Legislature(2017 - 2018)GRUENBERG 120
03/29/2018 03:15 PM House STATE AFFAIRS
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Confirmation(s): | |
| Presentation: Alaska Permanent Fund Governance by Angela Rodell, Chief Executive Officer | |
| Presentation(s): Fiscal Plans Overview by Leg. Finance Div. | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | SCR 17 | TELECONFERENCED | |
| + | HB 83 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
March 29, 2018
3:21 p.m.
MEMBERS PRESENT
Representative Jonathan Kreiss-Tomkins, Chair
Representative Chris Tuck
Representative Adam Wool
Representative Chris Birch
Representative DeLena Johnson
MEMBERS ABSENT
Representative Gabrielle LeDoux, Vice Chair
Representative Gary Knopp
Representative Andy Josephson (alternate)
Representative Chuck Kopp (alternate)
OTHER LEGISLATORS PRESENT
Representative Jennifer Johnston
COMMITTEE CALENDAR
CONFIRMATION(S):
State Commission for Human Rights
Christa Bruce-Kotrc - Ketchikan
Megan Mackiernan - Nome
Freddie Olin IV - Anchorage
- CONFIRMATION(S) ADVANCED
State Board of Parole
Sarah Possenti - Fairbanks
- CONFIRMATION(S) ADVANCED
Personnel Board
Alfred Tamagni, Sr. - Anchorage
- CONFIRMATION(S) ADVANCED
Police Standards Council, Alaska
Michael Craig - Anchorage
Justin Doll - Anchorage
David Knapp -Palmer
Larry Nicholson - Kodiak
- CONFIRMATION(S) ADVANCED
Public Offices Commission, Alaska
Anne Helzer - Anchorage
- CONFIRMATION(S) ADVANCED
Public Defender
Quinlan Steiner - Anchorage
- CONFIRMATION(S) ADVANCED
PRESENTATION(S): ALASKA PERMANENT FUND GOVERNANCE BY ANGELA
RODELL, CHIEF EXECUTIVE OFFICER
- HEARD
PRESENTATION(S): FISCAL PLANS OVERVIEW BY LEG. FINANCE DIV.
- HEARD
PRESENTATION(S): OVERVIEW OF PERMANENT FUND PROPOSALS IN THE
LEGISLATURE BY REID MAGDANZ AND ROB ERVINE, LEGISLATIVE STAFF.
- SCHEDULED BUT NOT HEARD
SENATE CONCURRENT RESOLUTION NO. 17
Proclaiming April 2018 as Sexual Assault Awareness Month.
- BILL HEARING CANCELED
HOUSE BILL NO. 83
"An Act relating to new defined benefit tiers in the public
employees' retirement system and the teachers' retirement
system; providing certain employees an opportunity to choose
between the defined benefit and defined contribution plans of
the public employees' retirement system and the teachers'
retirement system; and providing for an effective date."
- BILL HEARING CANCELED
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
ANGELA RODELL, Chief Executive Officer (CEO)
Alaska Permanent Fund Corporation (APFC)
Juneau, Alaska
POSITION STATEMENT: Gave a PowerPoint presentation entitled
"Alaska Permanent Fund Governance".
DAVID TEAL, Director
Legislative Finance Division
legislative Agencies & Offices
Juneau, Alaska
POSITION STATEMENT: Gave a presentation entitled "Fiscal Plans
Overview".
ACTION NARRATIVE
3:21:57 PM
CHAIR JONATHAN KREISS-TOMKINS called the House State Affairs
Standing Committee meeting to order at 3:21 p.m.
Representatives Kreiss-Tomkins, Wool, Birch, and Tuck were
present at the call to order. Representative Johnson arrived as
the meeting was in progress.
^CONFIRMATION(S):
CONFIRMATION(S):
State Commission for Human Rights
State Board of Parole
Personnel Board
Police Standards Council, Alaska
Public Offices Commission, Alaska
Public Defender
3:22:23 PM
CHAIR KREISS-TOMKINS announced that the first order of business
would be the confirmation hearings for the [governor's 11
appointments] to various boards and commissions.
CHAIR KREISS-TOMKINS stated that all the names were circulated
to the committee members. If any member had expressed a desire
to hold a confirmation hearing for any appointee, the committee
would have held a hearing; however, no names were singled out.
[CHAIR KREISS-TOMKINS reminded committee members that signing
the reports regarding appointments to boards and commissions in
no way reflects individual members' approval or disapproval of
the appointees and that the nominations are merely forwarded to
the full legislature for consideration during the joint session
of the House and Senate for the purposes of confirmation.]
3:22:38 PM
REPRESENTATIVE WOOL made a motion that the names of nominees
before the House State Affairs Standing Committee for the State
Commission for Human Rights, State Board of Parole, Personnel
Board, Police Standards Council, Alaska, Public Offices
Commission, and Public Defender be forwarded to the joint
session of the House and Senate for consideration. There being
no objection, the names of the appointees were advanced from the
House State Affairs Standing Committee.
^PRESENTATION: ALASKA PERMANENT FUND GOVERNANCE BY ANGELA
RODELL, CHIEF EXECUTIVE OFFICER
PRESENTATION(S):
ALASKA PERMANENT FUND GOVERNANCE BY ANGELA RODELL, CHIEF
EXECUTIVE OFFICER
3:23:13 PM
CHAIR KREISS-TOMKINS announced that the final order of business
would be three presentations: a presentation by Angela Rodell,
Chief Executive Officer on Alaska Permanent Fund Governance; a
presentation by David Teal on Fiscal Plans Overview; and third,
an Overview of Permanent Fund Proposals in the Legislature by
Reid Magdanz and Rob Ervine, legislative staff.
3:23:48 PM
ANGELA RODELL, Chief Executive Officer (CEO), Alaska Permanent
Fund Corporation (APFC), introduced herself. She described the
presentation as being focused primarily on the governance
aspect, including the duties and management of the Alaska
Permanent Fund (PF). She expressed a willingness to answer any
questions members may have about the corporation.
3:24:26 PM
MS. RODELL turned to slide 2, titled "1969: The Debate Begins,"
which read as follows [original punctuation provided]:
square4 Alaska receives $900 million in Prudhoe lease sale bonuses.
square4 Debate on Use of Royalties
square4 Fund State Infrastructure and Social Programs
square4 Establish a Development Bank
square4 Create an Investment Fund
MS. RODELL said that in 1969 when Alaska received $900 million
in Prudhoe lease sale bonuses, the unrestricted operating budget
for the State of Alaska was $178 million. This was a huge
windfall to the state. She reminded members that in 1969 Alaska
had only been a state for 10 years. Discussions were held as
part of the statehood debate on how the state would support
itself. There were significant demands and the $900 million was
quickly spent on projects throughout Alaska. That level of
spending concerned legislators and a debate began about whether
the royalty - a non-renewable resource - would be available to
benefit future generations, especially since the value was
unknown.
MS. RODELL highlighted that the debate was around three uses;
first, to fund state infrastructure and social programs; second,
to establish a development bank; and third, to create an
investment fund.
3:25:59 PM
MS. RODELL turned to slide 3, titled "The Alaska Constitution,"
which read as follows [original punctuation provided]:
Over four decades ago, in 1976, Alaskans in an
historic vote amended the Constitution of the State of
Alaska by a margin of 75,588 to 38,518 and created the
Alaska Permanent Fund.
Alaska Constitution Article IX, Section 15 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.
MS. RODELL, reviewing the slide, stated that the fund was
created through a constitutional amendment approved by the
voters in 1976 by a margin of 75,588 to 38,518. She pointed out
that there was not uniformity in the decision to create the
fund. Some people felt very strongly that the funds could be
used for other purposes rather than an investment fund.
MS. RODELL, referring to the paragraph on slide 3, commented
that the language within the [Alaska] Constitution was quite
simple. She read the paragraph [as above].
3:27:16 PM
CHAIR KREISS-TOMKINS asked whether there has been a point in
time where more than 25 percent of royalties have been deposited
into the Permanent Fund (PF).
MS. RODELL answered yes. She explained that as leases,
including terms and royalties, have been reviewed and approved
over the years by legislative bodies, there have been
determinations within those statutes. She said she would cite
the specific statute that allows the Alaska Permanent Fund
Corporation (APFC) to designate royalties in excess [of 25
percent] to the PF depending on when the lease agreement was
entered, or which field was leased.
3:28:28 PM
REPRESENTATIVE BIRCH commented that he was one of the 75,518
votes that established the PF.
3:28:41 PM
MS. RODELL stated that the first deposit of $734,000 came in in
February 1977, which was managed by the Alaska Department of
Revenue (DOR), because APFC did not form as the entity for
managing the PF until 1980. The allowable investments were
initially fixed income bond investments but over the years that
list expanded. Currently, the direction is to follow the
prudent investment rule.
MS. RODELL reviewed slide 5, titled "The Corporation," which
read as follows [original punctuation provided]:
The Alaska State Legislature passed SB161 in 1980
establishing the Alaska Permanent Fund Corporation and
providing:
square4 a sound management structure to maximize the
Fund's ability to generate investment returns
square4 a Board of Trustees entrusted with fiduciary
oversight. APFC's Mission To manage and invest
the assets of the permanent fund and other funds
designated by law.
MS. RODELL reported that currently, the APFC has
responsibility for one other fund it manages, which is the
Alaska Mental Health Trust Authority (AMHTA) principal.
3:30:17 PM
MS. RODELL turned to slide 6, titled "Fiduciary," and remarked
that although we often use the term "fiduciary" and know what it
means, it can be difficult to pinpoint or define the term. She
read from slide 6, stating a fiduciary was "relating to the
responsibilities of a person or organization that manages
property or money belonging to another person or organization.
3:31:03 PM
MS. RODELL turned to slide 7, titled, "AS 37.13.120 Investment
Responsibilities Mandates Use of the Prudent Investment Rule."
She said this is where you will find the mandate to use the
prudent investment rule. She read:
The Rule requires the test of fiduciary conduct be
undertaken from a portfolio formulation perspective
without considering the subsequent performance of the
portfolio. Formulation means assembling and
maintaining a portfolio of assets with a risk
tolerance suitable for the purposes, term,
distribution requirements, and other conditions of the
trust."
MS. RODELL commented that it was important to understand how
these two relate to one another: "The Prudent Investment Rule"
and fiduciary conduct be undertaken from a portfolio formulation
perspective. The prudent investment rule requires the APFC to
take a perspective of construction of the portfolio without
consideration to subsequent performance. She acknowledged that
this might seem counter to what one would expect. She stated
that rather one should assemble a portfolio of assets with a
risk tolerance that the investor believes is suitable for the
purposes, term, distribution requirements, and other conditions
of the trust which generates the return on investment.
3:32:06 PM
MS. RODELL explained that when discussing how the APFC
structures its portfolio and conducts its asset allocation, the
reason is not to drive returns. Otherwise an argument could be
made that [investments] should be 100 percent in private equity,
which has the highest returns for 2017, or in public equity
because it has higher returns and better liquidity. However,
the APFC does not do that; instead, it assembles the portfolio
and asset allocation with an eye towards what is the
corporation's risk tolerance. That risk tolerance must be set
in terms of the purpose of the fund, which is to hold these
funds in trust in perpetuity for all current and future
generations of Alaskans. She stated that different types of
risks can be taken, depending on the terms, if the [investor]
knows that he/she will have ten years to ride through different
business cycles. She identified it as a different risk profile
than if one needs the money in six months.
3:33:16 PM
MS. RODELL related that the distributions requirement feed into
that assumption of term, such as the length of time of the
investment, and any other conditions of the trust imperative to
the objective of the trust.
3:33:37 PM
REPRESENTATIVE BIRCH asked for clarification on differences
between a fiduciary and a trustee. He further asked what sort
of competency expectations exist for one or both.
MS. RODELL responded that she is a fiduciary and her portfolio
managers are considered fiduciary since they have been entrusted
with those responsibilities; however, the trustees have an even
higher standard since they are the ones who will ultimately be
held responsible for the delegations and actions of staff. The
trustee has a higher legal standard and has the right to
delegate certain responsibilities. Backing up to the definition
of fiduciary, she indicated that she and her managers have
certain responsibilities in managing certain day-to-day trades,
which is what makes them fiduciary. She pointed out that the
external managers have a fiduciary standard; however, the
trustees are responsible for the trust itself.
MS. RODELL said that the statutes have requirements for the APFC
Board of Trustees in terms of qualifications. She reviewed
qualifications that the four public members of the board must
have: recognized competence and wide experience in finance
investments or other business management related fields. The
other two members of the Board of Trustees are the Commissioner
of Revenue and another member of the Governor's cabinet;
currently that is Commissioner Andrew Mack.
3:35:36 PM
REPRESENTATIVE TUCK offered his belief that the trustees have a
fiduciary responsibility, but they are not necessarily
fiduciaries. He related his understanding that any trust can be
sued but wondered if a fiduciary could also be sued.
MS. RODELL related her understanding that all fiduciaries can be
held personally liable to the extent that criminal activity is
associated with the failure. She explained that tests apply to
a failure as a fiduciary, whether it was through circumstances
beyond his/her control or if it was knowingly and intentionally
a violation of that duty.
3:36:39 PM
MS. RODELL reviewed slide 8, titled "APFC's Governance, which
read as follows [original punctuation provided]:
Key determinates of APFC's governance success include:
square4 an effective independent management and organizational
structure,
square4 the adherence to accountability measures,
square4 defined legal and regulatory responsibilities,
square4 established policies and procedures,
square4 being a leader in establishing best practice
standards.
3:37:13 PM
MS. RODELL, turned to slide 9, titled "Perspective." She
turned to slide 10, titled "The Pew Charitable Trusts Oct
2016," and said to give members a sense of how the APFC
operates in this word of sovereign wealth funds, that in
October 2016 "The Pew Charitable Trusts" wrote a report on
sovereign wealth funds and the movement from volatile
severance taxes to a sustained revenue model. She recalled
that the APFC sent the report to the committee. She
paraphrased from slide 9, which read:
"Governments use sovereign wealth funds, so-called
because they are established by a sovereign nation or
U.S. state, to deposit a portion of revenue in an
investment account intended to generate returns that
will be used to achieve a specific public purpose or
set of goals."
MS. RODELL stated that one of the today's challenges has been
that "a specific asset or set of goals" is under debate. She
said that recognizing that is the challenge for Alaska, and how
the APFC governs and manages its sovereign wealth fund, is key
to understanding why the APFC's Board of Trustees has taken some
of the actions it has taken to date.
3:38:35 PM
CHAIR KREISS-TOMKINS pointed out that there was a much-
publicized legal analysis from the Legislative Legal and
Research Services counsel, relating to what constitutes public
purpose or benefit. He recalled a bill before the House Finance
Committee and legal speculation on whether that would lead to
the fund being taxable. He asked whether the APFC has had its
own counsel currently or previously explore that question or if
she had thoughts or commentary on that question.
MS. RODELL answered that the APFC has not had separate counsel
and has relied on the Department of Law (DOL) for the
department's interpretation. The DOL has reached out to private
counsel in instances in which it lacks the specific expertise.
She related the APFC's understanding was that it is unclear how
that would "play out." However, she said, the APFC universally
agreed that the APFC is an asset of the sovereign that is the
State of Alaska. What that asset gets used for may have
potential tax consequences if the federal government interprets
that [public purpose] is for private benefit and not a public
benefit. She pointed out that sometimes a lot of attention has
been paid to this and sometimes not. Thus, the APFC has not
seen the need to get private letter rulings or additional
opinions on this. The legislature appropriates the earnings of
the PF and that is where it stops for APFC, she said. The APFC
does not make the determination as to what the earnings are used
for.
3:41:12 PM
CHAIR KREISS-TOMKINS asked whether the DOL or outside law firms
that the executive branch has retained explored this question
and come to different conclusions than Legislative Legal and
Research Services attorneys have expressed.
MS. RODELL related her understanding that over the years there
have been differences of opinions expressed, but she thought it
had been years ago. She acknowledged that at one time there may
have been a potential disagreement between the DOL and
Legislative Legal and Research Services on the matter.
3:42:00 PM
MS. RODELL said the APFC thought it might be helpful to pass on
Pew Recommendations for US State Policy Makers with respect to
sovereign wealth funds. She turned to slide 11, titled "Pew
Recommendations for US State Policy Makers," which read as
follows [original punctuation provided]:
1. Identify the purpose of their state's sovereign
wealth fund and clearly articulate its goals in law.
2. Establish policies for the governance, investment,
and public disclosure of the funds activities in law.
3. Provide statutory or constitutional guidance
regarding withdrawals from the principal.
4. Be aware of volatility in interest earnings from
the fund.
MS. RODELL reviewed the first point and reported that the
statute surrounding the PF do articulate clear goals for the
fund and for the corporation. Reading point 2, she reported
that the APFC has clear guidance in its statute for how the
trustees will govern, on investments, and with its disclosures.
For example, the APFC must make annual disclosures by September
30 of each year as to the performance of the fund. The APFC has
oversight in statute by the Legislative Budget [and Audit
Committee] and all board materials are distributed to the LB&A
committee. Turning to point 3, she offered that the APFC has
had statutory guidance in the past and continues to urge
statutory guidance in the future with respect to withdrawals.
Finally, the APFC has had numerous discussions on market
volatility, which has been apparent in the market in recent
weeks.
3:43:54 PM
MS. RODELL reviewed slide 12, titled, "Best Practices," which
read as follows [original punctuation provided]:
"By establishing independent entities to oversee their
sovereign wealth funds, New Zealand and Alaska have
ensured prudent governance, monitoring, and disclosure
of their financials and management practices. They
stand as examples of many of the best practices for
sovereign wealth funds domestically or
internationally."
MS. RODELL pointed out that Norway was not listed on this slide.
The APFC felt proud to "get the shout out." She said she thinks
it is important for Alaskans to know the APFC was recognized for
its governance and in how the state established and continues to
have oversight governance monitoring of the fund.
3:44:50 PM
MS. RODELL turned to slide 14, titled "Resolution 17-01
Inflation Proofing," which read as follows [original punctuation
provided]:
¦ AS 37.13.145 (c) provides the inflation proofing
mechanism which is calculated at the end of the fiscal
year. Historically, the Legislature has included an
estimated amount in the language of the operating
budget to fulfill this statutory obligation.
¦ The Board of Trustees emphasized the importance of
inflation proofing by unanimously adopting Resolution
17-01 during their September 2017 Annual Meeting.
Directing APFC to identify and pursue legislative
support for inflation proofing the Principal of
the Alaska Permanent Fund to preserve the
purchasing power for all generations as stated in
AS 37.13.020.
MS. RODELL stated that the Board of Trustees identified two
things that have caused increasing concern. In September, the
Board of Trustees passed Resolution 17-01 on inflation-proofing.
This came about due to three years of non-appropriation for
inflation-proofing of the PF and protecting at least a portion
of the fund for future generations, she said. She said it
directed the APFC to identify and pursue legislative support for
inflation-proofing the principal of the PF to preserve the
purchasing power for all generations as stated in AS 37.13.020.
3:45:58 PM
MS. RODELL turned to slide 15, titled "Resolution 18-01 Rules
Based Legal Framework for Fund Transfers," which read as follows
[original punctuation provided]:
"Alaska has a long tradition of following a rules-
based system for Permanent Fund withdrawals and
savings. Since the Fund's inception, with the
exception of certain one time deposits into the
corpus, the State has adhered to a combination of
constitutional and statutory law to manage cash flows
into and out of the Fund, as well as those between the
corpus and earnings reserve.
MS. RODELL stated that earlier in the month the Board of
Trustees went further and passed Resolution 18-01 to encourage a
rules-based framework for fund transfers. This goes back to the
desire to have a known distribution requirement for policy. She
paraphrased the resolution.
MS. RODELL, turning to slide 16, titled "Resolution 18-01 Best
Practices," which read as follows [original punctuation
provided]:
Adherence to a rules-based system for Fund transfers
is a basic element of best practices for management of
sovereign wealth funds. The International Forum of
Sovereign Wealth Funds, of which the Permanent Fund is
a member, has adopted a set of Generally Accepted
Principles and Practices, including that, "There
should be clear and publicly disclosed policies,
rules, procedures, or arrangements in relation to the
fund's general approach to funding, withdrawal and
spending operations on behalf of the government."1
"Such a system helps provide a clear basis for
deriving the expected time horizon and efficient
investment policy for the savings, and promotes
macroeconomic stability and accountability."2 ?"
MS. RODELL strongly urged members to continue to follow a rules-
based system, whether it is one currently in statute or one to
come. She related her understanding that it is perfectly within
the legislature's purview to adjust the rules over time;
however, having an adherence to a rules-based system is a basic
element of best practices for the APFC.
3:47:32 PM
MS. RODELL directed attention to slide 17, titled "Resolution
18-01, be it resolved," which read as follows [original
punctuation provided]:
1) The Board of Trustees believes that adherence to a
legally established rules-based framework governing
Fund transfers is warranted and necessary, and such
transfers should not occur ad hoc;
2) The Board of Trustees acknowledges and supports
that with the fiscal challenges facing the State a new
rules-based framework established in law for the Fund
is likely necessary;
3) The Board of Trustees expresses appreciation to all
stakeholders involved in the difficult and
timeconsuming task of proposing, evaluating, and
deliberating a new rules-based framework to govern
Fund transfers;
4) The Board of Trustees and staff of the Permanent
Fund will continue to provide support to stakeholders
to develop a new rules-based framework established in
law to govern Fund transfers; and
5) That the Board of Trustees directs the Executive
Director to distribute this Resolution and Resolution
2017-1 (regarding inflation-proofing) to the Members
of the 30th Alaska State Legislature and offer to
testify in support of the need to follow a rules-based
framework.
3:47:34 PM
MS. RODELL said she was pleased to distribute the resolution to
the committee and glad to have the opportunity to testify in
support of the need to follow a rules-based framework. She
reiterated that for the APFC to perform its fiduciary
responsibilities and follow the prudent investment rule, that
part was a requirement on distribution.
3:48:30 PM
CHAIR KREISS-TOMKINS, in terms of a rules-based framework, asked
to have her comment on the value of rules being in the [Alaska]
Constitution versus in statute. He further asked her to comment
as manager protecting the real value of the fund for future
generations, how those two things differed.
MS. RODELL answered that there is need for flexibility. By
putting the language "at least twenty-five percent" in the
Alaska Constitution, it was recognized the statute would be
inflexible as to the minimum amount that would go to the PF.
However, there may be times when more than 25 percent would be
deposited. Further, there was a recognition that times change,
so the income was directed to the general fund (GF) unless
otherwise provided by law. This could mean that the legislature
could statutorily direct the income to the PFD or other fund,
such as the constitutional budget reserve (CBR) account to allow
flexibility since circumstances change.
MS. RODELL said that looking forward, the legislature must weigh
carefully the decision between what is immoveable and
unchangeable because the constitutional language has not been
touched since its inception in 1976. Remember, this debate
started in 1969 so it took seven years before a constitutional
amendment was formulated and adopted. Again, the constitutional
language has not been touched since then. Alaska does not
change its constitution easily or lightly she said. She
highlighted that as potential changes are drafted, it is
important to remember that aspect.
MS. RODELL recommended that what should stay in statute,
arguably, are the things that should remain flexible. She said
she would argue that might be the purpose and expense of the PF.
The legislature needs this flexibility because things change,
and the state has numerous needs and unforeseen events that
future legislatures might need to consider or be required to
adjust how the PF is used.
3:51:31 PM
REPRESENTATIVE BIRCH said he reviewed the constitutional
amendment recently. He read a portion of Alaska Constitution
Article IX, Section 15, "All income from the permanent fund
shall be deposited into the general fund unless otherwise
provided by law." He recalled from an earlier briefing that the
PF and earnings account is $65 billion, but the corpus of the
fund is $40 billion, of which $16 billion has been deposited per
the constitutional provision. He related his understanding that
since 1976, the legislature has supplemented that amount to
build the corpus of the fund to $40 billion. He asked whether
that was accurate.
MS. RODELL responded that was correct. She clarified that $16
billion represented the lease royalty payment with approximately
$7 billion in special appropriations. She recalled that at
times after dividends and inflation-proofing the legislature
would sweep out the account and deposit it to the principal of
the fund. An additional $16 billion came from inflation-
proofing appropriations, she said.
3:52:55 PM
REPRESENTATIVE BIRCH recalled that last year the legislature
attempted to adopt an inflation-proofing measure. He further
asked whether Ms. Rodell had a sense of the amount of inflation-
proofing required to protect the fund into perpetuity.
MS. RODELL answered that the fiscal year (FY) 19 Governor's
Proposed Budget restored appropriations for inflation-proofing
for FY 16, FY 17, and FY 18 in the amount of approximately $1.4
billion. In addition, a separate appropriation for FY 19 was
estimated to be $942 million. She explained the calculation was
based on the actual inflation rate, CPI [Consumer Price Index]
as published, which is calculated on the principal or corpus of
the fund. It was not based on the entire assets under APFC
management. She compared the FY 16 inflation-proofing of $47
million appropriation with the $942 million for FY 19. This was
due to the rise of inflation and the growth of the fund, but
primarily indicates how inflation has shifted in the last four
years, she said. This created a need for a larger deposit to
maintain the purchasing power of the $40 billion, which then
becomes $42 billion; thus, the inflation-proofing calculation
would be done on the $42 billion. She highlighted the
compounding effect that happens.
3:55:26 PM
REPRESENTATIVE BIRCH said that it strikes him as a very
reasonable thing to do since any realized earnings or gains of
the corpus of the PF are subject to appropriation and statutory
management. He related his understanding that the earnings are
subject to appropriation and statutory management. He offered
his belief that if the legislature does not inflation-proof the
PF, the fund will not grow, other than the 25 percent that is
deposited.
MS. RODELL answered yes. She referred to the 25 percent in
statute and stated that AS 37.13.010(a) outlines the different
percentages of the Alaska PF. She paraphrased AS
37.13.010(a)(2), which read as follows [original punctuation
provided]:
(2) 50 percent of all mineral lease rentals,
royalties, royalty sale proceeds, net profit shares
under AS 38.05.180(f) and (g), and federal mineral
revenue sharing payments received by the state from
mineral leases issued after December 1, 1979, and 50
percent of all bonuses received by the state from
mineral leases issued after February 15, 1980; and
3:56:42 PM
MS. RODELL said that answers Chair Kreiss-Tomkin's question of
whether more than 25 percent has been deposited into the PF.
Statutes have been written to do that; however, the
appropriations last year reduced it to the 25 percent, she said.
3:57:01 PM
CHAIR KREISS-TOMKINS referred to one of the resolutions the APFC
passed and whether it was fair to assume that the APFC Board of
Trustees supported retroactive inflation-proofing of the PF for
the years that the legislature failed to do so.
MS. RODELL answered yes, the APFC does support retroactive
inflation-proofing of the PF.
3:57:42 PM
REPRESENTATIVE WOOL referred [to slide 12, "Best Practices"] to
other countries that have sovereign wealth funds. He asked
whether Alaska was the only one that paid a dividend and whether
it mattered.
MS. RODELL offered to clarify that she did not mean to indicate
that Norway has poor governance of its funds; however, she was
happy that Alaska received the recognition. She responded that
Alaska is the only one that currently pays out a dividend.
North Dakota set up its legacy fund when it had the shale oil
boom but place a moratorium on the dividend program. She
recalled that North Dakota decided not to pay out any funds
until the fund was five years old. She was unsure of the
status, but North Dakota was considering whether to pay a
dividend and had expressed an interest in Alaska's PF.
3:58:59 PM
REPRESENTATIVE WOOL asked whether if a fund produces wealth and
3 percent or 4 percent was drawn from it, it really matters how
those funds are used.
MS. RODELL answered yes. She acknowledged that while we may all
care as individual Alaskans, the APFC must be indifferent as to
the use. She provided an example, such that with the Public
Employees Retirement System (PERS) and the Teachers Retirement
System (TRS), the focus is to provide an annual beneficiary
payment, not on how the beneficiaries would use it. She
suggested the PF as a similar concept, which is to ask, "What is
the number, what is the bogey, is it that you need us to hit, to
target, so."
4:00:37 PM
REPRESENTATIVE WOOL, in terms of inflation-proofing, asked
whether if the bogey was lower, for example, at 2 percent, the
inflation-proofing would be taken care of since it would be a
lower number. He asked whether it is that simple.
MS. RODELL answered that she wished it was that simple. The
reason that it is not that simple is because of the construct of
the earnings reserve account (ERA) versus the principal of the
PF. So long as the state was able to take an ad hoc draw up to
100 percent of the ERA, the APFC must always request an
appropriation for inflation-proofing the PF, in order to ensure
that the principal can capture back some of its purchasing
power.
4:01:34 PM
REPRESENTATIVE WOOL asked for further clarification on
inflation-proofing the PF. He asked if Alaska had one PF,
instead of the fund being separated into an ERA and the
principal of the fund, if it would be accurate that it would not
be necessary to inflation-proof the fund so long as the
legislature did not take off too much.
MS. RODELL responded that was correct.
4:02:00 PM
CHAIR KREISS-TOMKINS asked to cover the merits of ERA corpus
structure versus an endowment model.
MS. RODELL answered that from the APFC's standpoint, there is
very little merit to the ERA corpus structure. She elaborated
that for ease of managing the investments, having one fund with
a strict endowment payout would be a very clean approach. It
would meet the criteria, previously discussed, such that the
APFC could build a portfolio that recognizes the purpose to
payout "x" percent. We know the terms into perpetuity, with
some having a different term from the corpus.
4:03:09 PM
MS. RODELL explained that the APFC currently manages the PF as
if "both buckets" have the same term, but the debate over the
past three years makes it very clear that both accounts do not
have the same terms. She stated that the distribution
requirement has changed considerably; however, [the state] does
not yet have a requirement. She said she understood the merits,
from the state's policy perspective, of the reason to keep the
ERA and the principal separate.
4:03:41 PM
CHAIR KREISS-TOMKINS asked whether the perceived merit would be
that the legislature has a "big pot of money" that it can access
when needed.
MS. RODELL answered yes; but the legislature also has a
limitation to the amount of funds it could access. She stated
one of the fears she has heard expressed over making it "one
pot" was "oh, my goodness, now you're really going to spend all
of the principal" without recognizing, as Representative Wool
pointed out, setting the balance between not overdrawing and
being able to recoup what you spend.
4:04:31 PM
REPRESENTATIVE BIRCH thanked Ms. Rodell for the great briefing
and the work being done on behalf of all Alaskans.
CHAIR KREISS-TOMKINS concurred.
4:04:51 PM
The committee took an at-ease from 4:04 p.m. to 4:09 p.m.
^PRESENTATION(S): FISCAL PLANS OVERVIEW BY LEG. FINANCE DIV.
PRESENTATION(S):
FISCAL PLANS OVERVIEW BY LEG. FINANCE DIV.
4:09:23 PM
CHAIR KREISS-TOMKINS announced the next order of business would
be a presentation: Fiscal Plans Overview by the Legislative
Finance Division.
4:09:41 PM
DAVID TEAL, Director, Legislative Finance Division (LFD),
Legislative Agencies & Offices, introduced himself. He began by
describing fiscal plans. He said that this is about the fifth
or sixth iteration of developing fiscal plans, noting that they
tend to go in cycles; that each time the state faces low
revenues, people want a fiscal plan. In the past, oil prices
have recovered, and fiscal planning has been set aside.
4:10:41 PM
MR. TEAL offered his belief that ideally fiscal plans should be
developed when the state has lots of revenue; however, it has
never worked that way. Back to the question of what a fiscal
plan is, he recalled an individual asked during public
testimony, "So why don't you just say what you mean? Fiscal
plan, that's just bureaucrat speak for - you want to tax me and
take my [Permanent Fund Dividend] PFD." He acknowledged that
that was not far from the truth. He said that fiscal planning
addresses revenue, spending, and use of reserves to balance the
budget. The three options to balance the budget or the three
legs of fiscal planning are to use the Permanent Fund (PF),
reduce government services, and reduce spending.
4:12:04 PM
MR. TEAL advised that to compare the fiscal plans would be very
difficult because the only fleshed-out fiscal plan is the
governor's fiscal plan. He submitted a plan last year, revised
it, and resubmitted it this year. Although individual
legislators have their ideas about a fiscal plan, neither body
has reached consensus. He offered his belief that people were
waiting for the House and thought perhaps it may reach
consensus, but it has not yet.
4:13:02 PM
MR. TEAL stated that fiscal plans evolve over time. The House
could have a fiscal plan now, which could change in a week or a
month and the Senate has not yet come forward with a fiscal plan
this year. The Senate might argue that it still has a fiscal
plan in SB 26, which is pending in conference committee, where
it now resides. Some senators would like to "tweak" it but
there is not any real consensus. He related that the LFD has a
model designed to help the legislature with fiscal planning. It
allows many user inputs to be changed. He characterized the
model as complicated, so he did not bring it today. He offered
to speak on some of the elements, specifically use of PF
earnings.
4:14:01 PM
MR. TEAL said that to get into the model, the various taxes that
could be imposed, what can be done with spending cuts or growth
rates on expenditures - gets long and involved. The focus today
is really on the use of PF earnings, he said. One reason was
that it is by far the most powerful tool the legislature has
since the fiscal deficit runs about $2.6 billion. Using PF
earnings, as proposed by the governor, would close about $2
billion of that gap. Taxes at most would raise about $700
million, he said. Thus, using [PF earnings] represents the key
tool in fiscal planning.
MR. TEAL pointed out that one thing the model indicates is that
balancing the budget without using the PF earnings would be very
difficult. He said, "We cannot make it work without using
earnings." Another thing the model indicates is the difficulty
in agreeing on a more comprehensive plan - meaning reserves,
expenditures, and revenue. He offered that the problem was not
that there are not solutions; instead, there are lots of
solutions.
4:15:37 PM
REPRESENTATIVE WOOL referred to the $2.6 billion deficit
mentioned and that the governor's fiscal plan would address $2
billion. He said if the PF balance is $60 billion, and the
legislature takes a 5 percent POMV [percent of market value] if
the deficit would really be $3 billion. He asked him to
identify the error.
MR. TEAL answered that Representative Wood had not made an
error. He explained that under the governor's POMV plan, as with
most of the POMV plans, there is a payout. Under the plan, only
$2 billion goes for public services and the remainder goes to
dividends, he said.
MR. TEAL stated that LFD has been looking at the use of earnings
reserve account (ERA). He clarified that this did not mean
using the PF since it is not available to the legislature.
4:16:56 PM
MR. TEAL said that given that the legislature has been arguing
about POMV payouts for four or five years, one may infer there
is some deep-seated opposition to using the PF earnings or at
least irreconcilable differences in plans. He offered his
belief that most of the differences did not really matter much;
in fact, the plans are similar in concept although they differ
in detail. For instance, most of the POMV plans have a "five-
year lookback," which is generally agreed upon as resulting in a
stable payout. He pointed out the earlier discussion about the
dangers of POMV versus earnings. He deferred to the next
presenters to discuss this as part of their overview of PF
proposals. He offered to come back for their presentation and
answer any questions that arise.
4:18:33 PM
MR. TEAL stated that the five-year lookback provides stability
for government since it is difficult to start up a program and
decide not to fund it the next year since people move on and the
infrastructure is gone so programs tend to last awhile in
government. He turned to the discussions on the payout rate.
He related that it was a narrow range, with one plan using 4
percent, but most plans use between 4.5 percent to 5.25 percent
payout.
MR. TEAL offered that there has been some confusion about what
would be sustainable and some of this comes from the [Alaska]
Permanent Fund [Corporation] (APFC) comments. He suggested that
the math was simple. For example, if the PF earns 6.5 percent
interest and inflation was 2.25 percent, it would result in a
4.25 percent sustainable payout, he said. Given the lookback,
the nominal payout of 4.25 percent would not be paid on the
current value, but on the six-year lookback; thus, the payout
would basically be based on the PF balance three years ago.
Since the PF continues to grow, the effective payout rate is
always lower than the nominal rate. He characterized it as a
"25 basis points" difference; therefore, the state could afford
a 4.5 percent payout, which is clearly sustainable, based on
inflation.
4:20:32 PM
MR. TEAL said the APFC has also said that its target rate of
return is a real rate of 5 percent. Again, that would indicate
that the legislature could have a 5 percent sustainable payout
which based on the lookback, could go to 5.25 percent and still
be sustainable. He related that his attitude has been that it
does not really matter since it is not a big range. Pick a
number. They all work. He explained the difference, which was
that picking a low number would result in a lower payout in the
early years, but because of the lower payout the overall fund
increases so future payouts would be higher. The reverse would
be to pick a high number now, which would result in higher
payouts; however, the fund would not grow as fast resulting in
the "lines crossing" in about 20 years.
MR. TEAL emphasized that the real argument over the POMV is
inter-generational equity. He said, Do you want more now, or
do you want more left for future generations?
4:21:53 PM
CHAIR KREISS-TOMKINS asked whether he had a sense of other
sovereign wealth funds and what the median POMV payout is.
MR. TEAL answered that other sovereign wealth funds fall within
the same ranges. He reminded that Ms. Rodell briefly touched
on the key point, which was that a 4.25 percent payout rate
might be deemed sustainable; however, the large deficit would
remain. In fact, the deficit would be large enough with a
payout that low, that the Constitutional Budget Reserve Fund
(CBR) would be depleted in a couple of years, at which point the
state would need to implement a tax, spend, or use reserves.
4:22:51 PM
MR. TEAL offered to compare some options. The easiest option
for the legislature would be to agree to a 4.25 percent payout
and take an ad hoc draw, which is essentially a 4.25 percent
payout plus $800 million. However, that does not work, he said.
The difference between using 4.25 percent or 5.25 percent payout
does not matter either, since it would only affect the ad hoc
draw. The ad hoc draw at 5.25 percent would be lower because
the stated payout was higher. "But you simply cannot do ad hoc
draws and have a sustainable fund," he said. Instead, the
legislature must pick a sustainable payout and stick to it. He
predicted that if the legislature uses ad hoc draws it will
result in the reserves being drained, which will mean that the
legislature did not protect the PF.
4:23:40 PM
CHAIR KREISS-TOMKINS asked for Mr. Teals viewpoint on the
constitutional amendment to prohibit ad hoc draws.
MR. TEAL responded that it was a tough question because statutes
clearly cannot prevent ad hoc draws. He said that the [Alaska]
Constitution is the only way to prevent ad hoc draws. The only
safe way to have the PF support government or dividends would be
to put it in the [Alaska] Constitution; however, it then becomes
very inflexible and means the legislature cannot take any ad hoc
draws. There may come a time when an ad hoc draw becomes
necessary.
MR. TEAL said that the provision in Alaska's Constitution to set
up the PF has worked well for many years because the
constitutional language is vague. It requires a minimum of 25
percent be deposited in the fund, but it does not set a maximum
amount, nor does it specify what to do with the funds except to
invest it.
MR. TEAL related that Alberta [Canada] used to have a heritage
PF, which was larger than Alaska's PF, but Alberta invested in
infrastructure by building government buildings. Unfortunately,
there was not any return on its investment. By comparison,
Alaska very wisely stuck to financial investments rather than
infrastructure in Alaska with little or no cashflow return to
the PF.
4:25:52 PM
MR. TEAL acknowledged that he felt "a little nervous" about a
constitutional amendment, but it would provide the only real
protection the fund can have. It would assume, in many ways,
the state would go to an endowment plan.
MR. TEAL mentioned testimony before the House Finance Committee
on a bill creating an endowment. He offered his belief that it
was obvious that either the public does not understand endowment
theory at all, or the public has a great fear of government, or
both. The testifiers expressed concern that having an endowment
instead of a separate ERA, [the legislature] would begin
spending the corpus of the fund.
MR. TEAL further acknowledged it could happen since spending 5
percent without earning 5 percent. Earnings might be low for
several years which might mean dipping into principal. However,
in the long run the fund would grow, dependent on managers
picking a sustainable yield and the endowment earning enough to
make the payout plus inflation. He predicted an endowment would
continue to grow and spin off 5 percent. In fact, that is the
reason universities and foundations use endowment theory instead
of trying to run off earnings. "Earnings are inherently
unstable," he said.
4:27:52 PM
REPRESENTATIVE WOOL referred to slide 3, to the amendment to
language added to the Alaska Constitution at the time the PF was
created. He recapped that it sets the minimum amount to be
placed in a PF, but it does not set the maximum, nor does it say
what to do with the earnings. He suggested if the PF was a true
endowment model and it established a draw, but it did not
indicate what to do with it, that could make people
uncomfortable. As the legislature has been having discussions
on constitutional amendments, how to divide the earnings has
created some discomfort. Although education was listed in the
Alaska Constitution, it does not indicate how much funding
should go towards education, he said. He acknowledged that the
chair was interested in endowments and constitutions.
CHAIR KREISS-TOMKINS agreed that he was very interested in
constitutions.
REPRESENTATIVE WOOL highlighted that the provision provides a
lot of latitude.
4:29:06 PM
MR. TEAL directed attention to the last clause on slide 3, which
read, "...unless otherwise provided by law." He stated it is
provided by law that the ERA is part of the PF. He said:
It is not in the general fund; it resides by law in
the permanent fund. Easy to change. But it does not
change the fact that the entire earnings reserve,
despite the fact that it is considered part of the
permanent fund, is fully subject to appropriation.
And, of course, that's the underlying problem, all
along, but it wouldn't matter if that earnings reserve
were in the general fund or it stays where it is. The
point is, it can be spent at any time, in any amount,
with a simple majority.
4:30:24 PM
REPRESENTATIVE BIRCH said that the legislators and governor
would need to decide, and each person probably has a different
opinion. He offered his belief that appealing (indisc.) the
approach was reasonable and would provide a steady, predictable
draw on an annual basis. He related his understanding that the
Alaska Supreme Court last year decided that a dividend was not a
birthright but was basically "a line item in the budget." He
offered his belief that if the state cannot reduce spending
appropriately, that [the legislature] has an obligation to meet
that financial obligation. He wondered what was wrong with
paying the state's bills first and if money was left over to pay
a dividend for those who need it, that the legislature should do
that. He asked whether any work has been done on a "needs-
based" dividend, or perhaps a way to meet the needs of the
25,000 Alaskans that are in poverty [without it]. He said he
has frequently heard the argument that the people who rely on
the PFD.
4:32:23 PM
MR. TEAL responded that if the legislature could reach an
agreement on payout, which seemed likely, the split for
dividends was "a big deal." He said that there was not a real
economic government rationale for dividends. "We are the only
sovereign wealth fund that pays dividends," he said. He offered
his belief that paying dividends is a political decision with
large fiscal impacts, because every dollar spent on dividends
increases the deficit by a dollar. That "dividend split"
becomes a real fiscal issue. He related a scenario in which the
state had an $800 million deficit and added that, coincidentally
the state is paying out $800 million in dividends. If the state
asked a consultant for ideas, the consultant would advise that
it does not make sense to pay out a dividend, which no one else
in the world does. He suggested the answer was too easy since
the solution to the scenario would be not to pay dividends.
MR. TEAL recalled previous proposals ranging from not paying a
PFD if the state has a deficit, to paying a full PFD despite
having a deficit. He said that there was not a right answer to
this question. He acknowledged that some people have grown to
rely on the PFD and so it becomes a political decision. Some
constituents may not understand the fiscal situation, but they
certainly understand that the PFD arrives in October. They may
threaten that they better receive their dividend in October, or
they will not vote for the incumbent legislator who voted to
reduce or eliminate it. He cautioned the public against blaming
legislators for any vote related to the PFD since each
legislator must vote for what he/she believes to be right. He
reiterated that there was not any right or wrong on these
dividends so long as the legislature understands that every
dollar paid out for the PFD adds to the deficit by a dollar; and
the legislature must find a way to address the larger deficit.
He said it was not easy.
4:36:10 PM
CHAIR KREISS-TOMKINS, with respect to ongoing discussions in the
Capitol building, asked for his speculation on the probability
of an ad hoc draw by the legislature in the next two budget
cycles. In response to Mr. Teal, he added that he would
consider anything greater than 5.25 percent of POMV.
MR. TEAL asked for clarification on whether last year's draw
that was not taken was considered. He reminded the committee
that SB 26 has been before the conference committee for over a
year and if it was acted upon would have an effective date in
2018. He asked whether that would be considered an ad hoc draw.
He suggested that if it happened, it would be considered a
double draw. He wondered whether procedurally the House would
be able to get a super majority vote on the budget, and if not,
that the chances of an ad hoc draw continue to rise as time goes
on. He speculated that the only way to avoid it would be to
have a draw in 2018, which some people would consider an ad hoc
draw. He reiterated this was speculation rather than an
opinion.
4:38:30 PM
MR. TEAL recommended if the legislature wanted to move forward,
it should "get out of the weeds" and focus on the goals. He
advised members that his office has run the model to the point
that his staff can show [outcomes]. He related that people get
very lost in the individual details of the plan. He reiterated
that the payout is not critical since it represents between $100
million to $200 million per year, which would not be enough to
close the deficit or to move the legislature into the
unsustainable range. He said, "Pick a number. They all work."
He further suggested that members focus on goals and try to
figure out how to measure whether a fiscal plan is successful.
That would not happen by examining the details of the fiscal
plan but by developing a broad fiscal plan.
4:39:51 PM
MR. TEAL outlined one measure that the agency uses to assess how
well a fiscal plan works was by determining whether it maintains
the real value of the PF. He said it represents a key model
output for the agency, which is linked to the sustainable ERA.
When the agency examines the PF, the agency reviews the ERA
combined with the corpus of the fund. The state should be
maintaining the inflation-adjusted value of the combine the ERA
and the corpus of the fund.
MR. TEAL attested that the legislature cannot maintain that with
ad hoc draws or unsustainable draws. The health of the PF means
examining the health of the ERA since the legislature cannot use
the corpus of the PF.
4:40:46 PM
REPRESENTATIVE BIRCH expressed an interest in hearing the final
presentation, an Overview of Permanent Fund Proposals in the
Legislature by Reid Magdanz and Rob Ervine, legislative staff.
CHAIR KREISS-TOMKINS stated it may make sense to hold off on the
presentation.
4:41:54 PM
MR. TEAL reiterated that in evaluating a model, the division
first reviews the health of the CBR, which is linked to
deficits. Next, it looks to the PFD, which there is no right
answer on. The state can pay a higher PFD if the state has
taxes or by implementing other things.
MR. TEAL said some people might argue that having any broad-
based tax required to balance a successful fiscal plan means an
unsuccessful fiscal plan. He suggested that he had provided the
divisions measures of success, but each legislator should have
his/her own measures. If the legislature can agree on the
goals, it would find that the details are not as important as
they seem to be in some of the fiscal plans. Some get wedded to
a specific payout rate, or a linkage, but a successful plan
would consist of picking a rate, paying the rate, and not taking
ad hoc draws on the fund, and paying a PFD that members believe
is affordable. He said it would not "kill" one to pay a
dividend once, but it cannot be done long-term. He emphasized
that the key was to look ahead at the sustainability of a fiscal
plan instead of asking, "How do we get out of here?"
4:43:46 PM
CHAIR KREISS-TOMKINS announced that the final presentation, an
Overview of Permanent Fund Proposals in the Legislature by Reid
Magdanz and Rob Ervine was held over.
4:44:08 PM
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at 4:44
p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| APFC- Alaska Permanent Fund Governance Presentation 3.21.18.pdf |
HSTA 3/29/2018 3:15:00 PM |
|
| APFC-Resolution Rules Based System for Fund Transfers 3.21.18.pdf |
HSTA 3/29/2018 3:15:00 PM |
|
| APFC-Inflation Proofing 3.21.18.pdf |
HSTA 3/29/2018 3:15:00 PM |
|
| APFC-Brief from The Pew Charitable Trusts_October 2016 3.21.18.pdf |
HSTA 3/29/2018 3:15:00 PM |
|
| Overview of Permanent Fund Proposals Presentation 3.29.18.pdf |
HSTA 3/29/2018 3:15:00 PM |
|
| Resumes for Nominees Referred to H STA 3.29.18.pdf |
HSTA 3/29/2018 3:15:00 PM |