNSTON   asked  whether  the  PFC  would   ask  for  a                                                              
supplemental  appropriation if the  amount in  the budget  for the                                                              
next fiscal year does not contain the PFC's estimated amount.                                                                   
MS. RODELL answered yes.                                                                                                        
12:02:58 PM                                                                                                                   
REPRESENTATIVE KREISS-TOMKINS  referred [to slide 36]  to the APFC                                                              
Operations of $17,800,400  and asked what percentage  of assets in                                                              
value are managed internally versus externally.                                                                                 
MS.  RODELL answered  that approximately  40  percent are  managed                                                              
internally, and 60 percent are managed externally.                                                                              
REPRESENTATIVE    KREISS-TOMKINS    estimated    the   ratio    is                                                              
approximately  90/10 or 85/15  in terms of  cost of  management of                                                              
corporate  investment assets.  He  asked the  reason why  external                                                              
portfolio   management  is  proportionately   more  expensive   as                                                              
compared to internal management.                                                                                                
MS. RODELL  responded  that it is  important  to recognize  all of                                                              
the resources an  external manager brings to bear  on managing the                                                              
portfolio. She  said that the  corporation expects  its investment                                                              
managers  to have  expertise and  to understand  the markets.  For                                                              
example,  if the  PFC has  an investment  in  an emerging  market,                                                              
such as China, the  public equity managers must be  experts on the                                                              
Chinese stock  market. That  expertise has  an expense,  including                                                              
the overhead,  data, and  technology necessary  to stay on  top of                                                              
the  market, so  it  requires  investment in  infrastructure.  The                                                              
external managers'  basic compensation  structure is  commensurate                                                              
with the expertise being provided, she said.                                                                                    
12:05:02 PM                                                                                                                   
REPRESENTATIVE  WOOL  said  outside   investment  managers  handle                                                              
approximately  60 percent  of  the assets.  He  asked for  further                                                              
clarification  on  the percent  of  return attributed  to  outside                                                              
managers and  whether they  bring in more  than 60 percent  of the                                                              
MS.  RODELL answered  that  she  did not  wish  to  over or  under                                                              
characterize  one group.  She offered  to research  it and  report                                                              
back to the committee.                                                                                                          
12:05:46 PM                                                                                                                   
MS.  RODELL turned  to the  pie  chart on  slide 37,  "FY 20  Fund                                                              
Appropriations  HB  39 Language."  She  said  that when  she  left                                                              
Juneau  this  morning  [prior  to  Governor  Dunleavy's  operating                                                              
budget  vetoes], the  FY2020  appropriation from  the  ERA to  the                                                              
general fund  was $2.9  billion based on  the POMV.  An additional                                                              
$27  million was  directed  to the  Capital  Income  Fund for  the                                                              
Amerada HESS  portion, with $943  million for inflation  proofing.                                                              
She  related  her  understanding  that the  $9.4  billion  special                                                              
appropriation post-veto  amount is now  $5 billion. She  said that                                                              
the  appropriation  designated   to  the  principal  to  meet  the                                                              
constitutional  mandate  for  royalties was  $329.2  million  with                                                              
$251 million for prepayment for statutory royalties.                                                                            
MS. RODELL  reminded members  that by statute,  25 percent  of the                                                              
royalties from  leases entered  into after 1979  are to go  to the                                                              
principal of  the fund.  However, that  has not been  appropriated                                                              
in the last  few years. It  has been capped at  the constitutional                                                              
requirement of 25  percent. This year's operating  budget tried to                                                              
restore this difference  by depositing an additional  $251 million                                                              
into the principal.                                                                                                             
MS. RODELL said that this allows the PFC to use best practices.                                                                 
12:07:28 PM                                                                                                                   
MS. RODELL turned to slide 38, "The Fund: Alaska's                                                                              
Renewable Resource."                                                                                                            
     Board of Trustees Resolutions 18-01 and 18-04                                                                              
     Affirm the Importance of a Rules Based System                                                                              
       Structure and Predictability                                                                                             
       Ability to Plan                                                                                                          
       Investment Management Best Practice.                                                                                     
     The Math                                                                                                                   
      More Drawn = Less Available for Future Expenditures                                                                       
     and Generation of Investment Income.                                                                                       
       Spend Today or Invest for Tomorrow.                                                                                      
She  emphasized the  importance of  the POMV  and the  rules-based                                                              
system  since   it  provides  structure  and   predictability,  an                                                              
ability  to plan,  and allows  the corporation  to use  investment                                                              
management  best practices.  She  said, "It's  quite simple.  It's                                                              
not magic."                                                                                                                     
12:08:11 PM                                                                                                                   
REPRESENTATIVE KREISS-TOMKINS  referred to  slide 23. He  said the                                                              
Alaska  Permanent  Fund Corporation  is  one  of the  best  things                                                              
Alaska has  going for it  right now and  it's important to  set it                                                              
up for  success in the future.  He expressed appreciation  for Ms.                                                              
Rodell's work and the corporation employees.                                                                                    
12:08:43 PM                                                                                                                   
REPRESENTATIVE WOOL  thanked Ms.  Rodell for the  presentation. He                                                              
said there  is a  lot of talk  about a  $3,000 PFD, concern  about                                                              
overdrawing  the POMV,  and if  it  occurred once  or in  multiple                                                              
years. He  referred to  the statutory PFD.  He asked  whether this                                                              
would mean  the ERA  will be  depleted. He  surmised that  the PFC                                                              
has  modeled  this.  He wondered  if  saying  the  permanent  fund                                                              
dividend is not sustainable means that the ERA gets drawn down.                                                                 
MS.  RODELL said  what's  important  is to  recognize  there is  a                                                              
limit to  how much  can be spent.  The PFC  was encouraged  by the                                                              
POMV  because  it  recognizes  that   limits  were  necessary  and                                                              
manageable.  It created a  rule that  the PFC  could use  as long-                                                              
term investors  and the  legislature can use  as it  looks towards                                                              
revenue  sources  for many  different  types  of things.  How  the                                                              
legislature wants  to use that amount  is the reason the  group is                                                              
here today,  and it is  a really challenging  debate. The  PFC has                                                              
talked at  length about the 5.25  percent versus stepping  down to                                                              
5  percent  being reasonable.  She  said  the PFC  would  strongly                                                              
encourage everyone  to maintain  those requirements.  However, how                                                              
the legislature  spends $2.9 billion or  $3 billion is  the job of                                                              
the legislature  and not the  corporation, she said.  Further, the                                                              
corporation believes  that the 5.25 percent of  POMV stepping down                                                              
to 5  percent was a  reasonable set of  rules that  everyone could                                                              
live with,  which is why  it is so  important to maintain  it, she                                                              
12:12:08 PM                                                                                                                   
CO-CHAIR JOHNSTON made announcements before the break for lunch.                                                                
12:12:50 PM                                                                                                                   
CO-CHAIR JOHNSTON recessed the meeting.                                                                                         
^Fiscal Models                                                                                                                  
                         Fiscal Models                                                                                      
12:59:08 PM                                                                                                                   
CO-CHAIR JOHNSTON  reconvened the  meeting and announced  that Mr.                                                              
Teal  would provide  modeling  scenarios  for the  permanent  fund                                                              
dividend (PFD).                                                                                                                 
12:59:33 PM                                                                                                                   
DAVID  TEAL, Director,  Legislative  Fiscal  Analyst, Division  of                                                              
Finance, Alaska  State Legislature, Juneau,  said he was  asked to                                                              
present  the  long-term   projections  for  the   three  different                                                              
scenarios that were assigned to the working group teams.                                                                        
MR.  TEAL explained  that  Scenario A  is  the statutory  dividend                                                              
that happens  to be $3,000  this year, Scenario  B is a  repeat of                                                              
2018 for a $1,600  dividend, and Scenario C is  a dividend without                                                              
deficit, which  simply matches the  available revenue. He  said he                                                              
would start with  the FY2020 fiscal situation and how  the cost of                                                              
dividends is computed.                                                                                                          
He  directed  attention   to  slide  2,  the   6/11/19  Conference                                                              
Committee  calculations  for  a  PFD  that  maintains  a  balanced                                                              
budget.  It shows  the traditional  revenue,  primarily from  oil,                                                              
from  the Department  of Revenue  (DOR) projection  for price  and                                                              
production  forecasts. That  amount  is $2.304  billion. He  noted                                                              
that underneath the  revenue forecast is the percentage  of market                                                              
value (POMV)  payout, which is  $2.933 billion. The  total revenue                                                              
projected in FY2020 is approximately $5.2 billion.                                                                              
He  explained  that  the  next  calculation  is  the  unrestricted                                                              
general   fund    (UGF)   appropriations   that    are   operating                                                              
appropriations from  the Conference Committee Budget.  The capital                                                              
budget  was funded  primarily with  constitutional budget  reserve                                                              
(CBR)  funds,  which  failed,  so there  is  very  little  capital                                                              
budget  in the  reserve funds.  The  capital amount  noted in  the                                                              
analysis  is primarily mental  health funds  with some  transfers.                                                              
He  said  the  total  spending   is  approximately  $4.4  billion,                                                              
leaving a surplus of $800 million.                                                                                              
1:02:21 PM                                                                                                                    
REPRESENTATIVE  WOOL  asked,  if the  PFD  was  funded in  a  more                                                              
traditional way through  general funds, could the  $4.4 billion go                                                              
up another $170 million to $200 million.                                                                                        
MR.  TEAL replied  that an  additional $200  million should  cover                                                              
both  the  fiscal notes  that  were  funded  from the  Power  Cost                                                              
Equalization  (PCE), a  little  more than  $30  million, and  then                                                              
$170 million with  the capital projects that were  funded with the                                                              
CBR.  Add those  to the  general funds  and the  surplus drops  to                                                              
$600 million.                                                                                                                   
He explained  that  a surplus  of $800  million can  pay a PFD  of                                                              
$1,178 per  person. With  an assumed  budget surplus,  PFDs larger                                                              
than  the  affordable  $1,178  will   require  the  budget  to  be                                                              
balanced  with  cuts,  new  revenue,   or  by  taking  money  from                                                              
reserves. Increasing  the budget surplus  by $100 million  to $900                                                              
million will  result in a $1,334  PFD. A $1,600 PFD will  need new                                                              
revenue, cuts,  or reserves totaling  $270 million.  Similarly, to                                                              
pay the  statutory PFD of $3,000,  $1.1 billion would  be required                                                              
from reserves, budget reduction, or increased revenue.                                                                          
MR. TEAL explained  that the remainder of the chart  on slide 2 is                                                              
a POMV split where  the model computation shows how  to get to the                                                              
dividend  with cost  calculations.  The model  simply repeats  the                                                              
computations for  several years into the future.  The computations                                                              
are not complicated to forecast with various options.                                                                           
He turned to  slide 3, "Scenario A: Current Dividend  Statute." It                                                              
shows the  full statutory dividend  model using the  Department of                                                              
Revenue (DOR)  spring forecast for  price and production.  This is                                                              
about  half of  the  state's revenue.  Revenue  is  the base  with                                                              
limited options  for the forecast.  The DOR forecast  provides the                                                              
best  numbers. If  there  is concern  about  how  risky the  model                                                              
might be, then a  lower price or lower production  scenario can be                                                              
1:08:22 PM                                                                                                                    
REPRESENTATIVE  WOOL  asked  if  the  spring  forecast  means  the                                                              
forecast  was made  in the  spring of  2019 for a  future time  or                                                              
that the forecast has already been realized.                                                                                    
MR.  TEAL replied  these  are  projected numbers  through  FY2028.                                                              
Even the  numbers for FY2019 won't  be known for another  month or                                                              
two, he said.                                                                                                                   
SENATOR  HUGHES  directed  attention  to the  assumptions  in  the                                                              
middle  column that  list a  2.25 inflation  rate as  well as  the                                                              
population growth  rate. She asked  if both those  assumptions are                                                              
plugged  into   the  growth  of   the  budget.  She   offered  her                                                              
understanding  that factoring  in both those  assumptions  was one                                                              
of the  reasons the existing  constitutional spending cap  was too                                                              
MR. TEAL  answered yes,  and he  would address  that later  in the                                                              
He explained  that the starting  point of the operating  budget is                                                              
the 6/11/2019  Conference  Committee budget.  Now that the  vetoes                                                              
are known,  downward adjustments  will be made  to the  model. The                                                              
growth  rate   that  Senator  Hughes   noted  in  Scenario   A  is                                                              
inflation.  The  budget  starts  with the  FY2020  budget  and  is                                                              
increased by  the rate of inflation.  The budget is  not increased                                                              
for population.  As previously noted,  the population  growth rate                                                              
is used to calculate dividends.                                                                                                 
He said  the rate  of inflation  is used  in a  base scenario.  He                                                              
emphasized that  regardless of the scenario, the  same assumptions                                                              
must  be used.  He  described the  problems  that  occur when  all                                                              
scenarios are not run under the same set of assumptions.                                                                        
He continued  with Scenario A noting  that the model  shows school                                                              
debt  reimbursement   at  100  percent.  The  capital   budget  in                                                              
Scenario   A   is  the   House   budget,   except  all   the   CBR                                                              
appropriations  are  replaced  with   unrestricted  general  funds                                                              
(UGF).  The  UGF budget  is  approximately  $175 million  to  $180                                                              
million, a calculation  that also grows at the  rate of inflation.                                                              
The  model also  assumes  a $50  million  supplemental budget.  He                                                              
said these  budgets are unpredictable  but should not be  left out                                                              
because they are an annual fact of life.                                                                                        
1:13:48 PM                                                                                                                    
He pointed to the  revenue variables in Scenario A  and noted that                                                              
the  calculation  has no  sales  taxes,  income taxes,  and  other                                                              
taxation  options. No  additional  revenue is  in  the model.  The                                                              
inflation  rate   is  2.25  percent,  which  is   the  number  the                                                              
permanent  fund and  its  advisor, Callan,  uses.  The model  also                                                              
uses an investment  return of 6.55 percent. The  population growth                                                              
rate  comes  from   Department  of  Labor  statistics,   which  is                                                              
approximately  0.5   percent  per  year.  CBR  earnings   are  not                                                              
critical  for Scenario  A;  the  minimum CBR  balance  is just  an                                                              
option  within  the model.  The  model  does not  allow  unplanned                                                              
draws from  the earnings reserve  account (ERA). He said  he would                                                              
explain why that's so critical in a moment.                                                                                     
MR. TEAL said the  plan under Senate Bill 26 (2018)  is for a 5.25                                                              
percent  payout  to the  general  fund  through  FY2021 with  a  5                                                              
percent payout  thereafter. He  said the  modeling has  nothing to                                                              
do with statutory  net income so  that variable will not  be used.                                                              
The calculation for  the dividend program is the  existing law. It                                                              
is  not based  on  the POMV  and  there  is no  cap  on a  minimum                                                              
dividend. The model  is inflation proofed and it uses  some of the                                                              
$5.4 billion that  will be appropriated from the  earnings reserve                                                              
to the  corpus, which will  pay for the  inflation proofing  a few                                                              
years in advance.                                                                                                               
1:16:18 PM                                                                                                                    
He described  the output for the  dividends. The upper  right area                                                              
for  Scenario  A shows  the  graph  for dividends.  The  statutory                                                              
dividend  is roughly  $3,000  that will  be  increasing under  the                                                              
assumptions  in the  model.  The  bar graph  in  Scenario A  shows                                                              
whether the  permanent fund  is keeping  pace with inflation.  The                                                              
first bar  for each fiscal year  shows the permanent  fund growing                                                              
at the  rate of  inflation. The  second bar  for each fiscal  year                                                              
shows what  the permanent fund  is doing  under the model  and the                                                              
bars show  that the  permanent fund  is basically maintaining  its                                                              
current value. The  reason the bar graph shows  that the permanent                                                              
fund does  not completely  maintain its  current value  is because                                                              
the  payout is  too  big. He  explained,  "We've  got 6.5  percent                                                              
earnings  and  2.25   percent  goes  out,  leaving   4.75  percent                                                              
available  for a  payout and  we are  paying out  5.0 percent,  or                                                              
close to it. So, we don't quite keep pace with inflation."                                                                      
REPRESENTATIVE WOOL  referred to the PFD graph on  the upper right                                                              
and asked why the  graph shows a dip in the  payout between FY2023                                                              
and FY2024.                                                                                                                     
MR. TEAL explained  that it reflects the drop in  payout from 5.25                                                              
percent  to 5.0 percent  beginning  in FY2021.  He noted that  the                                                              
dip ultimately recovers.                                                                                                        
REPRESENTATIVE  WOOL summarized  his  understanding  that the  PFD                                                              
shown  in the  Scenario  A graph  is based  on  the statutory  net                                                              
income,  which  is independent  of  POMV,  so the  decreased  draw                                                              
would keep  the permanent  fund a little  bit larger.  He conceded                                                              
that  he  does not  understand  all  the  factors going  into  the                                                              
1:19:06 PM                                                                                                                    
MR. TEAL explained  that FY2018 was big year with  returns of some                                                              
10.7 percent.  That return factors  in for 5 years.  Going forward                                                              
that large  return fades  away and is  ultimately replaced  with a                                                              
constant 6.5 percent.                                                                                                           
He pointed  to the table  at the bottom  right of Scenario  A that                                                              
shows the  dividend payout  and what's left  for the  general fund                                                              
after the  dividend is paid each  year. In FY2020 it  shows $1.944                                                              
billion,  then  it goes  up  $2  billion,  and finally  near  $2.3                                                              
billion  a year.  The general  fund  gets whatever  is left  after                                                              
paying  dividends. This  table also  shows  what is  left for  the                                                              
general fund after the dividend is paid.                                                                                        
1:22:55 PM                                                                                                                    
MR. TEAL  directed attention to the  table at the lower  left that                                                              
shows deficits  up to $1.8 billion  a year, noting that  the money                                                              
to fill that gap  must come from somewhere. In  this version there                                                              
are no unplanned  ERA draws so the  CBR is used up  rather quickly                                                              
and will  be gone after  FY2020. The bar  graph on the  upper left                                                              
shows  expenditures  and revenue  with  the dark  line  indicating                                                              
expenditures  without  PFDs  and  the dotted  line  with  PFDs.  A                                                              
balanced budget  means the  bars must reach  the dotted  line. The                                                              
white  space means  the scenario  is not valid  because, "You  are                                                              
spending  money that  you don't  have." Having  white space  means                                                              
the  option cannot  be  considered,  he said.  The  way the  model                                                              
addresses this situation  is to first assume the  white spaces are                                                              
filled from the CBR.                                                                                                            
This scenario  shows  the budget  is filled from  the CBR  through                                                              
FY2020, but it fails  in FY2021 because the balance  in the CBR is                                                              
insufficient. If  there isn't any money  in the CBR and  there are                                                              
no taxes, the only  alternative is to fill deficits  from the ERA.                                                              
Such ad hoc or  unplanned draws are beyond the 5  percent POMV and                                                              
this causes  the ERA  balance to  decline which  results in  lower                                                              
returns and declining  dividends in the future. By  FY2028 the ERA                                                              
is almost depleted.                                                                                                             
MR. TEAL said the  conclusion from Scenario A is  that a statutory                                                              
PFD  is  unsustainable  at projected  revenue,  expenditures,  and                                                              
earnings. The  $3,000 dividend works  if $1.6 billion is  cut from                                                              
spending  or  revenue is  increased  by  that  amount. It  is  not                                                              
possible to continue  to pull $1.6 billion from  reserves so there                                                              
are two options instead of three, he said.                                                                                      
1:26:59 PM                                                                                                                    
REPRESENTATIVE  WOOL speculated  that  when  the earnings  reserve                                                              
runs out in FY2028,  the POMV draw would also go  down because the                                                              
overall value  of the  permanent fund is  depleted. He  noted that                                                              
Ms. Rodell  previously said the  permanent fund is  receiving cash                                                              
from rent  and other realized  gains. He  asked if the  cash could                                                              
immediately be dispersed in PFDs if nothing else were to change.                                                                
MR.  TEAL replied  that works  if earnings  are 10  percent as  in                                                              
2018, but they  are unpredictable from year to  year. The earnings                                                              
this year  are closer to 3  percent, which means earnings  of only                                                              
$1.8  billion. A  $3 billion  payout is  unsustainable with  those                                                              
earnings.  Depleting  the  ERA  puts  the  state  in  the  serious                                                              
position  of not  only  being unable  to  pay  dividends but  also                                                              
having to  cut the budget. This  will affect state  hiring because                                                              
career employees  can't be expected  to accept jobs when  there is                                                              
risk of layoffs  every year. He  said it's not that  the statutory                                                              
dividend formula  is unsustainable,  it's that approximately  $1.6                                                              
billion will  have to be permanently  cut from the budget  to make                                                              
the formula sustainable.                                                                                                        
1:32:32 PM                                                                                                                    
CO-CHAIR  JOHNSTON  asked if  the  budget will  be  static for  10                                                              
years  if $1.6  billion is  cut from  the budget  and there  isn't                                                              
MR. TEAL  agreed that cutting $1.6  billion and paying  a dividend                                                              
results in a CBR  that is relatively steady and an  ERA that keeps                                                              
pace  with inflation.  He said  the  Budget Reserve  chart on  the                                                              
middle left  shows whether  or not  a scenario  is viable.  If the                                                              
budget reserve  looks good,  the permanent  fund also  looks good.                                                              
Deficits  of $200 million  to $300  million turn  to surpluses  in                                                              
the out years.                                                                                                                  
CO-CHAIR  JOHNSTON  explained  that   the  modeling  scenario  she                                                              
requested was  suggested by  Senator Hughes.  She conceded  that a                                                              
couple  of large  "ifs" would  be  involved with  $1.6 billion  in                                                              
cuts, and inflation is always changing as well.                                                                                 
SENATOR HUGHES clarified  that her intent was to  ensure that both                                                              
inflation  and  population  growth weren't  used.  She  reiterated                                                              
that  is why  the  existing  constitutional spending  cap  doesn't                                                              
work; only one or the other is needed.                                                                                          
CO-CHAIR JOHNSTON  said population  growth is  not being  used and                                                              
she would guess that inflation is used.                                                                                         
1:36:47 PM                                                                                                                    
MR.  TEAL  responded that  he  plugged  in  the $400  million  UGF                                                              
vetoes that  were made  today. The  draws are  the same  and there                                                              
are still deficits of $1.5 billion that decline to $1.3 billion.                                                                
CO-CHAIR  JOHNSTON  remarked  that  with the  current  vetoes  the                                                              
state still has deficits.                                                                                                       
MR. TEAL answered yes.                                                                                                          
REPRESENTATIVE WOOL  asked if the  assumption is that  the current                                                              
vetoes would be extended to budgets in future years.                                                                            
MR.  TEAL answered  yes; there's  a $400  million reduction  every                                                              
year.  The assumption  is that vetoes  are repeatable  so  that is                                                              
the new level of  spending. He added that dividends  start to fall                                                              
because the ERA  is being used at more than a  five-percent payout                                                              
in order to fill the deficits.                                                                                                  
SENATOR OLSON asked about the school debt reimbursement.                                                                        
MR.  TEAL  explained  that  the $400  million  in  vetoes  already                                                              
includes a  veto of  some of the  school debt.  He noted  that the                                                              
school  debt  reimbursement  was  used early  in  the  session  to                                                              
create  a legislative  budget,  but  the vetoes  are  done and  it                                                              
should  be  left at  100  percent.  However,  there is  about  $50                                                              
million of  the $400 million  that is counted  in the  school debt                                                              
reimbursement line.                                                                                                             
1:39:13 PM                                                                                                                    
SENATOR  HUGHES  offered  her understanding  that  the  governor's                                                              
plan is to  continue reducing the  budget next year. She  asked if                                                              
he could show that  the $400 million is left in  this year and the                                                              
additional unknown amount is added for next year.                                                                               
MR.  TEAL  replied he  could  do  that  but  the purpose  of  this                                                              
modeling  is to look  at the  scenarios for  the $3,000  dividend,                                                              
the $1,600 dividend,  and the deficit. He said the  easiest way to                                                              
do that  is to  use negative 1  percent for  a growth  rate, which                                                              
shows that the budget  falls. The CBR is not  recovering, but it's                                                              
not  as bad  and  deficits are  $500  million,  falling to  almost                                                              
zero. He continued as follows:                                                                                                  
     With continued  cuts you can get there, it  doesn't have                                                                   
     to  happen all  in  one year.  You've  got $400  million                                                                   
     this year;  you can  see that that  isn't going  to give                                                                   
     you  a   sustainable  plan.   If  there  are   continued                                                                   
     reductions  it  will,  but   then  you  are  looking  at                                                                   
     budgets  that are falling  - and  if that's your  intent                                                                   
     it works. You  can see that while you are  using the ERA                                                                   
     in  an unplanned  way for a  while, you  stop, and  that                                                                   
     means  things  will  look  even  better  as  you  extend                                                                   
     beyond FY2028.                                                                                                             
MR. TEAL  said he agrees with  Ms. Rodell that the  legislature is                                                              
fooling itself by  looking beyond FY2028. He said  just projecting                                                              
three  years in  advance is  hard.  He emphasized  that the  model                                                              
does  projections, not  predictions, and  projections change  when                                                              
assumptions are changes.                                                                                                        
1:42:15 PM                                                                                                                    
REPRESENTATIVE WOOL  commented that the biggest variables  are oil                                                              
pricing  and oil  production  projections  and that  is  basically                                                              
two-fifths of the state's income.                                                                                               
MR. TEAL  reiterated that the  object of the  model is not  to try                                                              
to make  things look good  by making some optimistic  assumptions.                                                              
The object  of the model  is to look  at expectations of  what can                                                              
realistically  be  achieved. He  cited  the previous  modeling  on                                                              
continued budget  reductions as an example. Some  people might say                                                              
the governor  is committed  to continued  budget reductions  while                                                              
others might say  that the legislature has been trying  to cut the                                                              
budget  for several  years and the  capital budget  cannot  be cut                                                              
further. The question  is whether or not additional  cuts from the                                                              
operating  budget continue.  Once these  programs are  eliminated,                                                              
departments will  be eliminated at  some point. That's  fine, it's                                                              
just a matter of  how much goes to dividends and  how much goes to                                                              
government, he said.                                                                                                            
MR. TEAL moved  to slide 4 titled, "Scenario  B: $1,600 Dividend."                                                              
He  explained  that  under  this   scenario  there  are  continued                                                              
unplanned  ERA  draws  and  the CBR  is  extended  but  ultimately                                                              
vanishes.  The $1,600  dividend  is probably  workable. The  model                                                              
shows  the ERA  is growing  but there  are still  deficits on  the                                                              
order of $400 million  to $600 million. He said  a balanced budget                                                              
will probably  occur in the mid-2030s.  However, having no  CBR is                                                              
risky because  there is  no easy  place to  turn to for  balancing                                                              
the budget  if oil  prices plummet.  The state  will have  to pull                                                              
from  the  ERA  which  leads  to   declining  real  value  of  the                                                              
permanent fund.                                                                                                                 
1:46:46 PM                                                                                                                    
REPRESENTATIVE WOOL  speculated that because the CBR  has a higher                                                              
threshold,  it's  more  likely  that the  ERA  would  be  depleted                                                              
MR. TEAL  replied that one  option in the  model says to  not pull                                                              
from  the CBR,  but it  doesn't  make that  much difference.  That                                                              
would  address  the risk  factor  but  the  problem has  not  been                                                              
fixed. That just provides some time to fix the problem.                                                                         
CO-CHAIR JOHNSTON asked him to model no draws from the CBR.                                                                     
MR. TEAL replied  that he would model a CBR minimum  balance of $2                                                              
billion  with draws  strictly from  the ERA.  That shows  slightly                                                              
larger  deficits  than  before.  He reiterated  the  warning  that                                                              
running multiple scenarios tends to get confusing.                                                                              
1:49:44 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS asked  how much  larger the  CBR is                                                              
getting  as  a  result  of the  governor's  budget  not  having  a                                                              
reverse sweep.                                                                                                                  
MR. TEAL  answered  that he couldn't  answer  because he does  not                                                              
know precisely  what is being swept.  He explained that  without a                                                              
reverse sweep,  the $172 million  in the Statutory  Budget Reserve                                                              
(SBR) gets  swept as well as  several hundred million  in standard                                                              
sweepable things like the worker safety and hazard waste funds.                                                                 
He  said  the  big controversy  revolves  around  the  Power  Cost                                                              
Equalization  (PCE) Fund  and the Education  Endowment Fund  being                                                              
swept.  If the  two funds  are swept,  then the  PCE endowment  is                                                              
gone as  of June 30 and  there will be  no money for  PCE benefits                                                              
in  FY2020. He  noted  that the  crime bill  was  funded with  PCE                                                              
funds so if  the PCE fund is  swept, the crime bill  will not have                                                              
money to back it.  If the Education Endowment Fund  is swept, then                                                              
there would  be no funding  for things ranging from  scholarships;                                                              
grants  to the  university;  funds  for the  Washington,  Wyoming,                                                              
Alaska, Montana,  and Idaho (WWAMI)  School of Medical  Education;                                                              
and the Homework Help program for libraries.                                                                                    
1:53:00 PM                                                                                                                    
He reiterated  that until  there is  a list  of actual  funds that                                                              
are swept, he does  not know what is going to happen.  He said the                                                              
sweep  gets confusing  on something  like  the Vaccine  Assessment                                                              
Fund,  a fund  established from  a  bill sponsored  by the  Senate                                                              
president. That  is a $21  million fund that essentially  consists                                                              
of   voluntary  contributions   from   healthcare  and   insurance                                                              
providers. He  said if the  reverse sweep  does not occur  for the                                                              
Vaccine  Assessment  Fund, chances  are  low that  healthcare  and                                                              
insurance providers  will continue to contribute  to that program.                                                              
He remarked  that trying to predict  what is going to  happen in a                                                              
special session  and whether the  governor vetoes a  reverse sweep                                                              
is beyond his capabilities.                                                                                                     
1:54:48 PM                                                                                                                    
MR.  TEAL  moved  to  slide  5   titled,  "Scenario  C:  'Surplus'                                                              
Dividend," a scenario  for what happens if dividends  are based on                                                              
what  remains after  spending. In  this  scenario, dividends  drop                                                              
substantially and then  go back up as a result of  revenue and the                                                              
POMV payout  increasing in the future.  As revenue goes  up faster                                                              
than expenditures  are climbing,  then PFDs will  go back  up. The                                                              
CBR grows  steadily, meaning there  are surpluses. The  ERA grows,                                                              
keeping  pace  with  inflation.  There  are  no  deficits  because                                                              
whatever  is  left  after  spending  on the  budget  is  spend  on                                                              
He  opined that  Scenario  C  is not  as  trouble-free  as it  may                                                              
appear.  On the positive  side,  if PFDs depend  on spending  then                                                              
the people  would be interested in  what is spent and  there would                                                              
be pressure  to move the  budget downward.  Right now there  is no                                                              
income tax  and no  link between spending,  the dividend,  or what                                                              
people pay for government,  but there would be a  link in Scenario                                                              
C. Oil  is a very volatile  commodity and spending  during surplus                                                              
years will  be chaotic  without rules  governing the dividend.  He                                                              
observed  that  that  wouldn't  be  any  worse  than  the  current                                                              
situation. He  suggested it  would be a  lot easier to  settle the                                                              
question of the  dividend right now with a set of  rules to follow                                                              
that  are sustainable  and affordable.  He  acknowledged that  the                                                              
legislature would  spend a lot of  time and effort to  get to that                                                              
1:59:11 PM                                                                                                                    
REPRESENTATIVE  MERRICK  remarked  that  spending  during  surplus                                                              
years requires  a conversation  about a  spending cap.  She opined                                                              
that government  cannot help  itself and will  spend to  the point                                                              
that there is no surplus and no dividend.                                                                                       
REPRESENTATIVE KREISS-TOMKINS  asked him to comment  on the spring                                                              
revenue and production forecasts for North Slope oil.                                                                           
MR.  TEAL  suggested   he  hold  his  question   for  Commissioner                                                              
Tangeman from the Department of Revenue.                                                                                        
REPRESENTATIVE  KREISS-TOMKINS  asked  if  the  model  reflects  a                                                              
production forecast of 499,000 barrels per day.                                                                                 
MR.  TEAL answered  that  the  projection  for FY2020  is  530,000                                                              
barrels per  day and  that appears  to be  a little optimistic.  A                                                              
decline is  projected and  then production goes  up to  500,000 by                                                              
2:02:44 PM                                                                                                                    
REPRESENTATIVE  WOOL  expressed  hope  that  the  committee  would                                                              
ultimately look  at the  underlying PFD formula  and figure  out a                                                              
structure,  not just pull  numbers out  of the  hat such  that the                                                              
PFD discussion continues to be reargued.                                                                                        
MR.  TEAL explained  that  the model  would  help legislators  see                                                              
what  is sustainable  and  what  is  affordable. The  model's  big                                                              
advantage  is extending things  out because  deciding whether  the                                                              
state  can  afford  to  pay  a $3,000  dividend  in  FY2020  is  a                                                              
different question  than the state being  able to afford  to pay a                                                              
$3,000 dividend  every year. Paying a  $3,000 PFD as opposed  to a                                                              
$1,600 PFD  costs an extra $1  billion. He remarked that  he would                                                              
be  willing  to pay  an  extra  $1  billion  to, "Just  have  this                                                              
problem go away."                                                                                                               
REPRESENTATIVE  MERRICK  said Mr.  Teal  brought  up an  important                                                              
point regarding the  goal for the working group. She  asked if the                                                              
working group's  goal is  to recommend an  amount for  this year's                                                              
PFD or to say what is sustainable into the future.                                                                              
2:06:41 PM                                                                                                                    
CO-CHAIR JOHNSTON  suggested that she  read the resolution  of how                                                              
the  working group  was  created  and she  will  find  all of  the                                                              
above.  She  said a  short-term  goal  has  been forced  upon  the                                                              
working  group for  the next  special session.  The working  group                                                              
will continue  to address a  project that  is not easy  and cannot                                                              
be done quickly because great thought is required.                                                                              
SENATOR HUGHES said  in an ideal world knowing  what is affordable                                                              
and sustainable would  be helpful, but whatever is  in statute the                                                              
legislature can  choose to  follow it or  not. Also, the  seats in                                                              
the  legislature change  over time  and new  legislators may  have                                                              
different ideas.  She opined that the  PFD must be settled  in the                                                              
constitution with people  on board in a fair way.  She pointed out                                                              
that legislators  who thought the PFD  should not be put  into the                                                              
constitution,  including herself,  should  reconsider because  the                                                              
dividend  matter  must  be  settled. Otherwise,  it  is  going  to                                                              
continue forever.                                                                                                               
2:11:47 PM                                                                                                                    
^Revenue Models                                                                                                                 
                         Revenue Models                                                                                     
2:12:32 PM                                                                                                                    
CO-CHAIR JOHNSTON reconvened the meeting.                                                                                       
2:22:19 PM                                                                                                                    
BRUCE  TANGEMAN,   Commissioner,  Department  of   Revenue  (DOR),                                                              
Anchorage,  said he agrees  with almost  everything that  Mr. Teal                                                              
just stated. He and  Mr. Teal met two days ago  to ensure that the                                                              
inputs to  their models were  the same and  as a result, a  lot of                                                              
the   outputs  are   identical.   One  difference   is  that   his                                                              
presentation  has a 20-year  projection to give  a better  view of                                                              
the long term.  He reminded the committee that  forecasts are just                                                              
a prediction from  a point in time so a 10-year  forecast is a bit                                                              
of a  stretch. A 20-year  forecast is only  meant to  provide some                                                              
He said  he believes  he'll be able  to answer members'  lingering                                                              
questions as  he goes  through his slides.  He noted  that several                                                              
members asked  what happens if oil  prices spike, what  happens if                                                              
production spikes,  and what happens when there are  new people in                                                              
office.  He  said  he  would  not   speak  to  the  constitutional                                                              
amendments  but he  would address  questions  associated with  the                                                              
spending limit. If  there was a spending limit in  place, it would                                                              
take  care of  an oil  price spike  and  it would  limit what  new                                                              
legislators can and cannot do.                                                                                                  
2:25:38 PM                                                                                                                    
COMMISSIONER TANGEMAN  displayed slide  2, "A Contributing  Factor                                                              
to Why the ERA  is Currently at $19 billion:" He  pointed out that                                                              
a big reason  for the $19 billion  ERA relates to the  reduced PFD                                                              
distributions for  FY2017, FY2018,  and FY2019. The  statutory PFD                                                              
for those  three years totaled about  $4.8 billion and  the amount                                                              
paid  was  about $2.5  billion.  The  $2.3  billion that  was  not                                                              
distributed remained  in the ERA and earned about  $400 million in                                                              
interest. He emphasized  that contrary to what  some people think,                                                              
that money  was not  used for government.  He said another  factor                                                              
that  contributed to  the  large ERA  balance  was that  inflation                                                              
proofing  was  not  paid  out for  2016-2018.  He  estimated  that                                                              
accounted for another $2 billion.                                                                                               
2:27:28 PM                                                                                                                    
SENATOR  HUGHES said  she  knows  that in  FY2017  and FY2018  the                                                              
undistributed money  was not used for government,  but she thought                                                              
some was used for government in FY2019.                                                                                         
COMMISSIONER TANGEMAN  said the POMV started in FY2019  so part of                                                              
the  ERA did  go to  pay for  some  government. The  undistributed                                                              
$886 million  that remained  in the  ERA was part  of the  pool in                                                              
the POMV  calculation, but  it did not  go to pay  for government.                                                              
He stressed that there is no direct correlation.                                                                                
SENATOR HUGHES  asked if at  least $886  million from the  ERA was                                                              
used for government.                                                                                                            
COMMISSIONER  TANGEMAN  replied  the  POMV  calculation  was  $2.7                                                              
SENATOR  HUGHES responded,  "So  there would  have  been at  least                                                              
$886 million that went to pay for government. Correct?"                                                                         
COMMISSIONER TANGEMAN answered yes.                                                                                             
2:29:14 PM                                                                                                                    
CO-CHAIR  JOHNSTON asked  if  the reason  for  the separation  was                                                              
because of the two distinctly different statutes.                                                                               
COMMISSIONER TANGEMAN  said not necessarily, but that  brings up a                                                              
good point  because there has been  a lot of discussion  about the                                                              
two  competing  statutes.  He  said  they're  both  law,  but  the                                                              
concept that  surrounds the  POMV discussion  is different  and he                                                              
believes  incomplete.  He reminded  the  committee  that the  POMV                                                              
debate centered  on how much  the draw would  be and how  it would                                                              
be spent. The first  part is a math equation and  the decision was                                                              
to establish  a 5.25  percent draw  that steps  down to  5 percent                                                              
over time.                                                                                                                      
The second  part of the  equation is how  the draw will  be split.                                                              
The  administration's perspective  is that  until the  legislature                                                              
makes a  decision and  the governor  agrees, the calculation  will                                                              
be the PFD calculation  that is on the books. He  said he believes                                                              
that everybody  knew at the  time that  whatever the ERA  draw was                                                              
going to be, there was a hole in the equation.                                                                                  
2:32:20 PM                                                                                                                    
CO-CHAIR JOHNSTON said  she had to agree with  Senator Hughes that                                                              
it could be easily  argued that the undistributed  2019 amount was                                                              
used for government.                                                                                                            
2:32:33 PM                                                                                                                    
REPRESENTATIVE MERRICK  asked why the old statute  wasn't repealed                                                              
when Senate Bill 26 (2018) was passed.                                                                                          
COMMISSIONER TANGEMAN  replied everyone  was under the  assumption                                                              
that the  split portion  of the  equation would  be addressed  the                                                              
next year.  He said he  imagines the old  formula was left  on the                                                              
books  because repealing  the calculation  in  statute would  have                                                              
eliminated the  function that  was in place  to pay  the dividend.                                                              
The idea was that  it could be repealed once  the legislature came                                                              
to a conclusion on the calculation going forward.                                                                               
2:33:30 PM                                                                                                                    
REPRESENTATIVE  WOOL related  his understanding  that Senate  Bill                                                              
26  was  a heavy  lift  and  the  Senate  and the  House  came  to                                                              
different  conclusions  on  the split.  The  conference  committee                                                              
solution  was to  make the  draw one  year and  address the  split                                                              
later. To  that point,  he said  there is  nothing that  says that                                                              
the  formula has  to have  anything to  do with  the POMV  because                                                              
other revenue sources could be used for the PFD.                                                                                
He referenced the  $2.3 billion that was not  distributed over the                                                              
last three  years and said  one could argue  that the  FY2019 5.25                                                              
percent POMV  draw was  used for budgetary  purposes. He  asked if                                                              
that was what he said.                                                                                                          
COMMISSIONER  TANGEMAN  said  yes,  but  he  didn't  want  to  get                                                              
wrapped around  the axle on the  amount that was spent.  The point                                                              
was that  if the  statutory PFD  formula had  been followed  those                                                              
three years,  there would be  $2.3 billion  less in the  ERA right                                                              
2:35:43 PM                                                                                                                    
SENATOR  HUGHES  asked him  to  comment on  Representative  Wool's                                                              
statement that revenue  sources other than the POMV  could be used                                                              
to  pay the  PFD. She  offered  her perspective  that  the PFD  is                                                              
supposed to come from the ERA, not from other revenue sources.                                                                  
COMMISSIONER  TANGEMAN  said he  understands  what  Representative                                                              
Wool is  saying, but he  agrees more with  Senator Hughes  and the                                                              
way it's been done  for several decades. That is  that the statute                                                              
gives the  formula and  calculation and says  that the  money will                                                              
be drawn  from the  ERA and  go into the  permanent fund  dividend                                                              
REPRESENTATIVE  WOOL commented that  the way  it has been  done is                                                              
not working.  He said he suggested  other revenue  sources because                                                              
the question of  paying a dividend remains if and  when oil prices                                                              
drop  to zero. "If  there's  no oil revenue,  do  we need all  the                                                              
permanent fund  revenue to keep the  lights on or is  there enough                                                              
revenue to  give out a check?"  He suggested everyone  think about                                                              
that before committing to a large check in perpetuity.                                                                          
2:38:08 PM                                                                                                                    
COMMISSIONER TANGEMAN  told members that he waited  to release his                                                              
presentation until  after the governor's vetoes came  out at 11:00                                                              
this  morning.   He  noted  that   Mr.  Teal  did  not   have  the                                                              
opportunity to present that scenario.                                                                                           
He   continued   the   presentation    reviewing   the   following                                                              
     ? FY20 Budget (UGF Only):                                                                                                  
          ? Legislature's - $4.4B Op & $150mm Cap                                                                               
          ? Governor's - $4.0B Op & $150mm Cap                                                                                  
               ? $4B ERA transfer to Corpus (after                                                                              
          inflation Proofing and POMV)                                                                                          
      ? Base Revenue Forecast: Spring 2019 Revenue Sources                                                                      
     Book page 10                                                                                                               
          ? Extrapolated beyond 2028                                                                                            
     ? Production Scenarios: Fall 2018 RSB page 63                                                                              
          ? Declining at 3% after 2028                                                                                          
     ? Inflation: 2.25% (from Callan)                                                                                           
        ? Agency Operations and Capital Items Grow with                                                                         
     ? Population Growth: 0.5% (Department of Labor)                                                                            
     ? Permanent Fund Returns:                                                                                                  
          ? FY20-FY29: 6.55%                                                                                                    
          ? FY30+: 5% + inflation                                                                                               
     ? CBR Balance at End of FY19: $1.77 billion (Treasury)                                                                     
     ? Recommended Minimum CBR Balance: $1 billion                                                                              
COMMISSIONER TANGEMAN  clarified that for consistency  he used the                                                              
legislature's  $4.4  billion  operating budget  and  $150  million                                                              
capital budget. For  the governor's budget he used  the $4 billion                                                              
operating  budget  that  was  released   at  11:00  a.m.  and  the                                                              
additional $4 billion ERA transfer to the corpus.                                                                               
He explained that  the fall forecast is the official  forecast for                                                              
the next  fiscal year and  the price is  updated the  next spring.                                                              
The production  forecast is made only  in the fall. He  noted that                                                              
his graphs  go out 20  years and the  official forecast is  for 10                                                              
years. The  assumptions he  made for the  next 10 years  include a                                                              
production decline  of 3 percent.  He acknowledged that  there was                                                              
no  science behind  that number;  it was  that he  didn't want  to                                                              
show an overly optimistic number.                                                                                               
COMMISSIONER  TANGEMAN referenced  an article  in the paper  today                                                              
and confirmed that  the numbers were coming in  under forecast for                                                              
the  year. He  highlighted that  the  Willow and  Pikka oil  field                                                              
plays  are included  in that forecast  and those  plays have  made                                                              
him more  optimistic  about what  the forecasts  will show  in the                                                              
future.  That  won't be  clear  until  December, but  he  believes                                                              
those will  come out of the  heavily risked evaluation  phase into                                                              
the  under development  phase. The  production  forecast for  this                                                              
fall  should be  very different,  he  said. He  said the  forecast                                                              
shows about  a 5 percent decline  over 10 years and it  wasn't too                                                              
long ago  that the declines were  6-8 percent annually.  He opined                                                              
that flat  is a comfortable  place for the  state to be  right now                                                              
with the other opportunities that are coming along.                                                                             
2:42:45 PM                                                                                                                    
COMMISSIONER  TANGEMAN   recounted  that  he  used   2.25  percent                                                              
inflation, 0.5  percent population growth, 6.55  percent permanent                                                              
fund returns, and  5 percent plus inflation for  FY2030 to FY2040.                                                              
The CBR  balance at  the end of  FY2019 is  projected to  be $1.77                                                              
billion.  He acknowledged  that the  lack of  reverse sweeps  will                                                              
affect that  number but the presentation  does not take  that into                                                              
account. He  said he used the  recommended minimum CBR  balance of                                                              
$1 billion,  whereas Mr.  Teal did  not set a  minimum so  the CBR                                                              
disappears in some of his scenarios.                                                                                            
2:44:04 PM                                                                                                                    
COMMISSIONER  TANGEMAN displayed  the  bar graph  on  slide 4  and                                                              
read  the problem  statement: "Under  the  current projections  of                                                              
revenues and  investment earnings,  there is  not enough  money to                                                              
fund the  size of budget  passed by the  legislature and  the full                                                              
PFD  for  more  than  10 years."  He  said  that  statement  still                                                              
applies  despite  the  $400  million   the  governor  cut  to  the                                                              
[operating] budget the legislature had passed.                                                                                  
COMMISSIONER  TANGEMAN  reviewed  the  graph. He  noted  that  the                                                              
budget shortfall in  2028 that forces taxes was  also reflected in                                                              
Mr.  Teal's  slides.  However,   unlike  the  CBR,  the  ERA  does                                                              
regenerate  through  annual  earnings.  He  calculated  that  6.55                                                              
percent on  $65 billion yields $4.5  billion. If the POMV  draw is                                                              
$3 billion, more  is coming in than going out,  which is reflected                                                              
in subsequent years.                                                                                                            
2:46:39 PM                                                                                                                    
REPRESENTATIVE  WOOL questioned whether  the ERA would  regenerate                                                              
because the additional  draws would reduce the  balance upon which                                                              
to generate returns.                                                                                                            
COMMISSIONER TANGEMAN  agreed that  the additional draws  from the                                                              
ERA,  which  are  over  $1  billion in  2022  and  2023,  are  not                                                              
inconsequential. However,  the permanent fund balance  (light blue                                                              
background) is not  declining. He pointed to the  vertical axis on                                                              
the right of the  graph. He said this is despite  the 6.55 percent                                                              
forecast for  10 years, the 5  percent plus inflation draw  in the                                                              
out years,  and the  annual 5 percent  POMV draw. He  acknowledged                                                              
that the draws do keep the fund from reaching triple digits.                                                                    
2:48:35 PM                                                                                                                    
REPRESENTATIVE WOOL requested help interpreting the chart.                                                                      
COMMISSIONER  TANGEMAN  explained   that  the  light  blue  shaded                                                              
background  is  the  permanent  fund  itself  and  the  dark  blue                                                              
tringle on the left shows the ERA going to zero [in 2028].                                                                      
REPRESENTATIVE  WOOL asked the  value and type  of tax  that would                                                              
be needed in 2028.                                                                                                              
COMMISSIONER TANGEMAN  clarified that he used the word  "tax" in a                                                              
general  sense. It's  to show  that  something needs  to fill  the                                                              
$800 million gap when the ERA drops to zero in 2028.                                                                            
2:49:58 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS   referenced  the  assumptions  and                                                              
asked  if the  5 percent  plus inflation  for  the permanent  fund                                                              
returns in  FY2030 and  beyond uses  Callan's inflation  figure of                                                              
2.25 percent.                                                                                                                   
COMMISSIONER TANGEMAN confirmed that was correct.                                                                               
REPRESENTATIVE  KREISS-TOMKINS said he  calculated a  7.25 percent                                                              
return  on a  $70 billion  fund  for FY2030  and  beyond and  that                                                              
assumption equates  to $0.5 billion  in extra earnings  each year.                                                              
He  asked  the  commissioner  to   speak  to  the  basis  for  the                                                              
assumption  that returns  would increase  0.5 percent  in the  out                                                              
COMMISSIONER TANGEMAN  responded that the  permanent fund is  in a                                                              
position to  invest for the  long term  so it has the  opportunity                                                              
to  invest for  higher returns.  He  said he  believes that  using                                                              
inflation  adjusted  4.3  percent   for  the  next  10  years  and                                                              
inflation adjusted  5 percent  for long  returns is realistic.  He                                                              
reiterated that  he was showing  the 10 years beyond  the official                                                              
forecasts and  he could  have plugged in  a different  number that                                                              
would show  a different outcome. But  if he stayed with  a 10 year                                                              
forecast,  he'd be  showing the  same  graph Mr.  Teal showed.  "I                                                              
wanted  to  stretch out  what  changes  now  mean over  a  20-year                                                              
period  potentially.  So  we  could  run  it  at  4  percent  plus                                                              
inflation  or 8  percent  plus inflation  and  it would  certainly                                                              
show different numbers," he said.                                                                                               
REPRESENTATIVE  KREISS-TOMKINS  said  his initial  hesitation  was                                                              
the assumption  that there will  be increased returns  starting in                                                              
FY2030. Second, given  what is already known about  how assets are                                                              
managed, it's  more likely that  returns will go down  because the                                                              
ERA is going to zero. He asked the commissioner to comment.                                                                     
COMMISSIONER TANGEMAN  said returns over the last  five years have                                                              
ranged from  1 percent to 12  percent which is why  it's important                                                              
to rely on  history and the experts  at the permanent  fund to say                                                              
what they  think is a realistic  expectation. And 6.65  percent is                                                              
the number  that's  projected for  the next ten  years. He  agreed                                                              
that for  the past  30 years the  permanent fund  has only  had to                                                              
manage for revenue  that would be spun off of  dividends, but that                                                              
changed last year  when the legislature passed the  POMV. A lot of                                                              
widely ranging  scenarios were  put forward in  2017 and  2018 and                                                              
when he  puts on  his permanent  fund trustee  hat that  makes him                                                              
very nervous. That  is why the POMV legislation  was so important.                                                              
It narrowed  the sideboards for  potential draws which  calmed the                                                              
concerns of the permanent fund, Wall Street, and the state.                                                                     
COMMISSIONER  TANGEMAN said  it's  not the  job  of the  permanent                                                              
fund  [corporation] to  suggest how  to spend  the money.  Rather,                                                              
their  job  is  to  work with  the  legislature  to  establish  an                                                              
appropriate  POMV that  gives them  comfort  for investing  moving                                                              
forward. When  they heard proposals to  draw $8 billion  to fund a                                                              
budget, they had  to stay liquid to meet that  potential draw. Now                                                              
that they know  what the POMV looks  like, they can draw  in those                                                              
sideboards to a  great extent as to what the liquidity  needs will                                                              
be for the next 12 months.                                                                                                      
2:57:22 PM                                                                                                                    
CO-CHAIR JOHNSTON  asked how  many years  the department  looks at                                                              
in its spring and fall forecasts.                                                                                               
COMMISSIONER TANGEMAN answered 10 years.                                                                                        
CO-CHAIR  JOHNSTON asked  how many  years Callan  looks at  in its                                                              
COMMISSIONER  TANGEMAN said he  wasn't sure  but it's  probably 10                                                              
CO-CHAIR JOHNSTON  expressed concern  that the model  depletes the                                                              
ERA in the  early years. She  asked, as a permanent  fund trustee,                                                              
if he would manage differently as the ERA is depleted.                                                                          
COMMISSIONER  TANGEMAN  said  he   labeled  slide  4  the  problem                                                              
statement because  it demonstrates that it's not  possible to give                                                              
a  full  dividend  and  let the  full  budget  grow.  He  directed                                                              
attention to  the next  slide that  illustrates the "Surplus  PFD"                                                              
Option.  It's the  legislature's  budget and  the  POMV draw  then                                                              
whatever is  not needed for government  is left for  dividends. He                                                              
said that is the first option.                                                                                                  
3:01:47 PM                                                                                                                    
SENATOR HUGHES  asked if  the legislature  did projections  during                                                              
the years that the  budget was growing that might  have shown that                                                              
a  future  legislature  would  need   to  deal  with  the  current                                                              
COMMISSIONER  TANGEMAN said  he assumes there  were forecasts  but                                                              
he didn't really know because he wasn't around at the time.                                                                     
3:02:32 PM                                                                                                                    
REPRESENTATIVE WOOL  asked how accurate DOR's projections  were 10                                                              
years ago in forecasting the situation today.                                                                                   
COMMISSIONER  TANGEMAN said  price and  production forecasts  have                                                              
been fairly accurate  for the first two years  but each subsequent                                                              
year is  less and  less accurate.  Ten years  ago some  production                                                              
forecasts were in the 300s and it's actually 500.                                                                               
REPRESENTATIVE WOOL  observed that predicting the return  on a $60                                                              
billion fund might  be easier than predicting oil  revenues in the                                                              
next 10  or 20 years.  He described  predicting total  revenue and                                                              
how it  will be  dispersed as  a guessing  game regardless  of the                                                              
assumptions   that   are  made.   He   noted  that   unlike   this                                                              
presentation, Mr. Teal's presentation did not include taxes.                                                                    
COMMISSIONER  TANGEMAN  responded  that there  wasn't  a  workable                                                              
spending cap when  there were spikes in prices  and production was                                                              
up. The money  was spent and  therefore was not available  for the                                                              
down years.  That is the  importance of  a spending cap,  he said.                                                              
He noted that there  was a spending cap in the  constitution right                                                              
now  and the  proposal was  to fix  the problem  with the  formula                                                              
which is population  and inflation. Since 1982  that has exploded,                                                              
which is  another reason  to put  a cap in  place. He  agreed that                                                              
forecasts  are inaccurate  as soon  as they are  printed which  is                                                              
why it's important  to have sidebars  so you save in the  up years                                                              
to pay for the down years.                                                                                                      
REPRESENTATIVE WOOL  said the legislature  has saved  some because                                                              
it's been  using those savings the  last few years to  balance the                                                              
budget. "The  revenue wasn't  there but  we pulled  it out  of CBR                                                              
savings," he said.                                                                                                              
COMMISSIONER TANGEMAN  said that's true and he  believes that kept                                                              
people  from  recognizing that  Alaska  was  in a  recession.  The                                                              
budget was not in  line with the revenues that were  coming in and                                                              
the  legislature relied  on savings  to balance  the budget.  That                                                              
works for  the short  term but that  was done  several years  in a                                                              
row and the  fund dropped from $15  billion to where it  is today.                                                              
He  said  the  fact that  spending  didn't  follow  revenues  down                                                              
caused a faster bleed on the CBR.                                                                                               
3:06:50 PM                                                                                                                    
SENATOR OLSON highlighted  that he was first elected  in 2000 when                                                              
things  were fairly  rough and  that  was followed  by spikes  and                                                              
subsequent  declines.  Mr.  Teal  worked  in  Legislative  Finance                                                              
throughout  that time  and in 2006  he warned  the Senate  Finance                                                              
Committee that  if the legislature  didn't get a handle  on things                                                              
it would  get away  from them.  The problem  was that  the warning                                                              
fell on deaf ears  because the state was swimming  in money at the                                                              
3:08:08 PM                                                                                                                    
COMMISSIONER  TANGEMAN continued  to  review slide  5. The  legend                                                              
indicates that  black is  base revenue,  light blue is  principal,                                                              
dark blue  is the  ERA, and  green plus  the checkered  segment is                                                              
the  POMV  draw.  Those  two and  the  black  represent  the  base                                                              
budget.  The  solid  purple  is  the  surplus  that  is  left  for                                                              
dividends. The  checkered segment is  meant to show the  amount of                                                              
the calculated  dividend that  goes to  government. It  shows that                                                              
in 2022  the dividend drops  to about $500  and then it  starts to                                                              
grow.  He reiterated  that this  scenario shows  the imbalance  in                                                              
the legislature's  budget. It uses  base revenue plus  whatever is                                                              
needed of the POMV  to balance the budget and the  leftover is for                                                              
the dividend.  In this scenario,  the principal, the ERA,  and the                                                              
CBR all go up. In 2040 it shows  about $120 billion in reserves.                                                                
3:10:25 PM                                                                                                                    
COMMISSIONER  TANGEMAN moved  to slide 6  titled, "The  Governor's                                                              
Option (Step 1):  Reduce the Budget to $4.2 billion  ($400 Million                                                              
in  Vetoes)"  that   shows  what  the  governor   introduced  this                                                              
morning.  He noted  that  even with  the  $400  million in  vetoes                                                              
above the  reductions the  legislature passed,  it does  not solve                                                              
the  problem. The  ERA  lasts  a little  longer  but  it is  still                                                              
depleted  by  2028-2029. Dividends  could  still  be paid  in  the                                                              
future but  the savings in  the ERA go  away. The POMV  draw would                                                              
rely on annual returns.  It shows that for the  first couple years                                                              
there will be extra  draws from savings and the ERA.  He said this                                                              
is illustrative but  it's just the first of a  two-step plan. Step                                                              
2  of the  governor's  plan  is to  bring  revenues  in line  with                                                              
expenditures next year.                                                                                                         
3:11:48 PM                                                                                                                    
COMMISSIONER  TANGEMAN moved  to  slide 7  titled "The  Governor's                                                              
Option (Step  #2): Reduce the  Budget to $3.6 billion  (Governor's                                                              
Proposed  Budget)." This  proposal shows  that the  ERA starts  to                                                              
stabilize,  total reserves  are over  $100 billion,  and the  full                                                              
PFD is  paid under  the current  formula. He  said that  even with                                                              
additional  reductions  to  the FY2021  budget,  additional  draws                                                              
from savings and the ERA will be required through FY2027.                                                                       
3:12:45 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS asked if  the additional  ERA draws                                                              
are in excess of 5 percent of the market value.                                                                                 
COMMISSIONER TANGEMAN  agreed that the draws are in  excess of the                                                              
3:13:24 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  asked  what  the  administration's                                                              
position  is on  draws from  the  ERA that  are in  excess of  the                                                              
COMMISSIONER  TANGEMAN  said the  governor  would  have to  answer                                                              
that question. He's  said to follow the law but now  there are two                                                              
laws  that  slightly  contradict   one  another.  He  offered  his                                                              
perspective that  one law has  been on  the books and  working for                                                              
40  years, whereas  the law  that  has been  on the  books for  12                                                              
months won't be  complete until it addresses how the  POMV will be                                                              
split. Once  the split is established,  it will be clear  how much                                                              
of the  POMV will  go to the  dividend and how  much will  be left                                                              
for  government.  Under  this  administration  that  will  balance                                                              
because this governor  says that revenue must  match expenditures.                                                              
He  acknowledged that  future  governors and  future  legislatures                                                              
may make different decisions.                                                                                                   
3:15:09 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS said  it would  be helpful  to know                                                              
what  the governor's  position  is  on drawing  in  excess of  the                                                              
COMMISSIONER TANGEMAN  said he'd ask and pass the  answer along to                                                              
the group.                                                                                                                      
3:15:20 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  highlighted  that  the  governor's                                                              
budget  proposal was  released under  the  pretense that  revenues                                                              
would be  in line  with expenditures.  Theoretically that  was the                                                              
one year  plan but  those didn't  align because  that budget  used                                                              
savings  from AIDEA  and other sources.  He asked  why the  budget                                                              
proposal  the  governor  released   in  February  did  not  define                                                              
COMMISSIONER  TANGEMAN  said  he  believes it  did;  the  governor                                                              
presented a balanced budget.                                                                                                    
REPRESENTATIVE   KREISS-TOMKINS    interjected,   "Without   using                                                              
COMMISSIONER TANGEMAN  said he'd leave  the details to  the Office                                                              
of  Management  and  Budget  (OMB)  because  he  didn't  know  the                                                              
details. He mentioned petroleum properties.                                                                                     
REPRESENTATIVE  KREISS-TOMKINS said, "I'm  sorry to  interrupt but                                                              
that's a big detail and you're the commissioner of revenue."                                                                    
COMMISSIONER  TANGEMAN  responded,   "I'm  not  the  OMB  director                                                              
though so I can  only answer to the level that  I understand and I                                                              
know."  He   said  there   were  large   portions  that   required                                                              
legislative changes  such as petroleum  property taxes  and AIDEA,                                                              
but  they   didn't  get  traction.   Therefore,  the   budget  the                                                              
legislature  passed  and  the portions  the  governor  vetoed  are                                                              
significantly  different than  the budget  the governor passed  in                                                              
February.  The  governor's  goal   to  have  revenues  align  with                                                              
expenditures  hasn't changed, which  is why  the one-year  plan is                                                              
now a two-year plan.                                                                                                            
3:17:27 PM                                                                                                                    
REPRESENTATIVE  WOOL referenced  the statement  that the  year-old                                                              
statute only addressed  the draw and was therefore  incomplete. He                                                              
asked if the governor  would still cut the budget  $1.3 billion in                                                              
the next  two years  if the legislature  follows all  the statutes                                                              
relevant  to  the  draw  and  replaces  the  old  formula  with  a                                                              
sustainable  PFD  formula, all  of  which  is within  the  current                                                              
revenue  stream. Or  is  the cut  only  to pay  the  full PFD,  he                                                              
COMMISSIONER TANGEMAN  said finishing the second part  of the POMV                                                              
is just  the revenue  part of  the equation,  not the  expenditure                                                              
side. Base revenue  and the POMV that  is on the books  is a fixed                                                              
amount and if the  budget isn't reduced to that  level, there will                                                              
be a gap  that can't be  ignored. This administration  proposes to                                                              
address  that  gap  by  reducing  expenditures  to  meet  whatever                                                              
revenue come in.  If expenditures aren't reduced to  that level or                                                              
the  next  governor   decides  to  grow  the  budget   beyond  the                                                              
available revenue,  that evil red  slice (taxes) may  perhaps come                                                              
into play,  he said. He  said the bottom  line is whether  revenue                                                              
minus expenditures balance.                                                                                                     
REPRESENTATIVE  WOOL commented  that  a lot  of expenditures  were                                                              
cut today and the  tension is that the PFD formula  is sacrosanct.                                                              
That's  the   disagreement  between   some  legislators   and  the                                                              
governor and not all legislators agree.                                                                                         
COMMISSIONER  TANGEMAN  said  some  people  believe  the  dividend                                                              
should be  paid with  the surplus,  whereas the governor  believes                                                              
the  dividend should  be  paid first  and  expenditures should  be                                                              
reduced to balance with revenue.                                                                                                
REPRESENTATIVE  WOOL  pointed out  that  the middle  ground  would                                                              
change the formula to make the purple bar smaller.                                                                              
COMMISSIONER TANGEMAN acknowledged the point.                                                                                   
3:21:54 PM                                                                                                                    
SENATOR HUGHES  referred to  an earlier comment  that the  PFD has                                                              
not been working  the last few years. She offered  her belief that                                                              
it's the budget  that has not been  working, and that  ought to be                                                              
the focus.  Turning back  to slide  7 she  questioned the  need to                                                              
have a robust  ERA up to 2040  if the legislature abided  by the 5                                                              
percent draw, perhaps because it was in the constitution.                                                                       
COMMISSIONER  TANGEMAN said  it's  a good  point  if an  endowment                                                              
model  is followed.  This shows  the current  situation, but  once                                                              
things are  balanced and  the legislature has  figured out  part 2                                                              
of the  POMV question, the  ERA isn't needed  if you  stick within                                                              
those parameters, he said.                                                                                                      
3:23:52 PM                                                                                                                    
CO-CHAIR  JOHNSTON  related  her  understanding that  the  ERA  is                                                              
necessary to pay out the structured draw.                                                                                       
SENATOR  HUGHES  highlighted that  the  governor's  option Step  1                                                              
shows that  the ERA is  depleted and the  dividend is  still paid,                                                              
whereas  the  governor's option  Step  2  shows  that the  ERA  is                                                              
COMMISSIONER  TANGEMAN responded  that  the excess  ERA goes  away                                                              
but the  annual returns are  spinning off  revenue to pay  for the                                                              
POMV  in  the  particular  year.  The ERA  is  not  building,  but                                                              
commitments are being met.                                                                                                      
3:24:52 PM                                                                                                                    
REPRESENTATIVE  MERRICK  asked if  the administration  supports  a                                                              
change to the formula if it goes to a vote of the people.                                                                       
COMMISSIONER  TANGEMAN replied  the governor  has been very  clear                                                              
that as long  as it goes to a  vote of the people,  he will accept                                                              
any change the legislature makes.                                                                                               
COMMISSIONER TANGEMAN reviewed the following conclusions:                                                                       
        • There are many ways to address the fiscal issues                                                                      
          facing the state                                                                                                      
             • Cutting the PFD is the most regressive way                                                                       
               to solve the problem                                                                                             
COMMISSIONER  TANGEMAN clarified  that  the next  two bullets  are                                                              
his  own  thoughts.  The  POMV is  a  significant  change  to  the                                                              
revenue stream  and in a perfect  world it would  dictate starting                                                              
over  from  a  zero-based  budget. The  question  is  what  should                                                              
Alaska's  budget look  like now  that  the revenue  stream is  oil                                                              
plus  something   else.  He   emphasized  that  continued   fiscal                                                              
restraint will  be critical moving  forward because  production is                                                              
down and  there are no  forecasts for oil  price booms.  He opined                                                              
that is  why it's critical  to correct  the spending  limit that's                                                              
currently on the books.                                                                                                         
             • Alaska's budgets have been built for decades                                                                     
               on one revenue stream                                                                                            
             • We have entered  a new  period  in  Alaska's                                                                     
               history  and "picking  up where  we left  off"                                                                   
               by  merely  making   tweaks  to  the  existing                                                                   
               budget is not sufficient for the long term                                                                       
             • Continued fiscal restraint will be  critical                                                                     
               moving forward                                                                                                   
        • The "fiscal crisis" we are trying to solve may                                                                        
          not exist                                                                                                             
             • There are a lot of good things happening  on                                                                     
               the  North Slope which  may help resolve  much                                                                   
               of   the  problem.   The  Legislature   &  the                                                                   
               Governor  took an important first step  in the                                                                   
              right direction on the FY20 budget.                                                                               
             • We all have more  work  to  do in  order  to                                                                     
               right-size   the  government   for  the   next                                                                   
               generation ["It will require more cuts."]                                                                        
        • We may be trying to solve a temporary problem                                                                         
          with a permanent solution                                                                                             
             • It is prudent  to  gather  more  information                                                                     
               before making drastic changes                                                                                    
             • We are still the envy of most other states                                                                       
             • Let's keep  things  in  perspective      our                                                                     
               financial  reserves will allow  us to  pay the                                                                   
               full PFD  while we all make  prudent decisions                                                                   
               for the future of Alaska                                                                                         
3:29:19 PM                                                                                                                    
COMMISSIONER  TANGEMAN  noted  that,  as  requested,  he  provided                                                              
additional  information on  the  CBR. He  also  included a  fairly                                                              
robust  synopsis of  the CBR  including  the Sub  Account and  the                                                              
investment history.                                                                                                             
3:29:42 PM                                                                                                                    
CO-CHAIR  JOHNSTON asked  how the investment  policy changed  when                                                              
the legislature  started taking  draws from the  CBR and  how that                                                              
affected the return on investments.                                                                                             
COMMISSIONER TANGEMAN  referred to the  chart on slide  11 titled,                                                              
"CBR Return History."  He said the gold bars  representing the Sub                                                              
Account show that  account was invested at a  much more aggressive                                                              
rate than the  main account. When  there was up to $14  billion in                                                              
the CBR,  the fund  could afford some  longer term investments  to                                                              
earn those returns.  However, more liquidity was  necessary as the                                                              
CBR was  drawn down. The  need for more  liquidity is  the primary                                                              
reason that the Sub Account was zeroed out in 2015.                                                                             
3:30:55 PM                                                                                                                    
CO-CHAIR JOHNSTON  asked what  the current rate  of return  is for                                                              
the CBR.                                                                                                                        
COMMISSIONER TANGEMAN answered that it's 2.38 percent.                                                                          
3:31:24 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS asked  if he  would provide  charts                                                              
5,  6,  and 7  with  a  6.55  percent assumption  for  FY2030  and                                                              
COMMISSIONER TANGEMAN  asked for clarification that  he was asking                                                              
to have the  6.55 percent assumption  that's used in the  first 10                                                              
years  to be  mirrored in  the second  ten years.  [Representative                                                              
Kreiss-Tomkins  said  yes  and  Commissioner  Tangeman  agreed  to                                                              
provide the charts.]                                                                                                            
3:31:53 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  asked for  an  explanation of  the                                                              
Sub Account.                                                                                                                    
COMMISSIONER TANGEMAN  explained that  it was created  because the                                                              
legislature  wanted to  invest a  portion  of the  CBR that  would                                                              
earn a higher  return than 2.38  percent. He noted that  the dates                                                              
when that took place were in the handout he provided.                                                                           
REPRESENTATIVE KREISS-TOMKINS  asked how the  administration plans                                                              
to  invest the  cash infusion  into the  CBR from  the sweep  that                                                              
could be in the billions.                                                                                                       
COMMISSIONER  TANGEMAN  said  he  doubts  the  CBR  will  grow  by                                                              
billions  because  of the  sweep,  but  he  would continue  to  be                                                              
conservative  on  the CBR  investments  until  some of  the  large                                                              
decisions are made.                                                                                                             
3:34:22 PM                                                                                                                    
REPRESENTATIVE KREISS-TOMKINS  questioned how the sweep  would not                                                              
be in the billions  when the power cost equalization  endowment is                                                              
just short  of a  billion and that  is just  one of many  accounts                                                              
that will be swept.                                                                                                             
COMMISSIONER  TANGEMAN  said he  wasn't  part of  the  discussions                                                              
when the vetoes  took place and so  he'll need to catch  up on the                                                              
effects of the accounts that will not be reversed.                                                                              
CO-CHAIR JOHNSTON  asked Ms. Rodell  and Commissioner  Tangeman to                                                              
discuss  how  the  management  of  the  ERA  will  change  if  the                                                              
structured draw isn't followed.                                                                                                 
3:36:22 PM                                                                                                                    
MS. RODELL  said the first  step is to  articulate the  purpose of                                                              
the  ERA. In  the last  couple of  years the  discussion has  been                                                              
that it  has turned  from being  a receptacle  of earnings  of the                                                              
fund  to  a  budget  stabilization  or  reserve  fund.  While  the                                                              
characterization of  how the fund  is used has changed,  there has                                                              
been  no change  to the  investment mandate,  she said.  Secondly,                                                              
moving $4 billion  from the ERA back to the corpus  as a result of                                                              
the governor's  vetoes will  leave about $12  billion in  the ERA.                                                              
When  Senate Bill  26 was  debated it  included discussions  about                                                              
lookbacks  to decide  whether the  draws  were sustainable.  There                                                              
was  also talk  about having  a regular  sweep of  any amounts  in                                                              
excess over  4 years. That is  somewhat in line with  the creation                                                              
of the Sub Account  and Main Account. The idea of  the Sub Account                                                              
was that  a portion of the  budget reserve wouldn't be  needed for                                                              
at least 5 years  so it could have a longer outlook.  If there are                                                              
4 years  of POMV draws  left behind and  everything else  is swept                                                              
into the  corpus, it looks more  like what was envisioned  for the                                                              
CBR as well.                                                                                                                    
If that  is the  direction the  legislature and  the governor  are                                                              
going to  take the ERA, she  said her recommendation to  the board                                                              
will be about  de-risking by investing  on a short to  medium term                                                              
basis  for  the  purpose  of funding  important  services  of  the                                                              
state.  However,  before  doing   that  the  trustees  would  like                                                              
direction from the legislature, she said.                                                                                       
3:40:11 PM                                                                                                                    
CO-CHAIR  JOHNSTON summarized  that the  investment profile  would                                                              
change from  higher risk, higher  yield to something  more similar                                                              
to the original fund.                                                                                                           
MS.  RODELL said  she  believes  so but  depending  on the  market                                                              
environment,  fixed income assets  can do  very well.  Duration of                                                              
the investment  also makes a difference  because you have  to time                                                              
the maturities to the expectation.                                                                                              
3:41:31 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  noted  that  she  said  she  would                                                              
recommend an  adjustment in  the way the  ERA is invested  because                                                              
of  the  requirements  for  greater  liquidity.  That  means  less                                                              
investments which  means all  the math in  all the slides  is that                                                              
much uglier. He asked if that's wrong.                                                                                          
COMMISSIONER TANGEMAN  said it's not  wrong at all and  that's why                                                              
it's critical to  get on the same page. The first  graph shows the                                                              
ERA will bottom  out in 2028, which clearly demonstrates  it's not                                                              
possible  to go  to that  well  again and  again  to support  this                                                              
budget and a full dividend.                                                                                                     
3:43:12 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS   highlighted  that  even   in  the                                                              
governor's  ideal vision,  there are  ERA draws  in excess  of the                                                              
POMV. He said  per your testimony that would  result in management                                                              
changes, which  would mean lower  investment returns. Even  Step 2                                                              
of  the governor's  option  shows  ERA  overdraws. He  said  these                                                              
don't  reconcile  and  increasing   investment  returns  65  basis                                                              
points starting in 2030 further fails to reconcile.                                                                             
COMMISSIONER  TANGEMAN said  he inserted  the extra  ten years  to                                                              
demonstrate that  the budget eventually  balances after Step  2 of                                                              
the governor's plan.  Once things are synced and  brought in line,                                                              
it  will be  possible to  look at  the  long term  in a  different                                                              
light, he said.                                                                                                                 
3:44:46 PM                                                                                                                    
REPRESENTATIVE KREISS-TOMKINS  remarked that  the talk is  about a                                                              
10-20 year  outlook and the  administration has failed  to provide                                                              
a truly balanced  budget. He said it's difficult  to consider this                                                              
as a serious fiscal vision when the math doesn't work.                                                                          
COMMISSIONER  TANGEMAN said  he respectfully  disagreed. When  the                                                              
governor says  that revenues will  match expenditures,  that means                                                              
there will be a balanced budget for FY2021 on December 15.                                                                      
3:46:06 PM                                                                                                                    
CO-CHAIR  JOHNSTON  advised  that  when  Alaskans  voted  for  the                                                              
permanent  fund in  1976, revenues  went to the  general fund.  In                                                              
1982  after  the  constitutional  challenge of  the  dividend,  50                                                              
percent of  those revenues went to  the dividend. The rest  of the                                                              
revenues didn't  go into the  general fund,  but a portion  of the                                                              
earnings  was reinvested,  which grew the  fund tremendously.  She                                                              
described  it as  a partnership  in which  one partner  reinvested                                                              
earnings  to  grow the  company  and  the  other partner  took  50                                                              
percent. She said  that would change her view  of the partnership.                                                              
While  it's  not part  of  the  fund's  discussion, she  said  the                                                              
working  group needs  to consider  the  partnership, the  original                                                              
mission, what the 1982 division was, and how the fund has grown.                                                                
3:48:34 PM                                                                                                                    
CO-CHAIR  JOHNSTON asked  Mr.  Teal to  briefly  describe how  the                                                              
governor's  vetoes  affect the  dividend  and  what he's  done  by                                                              
taking  $1 billion  of  the $2.9  billion  out  of the  structured                                                              
MR. TEAL  said his response would  be based on the  first dividend                                                              
calculator sheet  he provided and the assumption  that the general                                                              
fund is  used. The  calculation shows that  with the  $400 million                                                              
in vetoes,  the $600 million surplus  becomes $1 billion.  He said                                                              
there  was also  a $1  billion veto  of  the POMV  payout. As  the                                                              
governor said,  the budget is balanced  and $1 billion  is left in                                                              
the ERA.  He said  that money  is available  for the 5.25  percent                                                              
payout and  there is enough for  a $1,600 dividend, but  he doubts                                                              
that is what the  governor meant given his claims  that he wants a                                                              
$3,000 dividend. He  said he suspects the only solution  is to use                                                              
the $1 billion  that's left in the  ERA and then draw  an extra $1                                                              
billion, which is unstainable.                                                                                                  
CO-CHAIR  JOHNSTON asked  if  $1,600 would  be  available for  the                                                              
next dividend without the additional draw.                                                                                      
MR. TEAL said that's correct.                                                                                                   
3:54:53 PM                                                                                                                    
CO-CHAIR  JOHNSTON   noted  that  about  a  week   ago  there  was                                                              
discussion that  if Governor Hammond's dividend had  gone forward,                                                              
the inflation  adjusted dividend  today would  be $3,000.  Senator                                                              
Bishop  wanted it  on the  record that  in 1980  the general  fund                                                              
budget  was $1.74  billion.  Adjusted  for inflation  that  budget                                                              
would be $5.14 billion in 2019.                                                                                                 
3:56:05 PM                                                                                                                    
SENATOR HUGHES  highlighted that  part of the  reason the  PFD was                                                              
proposed was the worry that the budget was growing so quickly.                                                                  
CO-CHAIR  JOHNSTON pointed  out that  Governor Hammond's  dividend                                                              
stipulated that it would be paid as funds were available.                                                                       
3:56:47 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS  said  it's  worth  noting  that  a                                                              
$1,050  dividend   existed  in  the  context  of   the  durational                                                              
residency formula.  Alaskans who  had not lived  in Alaska  for 21                                                              
years would receive a dividend that was less than $1,050.                                                                       
CO-CHAIR JOHNSTON shared that her dividend would have been $200.                                                                
3:57:30 PM                                                                                                                    
MR.  TEAL  said   the  50  percent  share  made   sense  when  the                                                              
assumption  was  that  the  government  would  also  take  its  50                                                              
percent.  But the  government didn't  do that.  He referenced  Ms.                                                              
Rodell's  presentation   that  looked   at  the   constitutionally                                                              
mandated  portion  of  the  permanent fund,  which  was  some  $17                                                              
billion. He said  it could be argued that everything  in excess of                                                              
the $17  billion was royalty deposits,  but it was  actually money                                                              
the government put into the fund. It was not royalty at all.                                                                    
MR. TEAL said  that if you were  trying to make the  argument that                                                              
the 40-year-old  formula is valid,  you might also say  you should                                                              
get 50 percent  of the earnings  on all the royalty  deposits. The                                                              
original  concept of  the permanent  fund was  that 25 percent  or                                                              
more of  mineral royalties would  go into the fund.  The situation                                                              
now  is that  only  about  30 percent  of  the permanent  fund  is                                                              
royalties and  the rest was added  by the legislature.  He said if                                                              
you follow  the formula  for 50  percent of  earnings and  get the                                                              
$3,000  dividend and  you know  that  only 30  percent is  royalty                                                              
deposits, you  could say  the dividend should  be just  30 percent                                                              
of $3,000,  which is  about $900.  He said  that is arguably  what                                                              
was envisioned when the formula was developed.                                                                                  
4:00:15 PM                                                                                                                    
SENATOR HUGHES maintained  that the record is very  clear that the                                                              
PFD was  to be paid  first. Government  taking 50 percent  was not                                                              
envisioned  but the record  does talk  about being available  when                                                              
oil  revenues  went   down.  She  offered  her   belief  that  the                                                              
partnership  metaphor  didn't  resonate,  because it  wasn't  that                                                              
type  of   relationship.  Rather,   it's  like  grandparents   and                                                              
grandchildren, she  said. The grandparents might  want to reinvest                                                              
the money  for the next  generation, which  is what the  state was                                                              
doing. The  grandchildren could  have some  now but the  dividends                                                              
would continue  in the  future. She reiterated  her view  that the                                                              
PFD isn't  broken,  it's the budget  that's broken.  She said  she                                                              
also doesn't buy  into the concept of living within  your means in                                                              
this context. If  oil were to drop to $10 per barrel,  it would be                                                              
very  difficult  for  the  state to  provide  the  most  essential                                                              
She said  all eyes  have turned  to this PFD  cookie jar,  and she                                                              
wants all eyes  back on the budget  to figure out what  is a right                                                              
sized  budget  in  Alaska.  She  said  she  feels  as  though  the                                                              
legislature  has been throwing  darts in  the dark  to get  to the                                                              
right  number so she  asked the  Office of  Management and  Budget                                                              
(OMB)  to tease  out  the  right size  when  all the  factors  and                                                              
Alaska's  unique  challenges  are taken  into  consideration.  She                                                              
said  she would  support  a full-scale  audit  by  someone who  is                                                              
nonpartisan  to understand  where  things could  be  shored up  or                                                              
combined  for efficiency,  and  what  isn't meeting  statutory  or                                                              
constitutional  obligations. She  reiterated that  it's been  very                                                              
frustrating  that the legislature  has been  going about  this all                                                              
wrong.  She maintained  that the  focus on  the PFD  has led  to a                                                              
chaotic situation  in the  legislature the last  few years  and it                                                              
really  needed to  be  settled so  legislators  can  focus on  the                                                              
4:05:35 PM                                                                                                                    
REPRESENTATIVE  MERRICK asked  if  there was  ever any  discussion                                                              
about  dividing the  permanent fund  and providing  a portion  for                                                              
the people and a portion for government.                                                                                        
CO-CHAIR  JOHNSTON  recalled  there were  many  discussions  about                                                              
doing different things with the permanent fund.                                                                                 
4:06:06 PM                                                                                                                    
REPRESENTATIVE  KREISS-TOMKINS asked  the record  to reflect  that                                                              
Cliff  Groh was in  the audience.  He was  legislative staff  when                                                              
the permanent fund  was established and he shared a  90 or so page                                                              
private  contemporaneous  history of  how  the sausage  was  made.                                                              
That blew  up some of my assumptions,  he said. It  doesn't answer                                                              
Representative  Merrick's question  but  it has  rich detail  that                                                              
may  be helpful  to the  working group.  He offered  to share  the                                                              
document with Mr. Groh's permission                                                                                             
4:07:13 PM                                                                                                                    
REPRESENTATIVE  WOOL  stressed that  the  original  intent of  the                                                              
permanent fund  is important,  but it is  not the defining  issue.                                                              
He said  he doesn't  entirely agree with  Senator Hughes  that the                                                              
budget  is  the  problem.  Perhaps spending  could  be  reduced  a                                                              
little less,  but per capita and  adjusted for inflation  it's not                                                              
the highest it's  ever been. There are efforts to  keep the budget                                                              
in  check  but   needs  change  as  the  population   changes.  He                                                              
highlighted  that when  about 100,000  Alaskans voted  to put  the                                                              
permanent   fund  in   the   constitution,   the  population   and                                                              
composition  of the  voters was  different  than it  is today.  He                                                              
said most  people realized that  spending needed to  be controlled                                                              
after  the first  oil money  was spent  so quickly.  On the  other                                                              
hand,  infrastructure in  the state  at the time  needed to  catch                                                              
up. He said the  PFD never came to the people for  a vote; it just                                                              
became a statute  and that worked well up until 3-4  years ago. He                                                              
acknowledged that a  spending cap was not a bad idea.  He said oil                                                              
has dropped  from 90  percent of  the state's  revenue to  just 40                                                              
percent  and  nobody  knows  where  it's going  next.  He  drew  a                                                              
parallel  to  demonstrate the  need  to  change models  when  it's                                                              
prudent to  do so. The oil industry  is aware of this  and they're                                                              
getting into solar,  wind, and other forms of energy,  he said. He                                                              
also noted  the changes in northern  and western Alaska  where the                                                              
ice  is  disappearing.  He  emphasized  that  the  consumption  of                                                              
hydrocarbons may change  in the next 10 years  because the revenue                                                              
structure the state has been relying on is changing.                                                                            
REPRESENTATIVE  WOOL said he  did not  support cutting  the budget                                                              
$1.3 billion  to $1.6 billion over  the next two years  because it                                                              
was too  drastic and  would cause  people to  leave the  state. He                                                              
noted that  people are  already leaving the  state because  of the                                                              
cuts  to   the  university.  He   emphasized  the  need   for  the                                                              
legislature to look  at revenue, the revenue projections,  the PFD                                                              
formula, and the priorities of Alaskans today.                                                                                  
4:11:21 PM                                                                                                                  
CO-CHAIR  JOHNSTON  thanked  everyone  for  their  hard  work  and                                                              
stated that the  next meeting would be  on July 8 at  9:00 a.m. in                                                              
4:12:12 PM                                                                                                                    
There  being no  further  business to  come  before the  Bicameral                                                              
Permanent  Fund Working  Group,  Co-Chair  Johnston adjourned  the                                                              
meeting at 4:12 p.m.                                                                                                            

Document Name Date/Time Subjects
01 - Alaska Permanent Fund Presentation for June 28, 2019, meeting.pdf JPFG 6/28/2019 10:00:00 AM
Bicameral Permanent Fund Working Group
02 - Legislative Finance Presentation to Permanent Fund Working Group, 28 June 2019.pdf JPFG 6/28/2019 10:00:00 AM
Bicameral Permanent Fund Working Group
03 - DOR Presentation to Permanent Fund Working Group, 28 June 2019.pdf JPFG 6/28/2019 10:00:00 AM
Bicameral Permanent Fund Working Group
04 - Angela Rodell response to June 28 working group questions, 2 July 2019.pdf JPFG 6/28/2019 10:00:00 AM
Bicameral Permanent Fund Working Group