Legislature(2003 - 2004)
04/22/2003 07:00 AM House W&M
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 22, 2003
7:07 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Cheryll Heinze
Representative Vic Kohring
Representative Bruce Weyhrauch
Representative Peggy Wilson
Representative Carl Moses
MEMBERS ABSENT
Representative Jim Whitaker, Co-Chair
Representative Norman Rokeberg
Representative Max Gruenberg
OTHER LEGISLATORS PRESENT
Representative Ralph Samuels
Representative Paul Seaton
Representative Dan Ogg
COMMITTEE CALENDAR
HOUSE BILL NO. 271
"An Act levying and providing for the collection and
administration of an excise tax on passenger vehicle rentals;
and providing for an effective date."
- HEARD AND HELD
HOUSE JOINT RESOLUTION NO. 26
Proposing amendments to the Constitution of the State of Alaska
relating to and limiting appropriations from and inflation
proofing the Alaska permanent fund by establishing a percent of
market value spending limit.
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 271
SHORT TITLE:PASSENGER/RECREATIONAL VEHICLE RENTAL TAX
SPONSOR(S): REPRESENTATIVE(S)KOTT
Jrn-Date Jrn-Page Action
04/15/03 0986 (H) READ THE FIRST TIME -
REFERRALS
04/15/03 0986 (H) W&M, FIN
04/22/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
BILL: HJR 26
SHORT TITLE:CONST. AM: PF APPROPS/INFLATION-PROOFING
SPONSOR(S): RLS BY REQUEST OF LEG BUDGET & AUDIT BY REQUEST
Jrn-Date Jrn-Page Action
04/17/03 1025 (H) READ THE FIRST TIME -
REFERRALS
04/17/03 1025 (H) W&M, JUD, FIN
04/22/03 (H) W&M AT 7:00 AM HOUSE FINANCE
519
WITNESS REGISTER
REPRESENTATIVE PETE KOTT
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: As sponsor of HB 271, testified on the
purpose of the bill and answered questions from the members.
CLARK GRUENING, Vice Chair
Board of Trustees
Alaska Permanent Fund Corporation
Juneau, Alaska
POSITION STATEMENT: Testified in support of HJR 26 and answered
questions from the members.
ROBERT STORER, Executive Director
Alaska Permanent Fund Corporation
Juneau, Alaska
POSITION STATEMENT: Testified in support of HJR 26 and answered
questions from the members.
ROBERT BARTHOLOMEW, Chief Operating Officer
Alaska Permanent Fund Corporation
Juneau, Alaska
POSITION STATEMENT: Testified in support of HJR 26 and answered
questions from the members.
ACTION NARRATIVE
TAPE 03-10, SIDE A
Number 0001
CO-CHAIR MIKE HAWKER called the House Special Committee on Ways
and Means meeting to order at 7:00 a.m. Members present at the
call to order were Representatives Hawker, Heinze, Kohring,
Weyhrauch, Wilson, and Moses. Also present were Representatives
Samuels, Ogg, and Seaton.
HB 271-PASSENGER VEHICLE RENTAL TAX
CO-CHAIR HAWKER announced that the first order of business would
be HOUSE BILL NO. 271, "An Act levying and providing for the
collection and administration of an excise tax on passenger
vehicle rentals; and providing for an effective date."
Number 0110
REPRESENTATIVE PETE KOTT, Alaska State Legislature, sponsor of
HB 271, testified on the purpose of the bill and answered
questions from the members. He explained that HB 271 is a
fairly simple mechanism which calls for the establishment of a
statewide car rental tax of 15 percent on all vehicles that are
rented for a period of less than 90 days.
Number 0217
REPRESENTATIVE WEYHRAUCH moved to adopt the proposed committee
substitute (CS) for HB 271, Version 23-LS0936\H, Kurtz, 4/16/03,
as the working document. There being no objection, Version H
was before the committee.
Number 0238
REPRESENTATIVE KOTT explained that the major change in the
proposed CS is the exemption for recreational vehicles (RVs).
The rationale behind this exemption is that the last increase in
the rental tax in the Anchorage area, [resulted in] three rental
companies going out of business. He pointed out that with the
price of a rental for an RV at $150 per day, there would be a
$20-plus increase in cost at a 15 percent rate. He commented
that he believes that may be somewhat excessive. Although there
is no conclusive evidence that the increase in rental tax caused
the businesses to fail, there may be some merit to that
[argument].
REPRESENTATIVE KOTT told the members that this proposal came
about at the suggestion of the administration. He pointed out
that if this increase were to go into effect [the tax] would
still be lower than the state of Washington's. Alaska is tied
for the 47th [lowest] place in terms of car rental taxes. He
told members that tomorrow during public testimony the members
will hear from companies that a tax will run them out of
business. However, he recalled traveling in Seattle, and while
he did not like the tax, there was no other option.
Furthermore, it did not stop the companies from doing business.
In most cases there would be a $4-5 increase at the 15 percent
level. Of course, that would depend on the type of vehicle
being rented. Representative Kott commented that this tax
mirrors what has been done in Anchorage through an ordinance.
This measure would raise slightly over $5 million the first
year, and $7 million the second year. The amount would increase
as tourism increases. He noted that government employees are
exempted from the tax.
Number 0634
CO-CHAIR HAWKER clarified Representative Kott's statement on
government employee exemptions by saying that exemptions are
only in effect when government employees are on government
business. The proposed 15 percent [sales tax] is just above the
mean and medium of rates across the country [as illustrated in
the chart in the bill packet]. Co-Chair Hawker asked if the
proceeds would be placed in a separate account in the general
fund where they may be used for tourism development and highway
maintenance.
Number 0744
REPRESENTATIVE KOTT responded to Co-Chair Hawker's comments by
saying that a State of Alaska employee ID card must be presented
when renting a vehicle while on state business. Use of ID cards
is on an honor system, he said. Representative Kott explained
that while funds could not be dedicated, the money raised would
be placed in a specific account within the general fund. There
could be some intent language or a statement on the record that
these funds should be used for the maintenance of roads, and
development of the tourism industry through marketing. He
pointed out that 80 percent of the tax will be paid by non-
Alaskans. He asked the members to think about the last time
they rented a car in Alaska. Usually, it is when traveling on
business or when the car is in the shop and an insurance company
pays for the rental. He asked the members to recall the last
time they rented a car and had to pay for it.
CO-CHAIR HAWKER commented that he has rented vehicles in most of
the 50 states in the last five years, and he had noticed the
lack of taxes on vehicle rentals in Alaska.
Number 0926
REPRESENTATIVE KOTT noted that some communities such as
Anchorage, Fairbanks, Juneau, and Kenai already have a form of
tax in place.
Number 0954
REPRESENTATIVE WEYHRAUCH said he assumes the tax would not
include RVs because they fall outside the definition of a
passenger vehicle. He surmised that Alaska is in 47th place
with respect to car rental taxes because local taxes are already
in place.
REPRESENTATIVE KOTT responded that he is correct.
REPRESENTATIVE WEYHRAUCH said that many people rent cars in
Alaska and then drive to Canada or outside, where they turn the
car in. How does the sales tax apply in these cases, he asked.
REPRESENTATIVE KOTT replied that the point of origin where the
vehicle was rented establishes the tax rate. For example, if an
individual rented a car in Alaska, drove it to Los Angeles and
turned it in a week later, the individual would be charged seven
days of tax at the Alaska rate. He reiterated that it is the
point of origin that determines the tax.
REPRESENTATIVE WEYHRAUCH noted that the dealer would pay the tax
to state.
CO-CHAIR HAWKER noted for the record that Representative Ogg has
joined the committee.
Number 1130
REPRESENTATIVE HEINZE asked if the car rental tax for
individuals coming into the city from the Bush for medical
reasons could be exempted.
REPRESENTATIVE KOTT responded that there is always a way to
address special exemptions if there is the will to do it. Often
times those individuals who travel for medical attention are
having the tab picked up.
REPRESENTATIVE HEINZE replied that she knows there are a lot of
folks coming into the city from the Bush for medical attention;
however, she said she cannot imagine that their tab would be
picked up.
REPRESENTATIVE KOTT explained that he knows that the BIA [Bureau
of Indian Affairs] has a contract that provides for individuals
who come from the Bush for medical treatment to be housed and
provides for shuttle service to and from the place where they
receive treatment. He said that [if an exemption were provided
for] individuals who may or may not be receiving medical
treatment, it would open the door for the possibility of
inappropriate activity.
Number 1341
REPRESENTATIVE KOHRING said he disagrees with Representative
Kott and asked how this legislation would benefit the economy of
Alaska. He opined that taxes are more of a strain to an economy
rather than something that will benefit an economy in terms of
contributing to growth. Benefits from tourists in terms of the
money spent in hotels, restaurants, gas stations, gift shops,
and grocery stores offset loss of revenue that might be gained
by a tax of this nature, he said.
Number 1509
REPRESENTATIVE KOTT acknowledged that it is unusual [for him] to
be advocating for a tax bill, since he has spent the last 10
years advocating against taxes. However, he believes it is time
to face reality. He said he is trying to do that in the least
painful way possible. This is one way to impose a small tax on
Alaskans who may rent a car, although in most cases, Alaskan's
will not be affected. Representative Kott stated he does not
believe there will be any loss of tourism as a consequence of
implementing this tax. Tourists who come to Alaska rent
vehicles, recreate, and participate in various activities, which
provide revenue for tourism operators or restaurants. The state
does not impose any tax on tourist at this point. Although
there may be an indirect relationship with respect to corporate
income tax, there is no direct tax. He said there is no
negative impact to local small businesses or restaurateurs.
Infact,with this legislation the state would receive a small
amount of money, $5-10 million, which could be used to offset
some of the damage to roads and parks by tourism. Certainly,
part of the money could be set aside for tourism marketing. It
is important to reinject some of that money to attract more
tourists.
Number 1838
CO-CHAIR HAWKER pointed out that this bill does not apply to
commercial motor vehicles [as defined in AS 28.41.100] or RVs.
Number 1930
REPRESENTATIVE WEYHRAUCH responded that the definition of a
commercial motor vehicle as described in Alaska Statute
28.41.100 means:
A motor vehicle or a combination of a motor vehicle
and one or more other motor vehicles used to transport
passengers and property, used upon a land or vehicular
highway, and that has a gross vehicle weight or
combination weight rating greater than 26,000 pounds
designed to transport more than 15 passengers
including the driver or is used in the transportation
of materials found by the U.S. Secretary of
Transportation to be hazardous, except that the
following vehicles meeting of the criteria, that he
just mentioned in (a) and (c) of the paragraph are not
commercial vehicles, emergency or fire equipment
necessary for preservation of life or property, farm
vehicles controlled or operated by a farmer, used to
transport agricultural products, farm machinery, or
farm supplies, not used in the operation of common or
contract motor carrier, or RVs (recreation vehicles)
used for the purposes other than commercial purposes.
CO-CHAIR HAWKER commented that [the definition] did include
vehicles used to transport either passengers or property. The
gross vehicle weight limit of 26,000 pounds appears to be the
key requirement.
REPRESENTATIVE KOTT commented that a bus could be exempted from
the tax.
Number 2112
REPRESENTATIVE WILSON noted that the definition mentions a 15-
passenger vehicle. Would the definition include a 12-passenger
van, she asked.
Number 2153
CO-CHAIR HAWKER commented that the statutes define a 15-
passenger van [as a commercial vehicle]. He said his own
experience in renting 12- and 15-passenger vans, which are
comparable to the one-ton Budget or U-Haul vans, is if there are
seats in them, they are considered a 15-passenger van, while
those without seats are considered a cargo van.
Number 2213
REPRESENTATIVE WILSON pointed out that some schools drive
cheerleaders to events in 12-passenger vans. She said she has
no idea whether these vans meet the weight requirement.
REPRESENTATIVE HEINZE asked if there is any forward thinking
about how these funds could be funneled back into tourism
marketing. She pointed out that these taxes are mainly tourism
user fees.
Number 2311
REPRESENTATIVE KOTT commented that she made a correct assessment
regarding forward thinking. The funds cannot be dedicated
directly into a specific arena unless there is a constitutional
amendment authorizing dedicated funds. Representative Kott
reiterated his earlier comments that intent language can be
included in the bill that would suggest that the legislature
wants a percentage of the proceeds which are generated from this
excise tax to go toward some other method of doing business in
the state of Alaska. He stated that he believes it would be a
good thing to include intent language for "tourism marketing" in
the bill. Representative Kott told the members that he cannot
promise any money raised from this excise tax will ever end up
in tourism marketing.
Number 2416
REPRESENTATIVE HEINZE explained that those in the tourism
industry will be on the outside watching these user fees
[accumulate]. How can the tourism industry get an answer about
more funds for tourism marketing, she asked. How will the
[Department] of Community and Economic Development will be
affected.
REPRESENTATIVE KOTT pointed to the fiscal note and said that the
details are comprehensive. He commented that there are entities
in the tourism field that are cognizant of this bill and other
measures that will generate money from non-Alaskans, whether
they are working on the North Slope or visiting as a tourist.
Representative Kott said that at some point the state will have
to provide some level of support for the tourism industry.
There will be a request for dollars for marketing activities
because without marketing, the industry will become stagnate.
For example, after [the terrorist attacks of September 11, 2001]
Las Vegas [as a tourism destination] was on the decline;
however, the city opted to spend $14 million for marketing. Las
Vegas is one of few cities that showed a marked increase in
tourism to their city. There is a nexus between marketing and
the number of tourists who visit a specific city.
Representative Kott commented that he would not have expected
Las Vegas to do so well considering the fact that large
properties would be targets for terrorism.
Number 2722
REPRESENTATIVE KOHRING reminded the members of contributions
made by tourists to the economy. If the primary justification
for this tax is to raise dollars for marketing and road
maintenance, it would be interesting to know what the
administration has in the way of quantifying the costs, he
commented. Representative Kohring opined that there has been
negligible cost to the state on wear and tear of the highways
and use of public facilities by tourists. He said he would like
to hear from the administration regarding what costs this tax
would try to offset.
Number 2844
CO-CHAIR HAWKER announced that there will be public hearings
tomorrow on HB 271. He told the members that as the session
grows short and the workload is heavy, he wants to keep moving
forward as quickly as possible. With that in mind, he announced
that anyone who would like to raise concerns or propose
amendments to the bill should provide them to the committee
today, so they can be considered tomorrow before and after
public hearings.
REPRESENTATIVE KOTT cautioned the members who might propose a
change in the definition of commercial vehicles or exemptions to
be aware of the potential conflict a change might have in
municipalities and the confusion that might follow with rental
car companies. He pointed out that HB 271 has basically
extracted language and regulations [that are currently used to
avoid unnecessary confusion].
[HB 271 was held over.]
HJR 26-CONST. AM: PF APPROPS/INFLATION-PROOFING
Number 3041
CO-CHAIR HAWKER announced that the final order of business would
be HOUSE JOINT RESOLUTION NO. 26, Proposing amendments to the
Constitution of the State of Alaska relating to and limiting
appropriations from and inflation-proofing the Alaska permanent
fund by establishing a percent of market value spending limit.
CO-CHAIR HAWKER explained that HJR 26 was submitted by the House
Rules Standing Committee at the request of the Legislative
Budget and Audit Committee by request of the Alaska Permanent
Fund [Corporation].
Number 3147
CLARK GRUENING, Vice Chair, Board of Trustees, Alaska Permanent
Fund Corporation, testified in support of HJR 26 and answered
questions from the members. He told members that HJR 26, which
is a proposed constitutional amendment, is a different way to
inflation proof, protect, and enhance the Alaska permanent fund.
Mr. Gruening explained that for 23 of the fund's 27 years of
existence, the permanent fund has been governed by a six-member
board of trustees. Protecting the fund against inflation has
been the highest public policy goal of the trustees since the
first board was appointed in 1980, he commented. The first
board testified to the legislature at that time that the
greatest threat to the permanent fund and to its permanence was
inflation. In response to that testimony, the legislature
adopted a statutory inflation-proofing methodology in 1982 which
is in use today.
MR. GRUENING said in more recent years, the board has examined
the use, by large endowments and public funds, of a formula
approach to determine the method and size of payouts from these
funds. This approach is generally referred to as percent of
market value payouts or POMV. The purpose of placing this
formula in the state constitution is to protect the long-term
real value of the fund and to provide consistent and predictable
distributions for the long term. After considerable review and
discussion the board recommended in February 2001, to the last
legislature, a constitutional change in the form of SJR 13 and
15. He explained that both measures received hearings but did
not come to the floor for a vote. As in the prior proposal, the
language in HJR 26 provides a spending limit on what can be
currently spent or in legislative parlance, appropriated. The
existing constitutional language establishing the permanent fund
only prohibits the appropriation of principal. In other words,
anything but the principal is income and can be spent, he
stated. Since the first board of trustees, 23 years ago, the
permanent fund has calculated the principal as a notational
number. It simply equals the sum of the constitutionally
mandated 25 percent of mineral revenues and non-mandated or
voluntary deposits the legislature has chosen to make. He noted
that the legislature has made appropriations to two-thirds of
what is now calculated as principal.
MR. GRUENING explained that the principal does not vary with the
market. Under the present statutory provision inflation
proofing is only on the principal, unlike HJR 26 which would
provide inflation proofing of the entire fund. He stated that
one of the most important reasons to support the proposal is
that it would maximize distributions over the long term by
establishing a percent of market value limit, and also eliminate
the distinction between principal and income. This proposal
would avoid the situation where market volatility on the
downside prevents any distribution from the permanent fund for
any purpose, whether it is dividends or anything else. Mr.
Gruening told the members that this is significant because since
1982, as the members are well aware, Alaska's fiscal picture has
changed dramatically. The Alaska permanent fund can be expected
to produce more future revenue than any other Alaska resource
including oil, natural gas, fishing, tourism, mining, or
anything else, he said. Whatever future decisions are made by
the legislature or the voters regarding the use of permanent
fund earnings, the 5 percent payout of market value limit will
assure complete and protected inflation-proofing while providing
predictable and sustainable distributions over the long term.
Number 3640
MR. GRUENING used the analogy of managing fisheries stocks when
the only sensible choice is to avoid taking too much of the fish
stock so that over the long term the harvest is maximized. Of
course, he said, over harvesting can reap short-term rewards of
more fish and more money, but the inevitable result, at best, is
fewer fish, less money, and at worst, permanent impairment or
destruction of the fisheries stock. He said the same is true
for managing distributions from a large investment fund, like
the Alaska permanent fund. If Alaska is going to have a fund
that is truly permanent, it is important to take those steps to
ensure permanence. This means investing for future generations
as well as current generations. This will require a commitment
to basic principles of long-term investment. He explained that
the critical flip side of a sound long-term investment strategy
is a sound, sustainable, and predictable distribution plan; a
plan that will sustain and provide benefits to each generation
of Alaskans.
MR. GRUENING commented that he believes everyone wants to avoid
defaulting to the position where the Constitutional Budget
Reserve (CBR) is today. Within the next three to four years the
CBR is destined for extinction, he predicted. As the investment
horizon of the CBR steadily shortens, it will be necessary to
keep the investments in very short term, and less profitable
investments. As the day the CBR's demise grows near, the
trustees and staff will have to also consider a shorter-term
investment horizon for a significant portion of the fund.
However, one thing is clear and that is that the permanent fund
can continue to import significant sums of money into Alaska,
year after year after year. If properly invested and protected
the permanent fund will successfully convert nonrenewal
petroleum wealth into Alaska for a permanent and substantial
stream of revenue for generations after the last barrel of oil
has been pumped. Mr. Gruening said that legislative passage and
voter approval of HJR 26 would protect the ability of the fund
to be managed for the long term and would continue to pour money
into the Alaskan economy over the long term.
Number 3941
MR. GRUENING concluded his testimony by telling the committee
that the proposed constitutional change in HJR 26 is much more
compatible with the funds diversified long-term investment
strategy with a 5 percent real rate of return over time. The
present constitutional language was designed over 25 years ago
for a fund that was 100 percent invested in bonds. Mr. Gruening
said he believes that succeeding generations of Alaskans will
view this amendment with the same degree of appreciation as the
original one approved 27 years ago. The trustees believe that
this proposal for complete and protected inflation-proofing
makes ultimate good sense for the Alaska permanent fund and
Alaska's future.
Number 4025
ROBERT STORER, Executive Director, Alaska Permanent Fund
Corporation, testified in support of HJR 26 and answered
question by the members. He told the members there are five key
issues that he believes are very important in this legislation.
The first issue of HJR 26 is a new method of memorializing and
inflation-proofing the fund in the constitution. He explained
that at the moment inflation-proofing is in statute and it is
done after the dividend [distribution]. It is important to note
that in the past the legislature has always had the money
available to inflation proof the fund. Mr. Storer said he
believes it is important to ensure that all generations are
treated equally and that the purchasing power of the permanent
fund is maintained over time.
MR. STORER explained that HJR 26 includes a spending limit which
means that no more than 5 percent of the moving average of the
fund [can be appropriated]. There has been discussion about
spending limits and making more money available during the
"bear" markets. However, he said he believes it is very
important to create discipline during the bull markets. What
has occurred is that endowments and foundations have incurred
spending patterns that they could not meet because they were
extrapolating a bull market and higher payouts. He emphasized
that this resolution would create a spending limit on the upside
so that it ensures there will be continuity over time during
both bear and bull markets. This change would provide greater
stability during volatile markets; since all markets are
volatile all the time, it is a question of magnitude. This
payout methodology creates greater stability than the current
methodology that is in statutes.
Number 4318
MR. STORER said, for example, if the members were to look
forward [from now] to FY 06, the rate of change on what is
available for distribution, would be an increase in the first
year [2004] of 35 percent, the following year [2005] 16 percent,
and the next year [2006] 18 percent. The POMV would be 2.5
percent growth to 4 percent greater predictability. He
explained that if the members looked at the bull market that
ended in March of 2000, the dividend payout was [based on] what
was available for the dividends which were growing
substantially; however, now what is available is dropping in
equal magnitude. He pointed out that the [dividend] went from
$1,963 to $1,541. If markets hold, there will be a $1,000
distribution this year. The change would provide greater
stability and predictability.
Number 4435
MR. STORER reaffirmed Mr. Gruening's comments that the 5 percent
payout is consistent with long-term objectives. He said that in
examining the history and projected future assets, allocation
and statutory limitations will allow the Alaska permanent fund
to achieve a 5 percent real rate of return, which is 5 percent
in excess of inflation over time. As was noted, 26 years ago
the Alaska permanent fund was established and it was a world of
fixed income securities, lower volatility, and higher cash
payouts, and that is what the current methodology is. Mr.
Storer said that the statutes served the fund well during that
period, but investment management has changed and he believes
that these changes [proposed in HJR 26] would move the fund to a
more consistent approach.
MR. STORER said his final point is that the changes will provide
predictability of annual appropriations under the POMV. He
pointed out that under the status quo it is not known if there
will be funds available for appropriation in any given year.
Mr. Storer commented that the fund uses a 5 percent moving
average of realized income. At the end of May, the fund will
have four years and 11 months left, and beyond that he would not
be able to say because of the magnitude of volatility that has
been experienced. He cautioned that there still is a 10 percent
chance that there will be no dividend. It really depends on how
the markets behave over time. Mr. Storer offered to answer
questions from the members.
Number 4642
ROBERT BARTHOLOMEW, Chief Operating Officer, Alaska Permanent
Fund Corporation, testified in support of HJR 26 and answered
questions from the committee.
TAPE 03-10, SIDE B
MR. BARTHOLOMEW told the members he would like to go through the
financial schedules and then review the resolution to highlight
suggested changes to the constitution. The first schedule,
titled "HJR 26 Financial projection [comparison of the Alaska
permanent fund]," is on page 4 of the handout. He asked the
members to look at FY 03 column and go down to the "Dividend
(lump sum) - Status Quo," which is the distribution or what
would be paid out for the dividend in FY 03, which is $686
million. He explained that [the corporation] will not know with
even one day left of the fiscal year if there will be any money
for the payout of the permanent fund dividend. If the markets
go well, there will be a payout of $686 million for the
dividend; if there is a bad market for a week at the end of the
fiscal year, given the way the rules work, the payout could be
zero.
MR. BARTHOLOMEW noted that whether there is an effort to build a
budget or an economy that has dividends, or whatever the
legislature chooses to do with the distribution of the permanent
fund, there is a significant risk. With the constitutional
amendment, he said, there is an assured payout every year. He
said that it is important to note that under the "status quo,"
all numbers that are shown being paid out of the permanent fund
each year are the dividends, then funds are transferred from the
earnings reserve [account] to the principal for inflation
proofing. It is assumed that there will be no other
distribution because that is the way the permanent fund has been
used for the past 10-15 years. Mr. Bartholomew commented that
whether that is the way it would work in the future is
speculative.
Number 4301
MR. BARTHOLOMEW asked the members to look at the lower part of
the schedule on the POMV where it shows the market value after
payout. This schedule assumes that the whole 5 percent would be
distributed from the permanent fund, and the market value over
time will be much smaller, he said. If under POMV, only the
dividend was paid out which has happened over time, the numbers
would be exactly the same. This schedule shows the differences
if the permanent fund were to be used for another purpose, it
will change what is available.
MR. BARTHOLOMEW pointed out that under Status Quo, lines 2-4
give a picture of the earnings reserve [account] as it is set up
today. He asked the members to note that if they look out over
time the earnings reserve [account] grows if there is only the
payout of the dividend, which happened in FY 02. The permanent
fund earnings reserve [account] had $6.5 billion, which is
available for appropriation by the legislature. The trustees
cannot manage for a large distribution if they do not know what
the legislature will do with it. With the 5 percent spending
limit the trustees know that the most that will come out in any
one year is 5 percent. The [fund managers] will be more
comfortable with that asset allocation of long-term investments
because there would not be a risk of large sums of money, that
may be sitting in long-term investments, such as stocks that are
in a down market. If the plan is to take a lot of money out of
the permanent fund, it is important not to be invested in long-
term investments. Mr. Bartholomew summarized his comments by
saying that the schedule is designed to give the members an idea
of what the numbers look like and what the permanent fund
produces in income each year and what will be available.
Number 4118
MR. BARTHOLOMEW directed attention to page 5, titled
"Calculation of annual effective rates of 5% POMV spending
limit." This schedule points out that a 5 percent payout, as
stated by the executive director, is an aggressive payout rate.
It is at the high end of what statutory limitations for
investments would allow the permanent fund to return over time.
He noted that the [trustees] are comfortable using a 5 percent
payout. There are two issues in this schedule that reduce the
effective rate or what is really being paid out. Normally,
capital markets grow every year. For example, today the Alaska
permanent fund has $23 billion. If it grows for the next five
years, then there will be an average that may vary from $23 to
$26 billion. The average of those five years will be $24.5
billion. The fund will take 5 percent of that five year average
and that is what is available [for payouts].
Number 3939
MR. BARTHOLOMEW went on to say that for example, in FY 08 the
fund is [projected to be] $26 billion, what is actually being
paid out of the total market value of the fund that year is less
than 5 percent. The first blue line across the spreadsheet
shows that the actual effective rate is closer to 4.7 percent
which is a built in cushion to ensure that the fund does not
overspend the sustainable yield from the permanent fund. The
second half of that schedule points out the rate of payout after
deducting the costs for the Alaska permanent fund. Currently,
when calculating income or what is available for distribution
that is determined after paying the operating budget of the
Alaska Permanent Fund Corporation. Right now the [operating
budget] is roughly $35-$40 million per year. The way the
constitutional amendment [HJR 26] is written the permanent fund
[Corporation's] operating budget would come out of that 5
percent limit, he told members. So this further reduces what is
being paid out after covering the costs of investing and
managing the funds. So again, this would mean there would be a
4.5 percent effective payout rate. This [constitutional
amendment] would ensure that there is a bigger cushion and the
risk of overspending is diminished.
CO-CHAIR HAWKER told Mr. Bartholomew that he appreciates the
succinctness and clarity of the first schedule.
CO-CHAIR HAWKER commented that he received 30 e-mails today
expressing the view that the only purpose of the permanent fund
is to pay dividends to individual Alaskans. He asked how the
permanent fund Board responds to those folks.
Number 3656
MR. GRUENING responded that this board, like prior boards, has
avoided getting involved in recommending what the legislature
should do with income from the fund. However, as a legislator
who helped craft the original language, and who was there when
it was approved by the legislature and the voters, he said, a
majority of the members did not see this fund as strictly a fund
to pay dividends. At that time, then-Governor Hammond had an
idea of what to do with dividends, but it was really envisioned
as a way to conserve this one-time wealth for future
generations. How those benefits would flow were not determined
by us, but many could foresee that when the oil wealth was gone,
this could help replace some of that [revenue] and serve to help
support services to which the public had become accustomed. He
emphasized that his comments are made not as a trustee or on
behalf of the permanent fund Board, but as a legislator who was
there in the beginning. Mr. Gruening added that the fund was
all things to all people. A lot of people saw it doing many
things. The two major thoughts were to conserve wealth and help
provide for some of the load when oil revenue was not there.
Number 3450
CO-CHAIR HAWKER stated for the record that his intention was not
to ask Mr. Gruening to take a position for the board. He said
he appreciates hearing Mr. Gruening's institutional experience
and understands that his comments are based on his personal
experience and not as a trustee of the board. Co-Chair Hawker
noted that the board has not taken a position on the disposition
of the funds. He asked Mr. Gruening if he believed the
disposition of the funds is the providence of the legislature
rather than the providence of the permanent fund Board if it is
not established in any constitutional dictate.
MR. GRUENING responded that is correct.
Number 3416
MR. BARTHOLOMEW pointed out that the statutes that are on the
books today have been there since 1982. These statutes set out
the formula which directs that the annual appropriation from the
permanent fund be based on the realized income, which then
directs 50 percent of that income to be allocated to the
dividends. The second step that is required is to inflation
proof the fund out of what is available [after the dividend
distribution]. He told the members that for the last 20 years
the permanent fund has only allocated 50 percent of the
available annual distribution to the dividend program even
though there have been residual funds after paying the dividend
and inflation-proofing the fund. Mr. Bartholomew reiterated
that there has been money available for other uses.
MR. BARTHOLOMEW explained that the history that the fund could
be available for other uses goes back to when the fund was small
and people were not use to the dividend. Those statutes have
not changed. The expression of the legislature 20 years ago,
however, was to not make the whole amount available [for
distribution].
Number 3251
CO-CHAIR HAWKER said he would like to follow up on the
spreadsheet [titled HJR 26 - Financial projection comparison of
the Alaska permanent fund on page 4]. He commented that there
is a trend. In looking all the way out to the projected FY 2013
numbers, which is a 10-year consequence of what is being
considered, the schedule is predicated on a total return
estimate of 7.6 percent to the future. He acknowledged that it
is a premise that is subject to debate; however he said he would
use these figures for the purposes of discussion. Lines 2-4,
which are the earnings reserve accumulations in this model,
shows an accumulation of $6.9 billion in the earnings reserve on
a market value basis. Co-Chair Hawker noted that Mr.
Bartholomew said that the fund currently pays out one-half of
the earnings of the fund in dividends and the other half is
being internalized into the fund. He asked if the other one-
half that is being internalized corresponds to the accumulation
of the earnings reserve.
Number 3128
MR. BARTHOLOMEW replied that it does [correspond to the
accumulation of the earnings reserve]. What this model projects
is what the fund will earn. It is the [projected] median return
that the fund's consultants have said the capital markets should
produce over the long term. He pointed out that the 7.6 percent
is the total return; the current assumption for inflation for
the next five years is 2.6 percent; and the difference between
those two [figures] is 5 percent. If the fund is earning 5
percent and only paying out the dividends, around 2 percent of
the fund would be needed for the dividend for the next few
years. Mr. Bartholomew explained that what is accumulating in
the earnings reserve is the excess earnings that have not been
spent, and are believed to be available on a sustainable basis.
What has happened in the past 10-15 years is that there has been
more saved for future generations than has been spent on current
years. He told the members that the 5 percent [spending limit]
is research and analysis' best estimate regarding the best way
to balance the fund between current and future [needs]. As the
earnings reserve grows it means more money is being saved for
the future and less money is being spent from what is available
currently.
Number 2955
CO-CHAIR HAWKER clarified that the $6.9 billion in FY 13 [Total
earnings reserve - end of year (after payouts)] represents the
continued discipline of savings and spending only for either
dividends or inflation-proofing, not spending for any public
purpose that portion of projected earnings that is not used for
either dividends or inflation proofing.
MR. BARTHOLOMEW responded that is correct.
CO-CHAIR HAWKER noted that FY 13 [line 1 under the heading of
POMV - 5% (beginning in FY 05)] the Total Market Value End of
Year (after payouts) is $31.7 [billion], and the Total Market
Value in FY 13 under the current Status Quo heading is $38.8
[billion]. He asked if the difference of $7 [billion more under
the Status Quo option] is a result of the accumulated savings
discipline of not having used those earnings that were
reinternatized into the fund.
MR. BARTHOLOMEW responded that it is exactly right.
CO-CHAIR HAWKER reemphasized Mr. Bartholomew's point that it is
the legislature's prerogative to use the full 5 percent for
public purposes in whatever manner is appropriate.
MR. BARTHOLOMEW replied that they chose a scenario to model
which would show the full effect of the 5 percent. He noted
that he believed that was the most that could be taken [from the
fund].
Number 2743
CO-CHAIR HAWKER asked if using the 5 percent POMV payout option,
with the continued current statutory concept regarding how much
is paid in individual dividends, which is 50 percent of payout
right off the top, would mean the payout will be one-half of the
$1.235 billion in FY 05, which is the POMV payout available for
appropriation in lump sum.
MR. BARTHOLOMEW responded that there is a difference between the
two methods. If using the second method, which is the payout of
the POMV method, and there would be a continuation of the 20-
year history of making one-half of what is annually available
allocated to the dividend, then that line which says [POMV
Payout] available for appropriation in lump sum would be split
50-50 and that is how much money would be allocated.
Number 2617
CO-CHAIR HAWKER compared the status quo or the current payout
structure with the POMV methodology. Under the POMV
methodology, he said, approximately one-half of $1.2 billion is
roughly $600 million, which would be $200 million greater than
the current projected dividend under the status quo of $400
million. He noted that these results are in the trailing years
of a declining market, with 5-year averaging the dividends will
continue to drop precipitously. Co-Chair Hawker compared FY 06
and FY 07, noting that FY 07 is at a breakeven point. What is
prudent in managing future revenue streams in a period of rising
markets, he asked.
Number 2427
MR. BARTHOLOMEW explained that what has happened is that the
dividend got up to almost $2,000. If the formula remains as it
is today that will drop down to $700 or $800 in a year or two.
That is a huge fluctuation that hits the economy or wherever the
legislature chooses to use the earnings. He told the members
that [the corporation] would recommend changing that payout
method so the dividend does not go so high in the good years and
not drop down drastically in the down years.
CO-CHAIR HAWKER commented that is the fundamental premise of the
POMV method which enforces savings in periods of rising and good
markets and keeps the legislature's hands off of those earnings,
but makes an element of those earnings available in declining
years.
Number 2326
REPRESENTATIVE WILSON observed that what has been currently done
in paying out 50 percent in dividends and saving the other 50
percent for future generations, has resulted in the loss of
those funds.
Number 2244
MR. BARTHOLOMEW responded that what has happened is that part
[of the funds] have been paid out in dividends, and part have
been transferred from the earnings reserve to the principal for
inflation-proofing the fund. Part was lost in the decline in
the stock markets. He said that it is true to say that [some]
of the funds have been lost, but that is also reflected in
capital markets. The funds were there in 2000 and if a guru
could predict the markets, the funds could have been removed
from the permanent fund, but the investment professionals would
caution against thinking cherry picking at the top [of the
market] can be done and then re-enter the market when it is low.
The markets go up and down, and therefore he recommended a
distribution method that stays in the middle and does not run
up.
MR. STORER commented that one-third of the principal of the
permanent fund is special appropriations. So prior legislators
have invoked a discipline, by virtue of taking that larger
earnings reserve and moving it into the principal, so all the
funds have not been dissipated away.
Number 2109
REPRESENTATIVE WILSON said that when comparing the two options,
it appears to her that the POMV at the 5 percent option, which
the permanent fund Board is suggesting, really gives more
security and predictability for the future of the fund. She
noted that it also allows the legislature to appropriate some of
the other 50 percent and still ensure that the fund will
continue to grow.
MR. STORER agreed with Representative Wilson. He commented that
this option would create discipline and predictability that
allows informed decisions to be made.
Number 2012
REPRESENTATIVE HEINZE asked Mr. Gruening to address a
hypothetical question. Assuming there is a year where the funds
in the capital markets are low and the inflation rate is high,
under this [constitutional] amendment does the legislature have
the flexibility to add more into [the fund] for inflation
proofing.
Number 1929
MR. GRUENING commented that he will address the legislative
portion of the question and Mr. Storer will answer the market
situation Representative Heinze envisions. He told the members
that the legislature always has the power of appropriation and
could decide to appropriate more money to the fund. Nothing in
HJR 26 would prevent that.
MR. STORER reiterated that the [resolution] would implement a 5
percent spending limit. The legislature is not required to use
all 5 percent, and can use less if deemed appropriate.
Historically, inflation has been about 3.1 percent so it not
only invokes a discipline on the payout, but invokes a
discipline on what [is required for] inflation [-proofing]. The
current inflation rate is about 2 percent. The permanent fund's
consultants think inflation over the next five years will be
about 2.6 percent. He commented that they recognize that some
years inflation will be higher than the 3 [percent] and some
years lower. He emphasized that they expect to earn 5 percent
real income in excess of inflation.
Number 1800
REPRESENTATIVE HEINZE asked if there is another national
endowment that calculates its payouts the way the permanent fund
does.
MR. STORER responded that the permanent fund did a study, and
what is being proposed is currently used for approximately 70
percent of the endowments and foundations. [Endowments and
foundations] use the methodology of payout of the moving average
of their funds. He told the members that what is being proposed
is consistent with the way most endowment funds move forward.
Mr. Storer commented that he is not aware of any example of a
fund that uses the 5 percent moving average of realized income.
Number 1704
CO-CHAIR HAWKER said that over the years there have been many
references in reports and documents by the permanent fund on
research done with respect to other large endowments and managed
funds. He asked if there is a report or summary study on that
work which would be available to the public.
MR. STORER replied that some of that information is in the
trustees' paper, but there are also two surveys, one from
Greenwich Associates and one from NACUBO [National Association
of College and University Business Officers]. He told the
members that they would be glad to provide copies of the
studies.
CO-CHAIR HAWKER replied that he would appreciate receiving
copies of these studies. He turned to the trustees' document,
volume 7, which is about a year old now, and addresses prior
proposals and legislation. He asked if the premises and
presentation in that document are still fairly applicable to the
current situation.
MR. STORER said that he still believes the document is
applicable with the exception of one thought. At the time the
document was created the earnings reserve was so large that no
one thought that it was necessary to change the distinction of
principle. However, now the corporation believes it is not in
the best interest of the long-term management of the fund for
predictability, et cetera.
Number 1516
REPRESENTATIVE SAMUELS asked Mr. Storer if he said that none of
the other large endowments use a rolling average.
MR. STORER responded that about 70 percent of large endowments
and foundations use a rolling average. Some use five years and
others use seven years. However, [these rolling averages] are
not of realized gains.
REPRESENTATIVE SAMUELS asked if our current formula, which is a
five-year average of cash flow income, is used by any existing
funds or endowments.
MR. BARTHOLOMEW said no.
Number 1441
REPRESENTATIVE SAMUELS asked how the 5 percent [spending limit]
compared with other endowments: large, middle of the road, or
conservative.
MR. STORER responded that the [5 percent] figure would be
considered the middle of road. He said they found 4.5 percent
to 5.5 percent for the more aggressive funds which are invested
in more volatile assets, publicly traded stocks, private equity,
market venture capital will tend to have a higher payout.
Furthermore, this is consistent with our long-term objectives
regarding how the fund is managed.
Number 1347
CO-CHAIR HAWKER recalled Mr. Storer's earlier observation that
no one does it quite like the permanent fund. Co-Chair Hawker
asked if he was referring to the measurement only on realized
market gains and losses rather than a full market value
calculation which includes unrealized gains and losses.
MR. STORER responded that is correct.
Number 1250
MR. BARTHOLOMEW, upon the committee's agreement, began reviewing
HJR 26. He truned attention to Section 1, page 1, of the
resolution and specified that the bold print is what will be
inserted into constitution. This [language] gives reference to
the spending limit that is established in Section 2. The first
addition is just to add into the text that how the legislature
uses the money will be addressed in Section 2. On line 10, the
word "principal" is removed from the constitution. He
reiterated the executive director's statement that it is
believed that the permanent fund will be protected and that the
corpus and principal of the permanent fund will be protected
through a spending limit versus the limitation of principal in
the constitution. Lines 12-13 remove language that has been in
the constitution since 1976, when the original amendment was
passed. [The original amendment] stated that all earnings and
all earnings and income from the permanent fund would be
deposited into the general fund unless otherwise directed by
law. That language is deleted with the intent that all the
income of the permanent fund will remain in the permanent fund
subject to Section 2. In other words, the income will now be
part of the permanent fund.
Number 1056
MR. BARTHOLOMEW responded to Co-Chair Hawker's comment that this
section does take the income away from the appropriation
[process]. On page 2, Section 2, the first [two lines] add
language to explain that the objective of the spending limit is
to make sure only the real income is appropriated. That is the
income that is earned in addition to inflation. The [next
lines, lines 4-6] set the actual spending limit and the
protection of the permanent fund through the limit to real
income of 5 percent of the 5-year average.
MR. BARTHOLOMEW pointed out that the legislature is now working
on the FY 04 budget with a month to go with the legislative
session, and there is no idea what will be available from the
permanent fund. This language, says the permanent fund will go
back one extra year, so in essence the five-year average is
going to be for the fiscal year that is already over. So when
the legislature comes to town in January, there will not be any
speculation with regard to what is available. The permanent
fund will have computed all the numbers, done the five-year
average, and will say X number of dollars will be available if
necessary.
Number 0913
MR. BARTHOLOMEW explained that in Section 3 there is some
transitional language. There was some concern when the proposal
was brought forward for a constitutional amendment two years ago
that the current earnings reserve was not part of the permanent
fund and there could be an argument to leave the earnings
reserve in the general fund. The Senate State Affairs and
Senate Judiciary Committees, and the Legislative Legal and
Research Services director felt that by adding this transitional
language it would clarify that the earnings of the permanent
fund that are accumulated at the time the resolution is voted on
by the people would be part of permanent fund. He commented
that the Board of Trustees supports the idea that the earnings
reserve would be a part of the permanent fund. Section 4, talks
about the fact that this would go to a vote of the people in
November 2004, he said.
Number 0805
CO-CHAIR HAWKER asked if the model includes any provision for
new principal investment from on-going oil and gas state
resource revenues or is this a status quo model based on the
existing investment.
MR. STORER replied that the model does anticipates future
contributions for mineral leasing.
MR. BARTHOLOMEW explained that the model is based on the current
Department of Revenue forecast. It is not based on any new
fields that are not in production today. It is based on the
known and expected production from the existing oil fields.
CO-CHAIR HAWKER clarified that it is not based on any new fields
that could be brought on line. Is it also based on the current
statute which has the calendar division between old fields and
new fields for the 25-50 [split, which refers to a change in the
amount of money the State of Alaska receives from new oil
leases].
Number 0704
REPRESENTATIVE WILSON commented that she really appreciates the
provision in Section 2 (b), lines 4-5, which eliminates the
guess work and provides the legislature with solid numbers.
REPRESENTATIVE HEINZE asked what the rate of change means.
Number 0618
MR. STORER responded that when he mentioned the rate of change
he was talking about distribution. It is the percentage change
from one year to another. For example, two years ago the
dividend was $1,963; last year it was $1,541, and that rate of
change is about a 25 percent drop.
CO-CHAIR HAWKER announced that is the end of testimony today and
that there will be more hearings on HJR 26.
[HJR 26 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
8:38 a.m.
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