Legislature(2021 - 2022)DAVIS 106
04/13/2021 11:30 AM House WAYS & MEANS
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| Audio | Topic |
|---|---|
| Start | |
| HB165 | |
| HJR1 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 165 | TELECONFERENCED | |
| *+ | HJR 1 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 13, 2021
11:34 a.m.
MEMBERS PRESENT
Representative Ivy Spohnholz, Chair
Representative Adam Wool
Representative Andy Josephson
Representative Calvin Schrage
Representative Andi Story
Representative Mike Prax
Representative David Eastman
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 165
"An Act making a special appropriation to the Alaska permanent
fund; and providing for an effective date."
- HEARD & HELD
HOUSE JOINT RESOLUTION NO. 1
Proposing amendments to the Constitution of the State of Alaska
relating to the Alaska permanent fund and to appropriations from
the Alaska permanent fund.
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 165
SHORT TITLE: APPROP: EARNINGS RESERVE TO PERM FUND
SPONSOR(s): REPRESENTATIVE(s) KREISS-TOMKINS
04/07/21 (H) READ THE FIRST TIME - REFERRALS
04/07/21 (H) W&M, FIN
04/13/21 (H) W&M AT 11:30 AM DAVIS 106
BILL: HJR 1
SHORT TITLE: CONST AM: PERMANENT FUND; POMV;EARNINGS
SPONSOR(s): REPRESENTATIVE(s) KREISS-TOMKINS
02/18/21 (H) PREFILE RELEASED 1/8/21
02/18/21 (H) READ THE FIRST TIME
02/18/21 (H) SPONSOR SUBSTITUTE INTRODUCED
02/18/21 (H) READ THE FIRST TIME - REFERRALS
02/18/21 (H) STA, JUD, FIN
03/10/21 (H) W&M REPLACES STA REFERRAL
03/10/21 (H) BILL REPRINTED
04/13/21 (H) W&M AT 11:30 AM DAVIS 106
WITNESS REGISTER
REPRESENTATIVE JONATHAN KREISS-TOMKINS
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Introduced HB 165, as the prime sponsor.
ANGELA RODELL, Chief Executive Officer
Alaska Permanent Fund Corporation
Juneau, Alaska
POSITION STATEMENT: Provided invited testimony during the
hearing on HB 165.
REPRESENTATIVE JONATHAN KREISS-TOMKINS
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Introduced SSHJR 1, as the prime sponsor.
IAN LANG, Executive Director
Institute of the North
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation, titled
"HJR 1," dated 4/13/21.
ANGELA RODELL, Chief Executive Officer
Alaska Permanent Fund Division
Juneau, Alaska
POSITION STATEMENT: Provided invited testimony during the
hearing on SSHJR 1.
ALEXEI PAINTER, Director
Legislative Finance Division
Juneau, Alaska
POSITION STATEMENT: Answered questions during the hearing on
SSHJR 1.
ACTION NARRATIVE
11:34:35 AM
CHAIR IVY SPOHNHOLZ called the House Special Committee on Ways
and Means meeting to order at 11:34 a.m. Representatives Wool,
Josephson, Schrage, Story, Prax, and Spohnholz were present at
the call to order. Representative Eastman arrived as the
meeting was in progress.
HB 165-APPROP: EARNINGS RESERVE TO PERM FUND
11:35:40 AM
CHAIR SPOHNHOLZ announced that the first order of business would
be HOUSE BILL NO. 165, "An Act making a special appropriation to
the Alaska permanent fund; and providing for an effective date."
11:35:54 AM
REPRESENTATIVE JONATHAN KREISS-TOMKINS, Alaska State
Legislature, prime sponsor, introduced HB 165. He explained
that the proposed legislation was a vehicle for contemplating
the transfer of money [$4.35 billion] from the earnings reserve
account (ERA) to the principal of the Alaska permanent fund to
be protected in perpetuity for future generations of Alaskans
and from legislative spending. He noted that he had introduced
similar legislation last year; further, that this notion had
been implemented in past budget cycles via amendments to the
operating budget, which were bipartisan, bi-caucus, and
bicameral. He stated that as the bull market continued, he
wanted to propose HB 165 as a vehicle for exploring another
transfer from the ERA to the principal - especially given the
legislature's "pent up budget angst" due to the drainage of the
state's savings accounts. Consequently, he believed that the
ERA was at risk more than ever before of being overspent - much
like the other accounts that the legislature had at its
disposure over the last decade. He concluded that the proposed
legislation would be a mitigative measure against overspending.
11:38:11 AM
CHAIR SPOHNHOLZ pointed out that the bill contained only three
sections.
11:38:21 AM
REPRESENTATIVE KREISS-TOMKINS confirmed. He noted that the bill
proposed a transfer of $4.35 billion, which he characterized as
a "Lorem Ipsum," or placeholder, value. He said that either
Legislative Finance Division (LFD) would put forward a number or
he would defer to the will of the committee. He believed that
an appropriate amount was a figure that would leave three times
the 5 percent POMV [percent of market value] draw in the ERA.
11:40:00 AM
REPRESENTATIVE KREISS-TOMKINS provided a sectional analysis of
the bill [included in the committee packet], which read as
follows [original punctuation provided]:
Sec. 1 $4,350,000,000 is appropriated from the
Earnings Reserve Account to the
Sec. 2 The appropriations made in Section 1 do not
lapse.
Sec. 3 There is an immediate effective date.
REPRESENTATIVE KREISS-TOMKINS surmised that almost all
[legislators] shared the goal of protecting and growing the
permanent fund. He believed that the countervailing
consideration was that if there were a market downturn, the
balance in the ERA could diminish quickly leaving the
legislature in a tough situation. However, he pointed out that
even without a transfer of funds, that risk was always present
under the current structure of the fund. He concluded that it
would be a calculation of risk versus benefit for the
legislature to keep in mind.
11:42:40 AM
CHAIR SPOHNHOLZ opened invited testimony.
11:43:02 AM
ANGELA RODELL, Chief Executive Officer, Alaska Permanent Fund
Corporation (APFC), stated that this idea was one that
legislators had done throughout the history of the permanent
fund. She reported that more than one-third of the current
principal was derived from special appropriations, which
indicated their value to the fund. She emphasized that APFC's
Board of Trustees recommended leaving a portion in the ERA to
serve as a buffer in the event of market fluctuations. The
buffer, she said, was ideally three to four times any draw
amount, which the proposed legislation would conform to.
11:44:29 AM
REPRESENTATIVE JOSEPHSON expressed concern about the statement
of "three to four times" [the annual draw], as those were two
"very different" amounts. He believed that APFC had voiced a
preference of four times in previous testimony.
11:44:47 AM
MS. RODELL referenced Trustee Resolution 1804, which recommended
four times - an amount that was reduced to three times in
Trustee Paper 9. She acknowledged that there were differenced
within the trustee's own recommendations; however, she indicated
that she valued a resolution over a paper.
CHAIR SPOHNHOLZ inquired about the date of Trustee Paper 9.
MS. RODELL stated that the paper was issued in December 2019,
whereas the resolution was from 2018.
11:45:43 AM
CHAIR SPOHNHOLZ sought to confirm that the paper reduced the
recommended amount from four times to three.
MS. RODELL confirmed that the resolution was adopted in 2018;
subsequently, the trustees embarked on a paper, which studied
these issues. She reported that in lesson no. 5, "Reforming the
Earnings Reserve Account," the trustees reduced it to three
times.
11:46:19 AM
REPRESENTATIVE PRAX asked whether it made sense to reduce
liquidity given the future outlook of the state.
11:47:04 AM
MS. RODELL said the bill would not reduce liquidity in the fund.
She clarified that the bill would reduce the amount available
for future appropriations.
11:47:20 AM
REPRESENTATIVE PRAX believed that because it would reduce the
amount of cash available to spend, it would reduce liquidity.
He opined that if an individual had lost his/her job, it would
not make sense to move money from a savings account to a CD, as
that person's future income was uncertain. Further, he shared
his belief that the idea of preserving the permanent fund "as an
end in itself" did not make sense. He pointed out that if
Alaska had not received pandemic relief funding from the federal
government, the legislature may have wanted to draw a
considerable amount from the ERA. He added that the same
situation could occur again, in which case, should the proposed
legislation pass, "we would be sitting on $60 or $70 billion
dollars and no ability to spend it." He questioned whether
anyone had considered that.
11:49:14 AM
MS. RODELL noted that firstly, this movement of money would
allow it to continue to be invested similar to the current
principal; therefore, it would be generating future revenues for
the state. She clarified that the transfer would not preclude
some spending in the future. Secondly, she conveyed that this
concept was more akin to a retirement account and the
restrictions placed on spending from that account when the
account holder knows they need to rely on that retirement
account to deliver income for 20-plus years in the future.
Thus, she likened the proposed transfer to putting additional
money into a retirement account.
11:50:41 AM
REPRESENTATIVE STORY asked for the rationale behind changing the
recommended amount.
11:51:12 AM
MS. RODELL explained that the ERA collected all the statutory
income of the fund, therefore, realized gains or losses flow
into that account. She reminded the committee that the
principal did not grow because it didn't keep any of its gains,
so inflation proofing ensured that the principal held onto its
purchasing power. She added that inflation proofing and the
POMV [draw] came out of the ERA, as well as the POMV [draw].
Further, investment, growth, assets, and risk all impacted the
ERA. Thus, the recommended figure was associated with creating
a buffer to allow for obligations to be met under the current
construct.
11:52:48 AM
REPRESENTATIVE JOSEPHSON asked whether he should be concerned
about unrealized earnings. He suggested that if the ERA was
reduced in this fashion, it could change investment decisions or
require liquidation that would not otherwise be necessary.
MS. RODELL stated that there would be a real concern if this
bill had proposed draining the ERA to zero because the buffer
would be gone. She said that's when realized gains become
important because if they turned to unrealized losses it could
result in a negative balance in the ERA.
11:53:58 AM
REPRESENTATIVE JOSEPHSON questioned whether a negative balance
in the ERA was allowable.
MS. RODEELL said that had never occurred. She explained that
accounting and statutes were not aligned on this issue, as a
negative balance was allowed under Governmental Accounting
Standards Board (GASB) Rules, but not under a traditional budget
reserve construct. She added that if that scenario were to
occur, APFC would seek guidance from the Department of Law as to
how to proceed. She expounded that from an investment
perspective, an unrealized net loss could turn positive if the
markets took a favorable turn, which was why a negative balance
was allowed under an accounting construct.
11:55:14 AM
REPRESENTATIVE JOSEPHSON remarked:
When we're looking at this "three or four times" the
draw test, is July 1 the wrong date to look at?
Because I looked at July 1 last year, and it was
either $5.3 or $5.5 billion, and that had been
reduced, in my mind, by that part that was unrealized
and that part that was anticipated for transfer.
REPRESENTATIVE JOSEPHSON asked whether he was thinking about it
incorrectly.
MS. RODELL confirmed that Representative Josephson was thinking
about it correctly. She stated that when the $4 billion
transfer for fiscal year 2020 (FY 20) was put into the budget
bill and adopted, it was "in the waterfall after all other
things had been done." She said it was set at "up to" $4
billion, which had been reduced by the governor's line-item veto
power. Consequently, there was a recognition that the balance
on the start of July 1 might be different from what it was when
the appropriation language was adopted by the legislature.
11:56:39 AM
REPRESENTATIVE EASTMAN asked how the state's credit rating would
be impacted by the proposed legislation should it pass.
11:57:22 AM
MS. RODELL noted that interactions with the credit rating
agencies fell on the Department of Revenue (DOR). Nonetheless,
she indicated that their reaction could be mixed. She
speculated that the agencies would value the fact that money
would be generating revenue for a longer timeframe.
Alternatively, the ability to meet short-term obligations could
be in question. She deferred the question to DOR.
11:58:19 AM
REPRESENTATIVE EASTMAN acknowledged that the bill would comply
with the recommendation of leaving three times the draw amount
in the ERA; however, he asked whether there was "something
special" about this year and whether that recommendation would
be ongoing.
11:59:04 AM
MS. RODELL confirmed that the recommendation was ongoing. She
noted that APFC had not requested this appropriation; therefore,
it was a policy decision to be made by the legislature.
11:59:29 AM
REPRESENTATIVE WOOL inquired about the flow of money to and from
the ERA, as well as from the ERA to the corpus of the permanent
fund. He considered a scenario in which there were several down
years, surmising that ideally, there would be enough money in
the ERA to "survive" the 5 percent POMV draw, which was
approximately $3 billion at present. He noted that three times
that amount would be $9 billion. Thus, if the ERA had a balance
of $9 billion or $12 billion, he questioned whether a stock
market downturn could reduce the balance regardless of POMV
draws.
MS. RODELL stated that a reduction in total size would be seen
in the unrealized gain portion of the ERA. She recalled that on
February 28, [2020], which corresponded to the most recent
financial statement available, there was $9.9 billion in
realized earnings and $3.1 in unrealized gain associated with
ERA investments. She explained that any reduction would have
impacted that $3.1 billion.
REPRESENTATIVE WOOL considered a scenario in which the ERA
balance was significantly exhausted due to down years. At that
point, he asked whether APFC could decide to sell assets to
realize a gain. Additionally, he sought to confirm that the
earnings from that sale would be placed into the ERA.
12:02:34 PM
MS. RODELL confirmed that if an investment action was taken to
realize any unrealized gains, they would move into the ERA.
12:02:48 PM
REPRESENTATIVE WOOL concluded that a sale [of assets] could
"beef up" the ERA if the balance became extremely low.
12:03:04 PM
MS. RODELL answered that the ERA received regular cash income
throughout the year. She reported that roughly $1.2 billion to
$1.5 billion came from stock dividend payments, rentals,
etcetera. The rest of the cash that flowed into the ERA, she
said, was generated off commercial financial investment
decisions, which were not made for any other reason. She shared
her belief that APFC would not want to be put in a position
where they had to make investment decisions for non-commercial
financial reasons.
REPRESENTATIVE WOOL surmised that the recommended balance in the
ERA was either $9 billion or $12 billion, as that would be three
or four times the amount of the 5 percent POMV draw. However,
as money trickled in, that figure could increase. He asked
whether instead of providing for a draw amount, the solution
would be to specify via statute that the ERA shall contain three
times five percent of the value of the permanent fund. He
questioned whether that statutory language would serve the same
purpose without the legislature having to transfer several
billion over subsequent years.
12:05:01 PM
MS. RODELL stated that due to a Supreme Court ruling, any ERA
movement required an active appropriation by the legislature.
12:05:21 PM
CHAIR SPOHNHOLZ recalled that Ms. Rodell had stated that in
Paper 9, [APFC] reduced the proposed buffer from four times the
annual draw to three times the annual draw. Further, as of the
most recent reporting period, she reported that there was
approximately $16 billion in the ERA including unrealized gains
of $3.1 billion. She asked whether the paper specified that the
recommended amount must be amongst realized gains.
12:06:17 PM
MS. RODELL shared her belief that the paper did not specify what
the measurement was against. She understood that it was a
recognition of the entire ERA - not just the realized portion.
CHAIR SPOHNHOLZ sought to confirm that theoretically, if the
legislature were to transfer enough money into the corpus to
allow for three times the annual draw in the ERA including
unrealized gains, that would be consistent with paper 9 and
prudent policy.
12:07:13 PM
MS. RODELL confirmed. She reminded the committee that the ERA
did not have its own a standalone portfolio. Instead, it owned
a proportionate share of every single asset, and the principal
owned a majority of that asset. She explained that when the ERA
was smaller in comparison to the principal, a proportionate
amount of the unrealized gain also moved back over to the
principal. Consequently, fluctuations were visible in the
unrealized gains portion of the ERA due to the phenomenon of
monthly reallocation based on the proportion of the ERA to the
principal. She said when discussing a draw, it was not
unreasonable to consider the balance referred to as "uncommitted
realized" rather than the unrealized gain portion.
12:08:59 PM
CHAIR SPOHNHOLZ sought to clarify whether Ms. Rodell was
suggesting that the unrealized gains should be excluded from the
calculation or included in the calculation.
12:10:55 PM
MS. RODELL clarified that if $4.3 billion was transferred from
the ERA to the principal under the proposed legislation, half of
the $3 billion in unrealized gain would be transferred along
with it. Therefore, after the transfer, the ERA would be
reduced by more than $4.3 billion. She reminded the committee
that of the $16.1 billion in the ERA, $9.9 billion was
uncommitted, $3.1 billion was committed, and $3.1 was unrealized
gain. Thus, if $4.3 billion was transferred from the
uncommitted, a proportion of the unrealized gain would be moved
as well.
CHAIR SPOHNHOLZ sought to verify that the unrealized gain was
associated with the realized gain assets.
MS. RODELL answered yes. Further, she pointed out that
unrealized gain was not cash - it was a figure that had to be
shown on paper due to the financial accounting requirements.
12:12:26 PM
REPRESENTATIVE EASTMAN asked whether passage of the bill would
impact APFC's ability to respond to higher inflation.
12:12:54 PM
MS. RODELL answered no.
12:13:00 PM
REPRESENTATIVE SCHRAGE questioned whether APFC ever changed its
investment strategy in response to a need for liquidity given
that the ERA was subject to any appropriation by the
legislature.
12:13:31 PM
MS. RODELL stated that when the ERA was created, the statutes
specified that it shall be invested like the permanent fund,
which the trustees interpreted as the asset allocation of the
principal. She added that nothing pertaining to APFC's mandate
had changed, nor had they been directed to make a change. She
shared her belief that APFC could manage under the current
statutes.
12:14:19 PM
CHAIR SPOHNHOLZ announced that HB 165 was held over.
HJR 1-CONST AM: PERMANENT FUND; POMV;EARNINGS
12:14:32 PM
CHAIR SPOHNHOLZ announced that the final order of business would
be SPONSOR SUBSTITUTE FOR HOUSE JOINT RESOLUTION NO. 1,
Proposing amendments to the Constitution of the State of Alaska
relating to the Alaska permanent fund and to appropriations from
the Alaska permanent fund.
12:15:09 PM
The committee took a brief at-ease.
12:15:30 PM
REPRESENTATIVE JONATHAN KREISS-TOMKINS, Alaska State
Legislature, prime sponsor, introduced SSHJR 1. He explained
that the joint resolution would constitutionally protect the
real value of the Alaska Permanent Fund by "hardening" the
percent of market value (POMV) structure. Essentially, it would
convert the permanent fund into a traditional endowment, which
most sovereign wealth funds abide by. Under a traditional
endowment, a set amount of the market value would be taken out
each year making it impossible to "dip in and take extra." He
stated that another policy benefit of this approach would be the
elimination of the division between ERA and principal, which
would remove the risk of the ERA "bottoming out" in the event of
a market correction. He continued to explain that there would
be a steady and certain availability of cash for appropriation
by the legislature each year. The structure, he said, was
informed by trustee resolutions that had been passed through the
years. He believed that adopting this structure would remove
the permanent fund from the fracas of budget debates in the
legislature. Additionally, it would force the legislature to
balance the budget and make the hard decisions between more cuts
and more taxes, he said.
12:18:59 PM
REPRESENTATIVE JOSEPHSON pointed out that typically, there was
no discussion in committee of the strategy associated with the
legislation. Nonetheless, he sought to confirm that the
proposed join resolution would not dissolve the PFD formula.
REPRESENTATIVE KREISS-TOMKINS confirmed [that the PFD formula
would remain in statute.]
12:19:38 PM
REPRESENTATIVE JOSEPHSON asked for verification that under SSHJR
1, the ERA would no longer exist.
REPRESENTATIVE KREISS-TOMKINS confirmed. However, he emphasized
that each year, money from the permanent fund would still be
available for appropriation, which could then be used for
dividends.
12:20:33 PM
REPRESENTATIVE JOSEPHSON surmised that supporters of the PFD
formula would want to ride this resolution to its culmination.
He asked whether the bill sponsor had considered that.
REPRESENTATIVE KREISS-TOMKINS sought to clarify the meaning of
Representative Josephson's question.
12:21:25 PM
REPRESENTATIVE JOSEPHSON speculated that supporters of the
dividend formula would feel some insecurities about the
proposal. He asked how the bill sponsor would assuage those
concerns.
CHAIR SPOHNHOLZ interjected to ensure that the invited
testifiers had time to present. She noted that she had a
particular interest in this topic of discussion, which would be
addressed in further detail after the invited testimony.
12:22:52 PM
IAN LANG, Executive Director, Institute of the North, informed
the committee that the Institute of the North was a nonpartisan
thinktank founded by Governor Walter J. Hickel. Its mission, he
said, was to ensure maximum public benefit from Alaska's shared
resources. He stated that he was testifying today because the
Alaska permanent fund, one of the state's common resources, was
at risk. Further, he shared his belief that the approach
proposed in SSHJR 1 was the most important step towards ensuring
a prosperous future for Alaska. He pointed out that no other
state in the history of the United States has ever had what
Alaska has, adding that the state's public sector could be
endowed forever if legislature so chooses.
12:25:11 PM
MR. LANG directed attention to a PowerPoint presentation, titled
"HJR 1" [hard copy included in the committee packet]. He began
on slide 2, noting that the concept of a constitutional POMV was
an old concept and one that, although unimplemented, was the
most well studied, fully vetted, and widely supported idea in
Alaska public policy. He added that it had always been the
cornerstone of the state's future. In addition to good policy,
he argued that SSHJR 1 was the single best strategy for
resolving the larger fiscal challenge. He stressed that today's
choices would have incalculable impacts on the state's future.
He reported that [state] spending had been cut by 40 percent and
$17 billion had been spent in non-permanent fund savings to
backfill the budget.
12:26:41 PM
MR. LANG continued to slide 3, emphasizing that continued
failure to resolve Alaska's budget imbalance remained the single
greatest threat to Alaska's future. He believed that [the
legislature] needed to ask itself, "How does this end?" He
urged committee members to reflected on lessons from the last
seven years to help anticipate the most likely outcome. Slide 4
reiterated that so far, it had proved difficult for the
legislature to broker a grand bargain to close the gap;
consequently, year after year, they defaulted to the path of
least resistance: use savings. He argued that as long as
savings were accessible, savings would be used.
12:28:04 PM
MR. LANG advanced to slide 5, which highlighted that spending
down the permanent fund was Alaska's default fiscal plan. He
believed that the state was hurdling towards an unwanted outcome
that people felt powerless to prevent because there had not been
an effective vehicle for driving compromise. He continued to
slide 6 and recalled the adoption of the statutory POMV formula
several years ago, which marked a significant shift from a heavy
reliance on oil revenue to effectively becoming an endowment
state, as 70 percent of the general fund revenue was coming from
the permanent fund. Nonetheless, protections were not in place
to ensure that the endowment functioned properly.
12:29:32 PM
MR. LANG turned to slide 7 and highlighted three problems with
the status quo: technical, financial, and philosophical.
Firstly, in regard to the technical challenges, he explained
that the risk of being unable to make the POMV draw in one or
more of the next 20 years was 50 percent under the current
structure (slide 8). Secondly, he discussed the imprudence of
unsustainable spending from the permanent fund. He reported
that $50 million in annual earnings was lost for every $1
billion spent today. Accordingly, if the $16 billion in the ERA
were to be spent today, it would cost the fund $800 million in
earnings making the deficit that much greater. The third issue,
he said, was what inspired the Institute of the North to get
involved in this discussion. He opined that the permanent fund
was an asset for all generations of Alaskans. It was conceived
to be a vehicle for converting nonrenewable resources into
renewable wealth for the state's residents, he said. Since the
fund's creation, he reported that $149 billion in oil revenue
had been accrued, of which 87 percent was spent on
infrastructure and other needs. He believed that spending down
the permanent fund would be fundamentally unfair to Alaskans and
a "tragic legacy."
12:33:29 PM
MR. LANG moved to slide 11 and conveyed that regardless of one's
values or beliefs - be it maintaining public services, lower
taxes, or protecting the dividend - everyone would benefit in
the long-term from protecting the real value of the fund. Slide
12, which reiterated that the concept behind SSHJR 1 was an old
idea, read as follows [original punctuation provided]:
• '80 - Recommended by Trustee Malone 9co-sponsor
of PF legislation)
• '95 - Recommended by Long-Range Financial
Planning Commission
• '96 - Recommended by PF Board of Trustees
• '99 - Approved by House of Representatives
• '00 - Trustees Resolution
• '03 - Trustees Resolution
• '04 - Trustees Resolution
• Resolutions of support from countless
organizations
MR. LANG noted that the window for implementing this change was
narrowing considerably.
12:34:39 PM
MR. LANG advanced to slide 13, reiterating the SSHJR 1 was good
strategy in addition to good policy. He reminded committee
members that the gap would close one way or another; further, he
stressed that any deal made now would be better than a deal made
in five or six years. He explained that this constitutional
amendment would act as a deadline, after which overdraws from
the ERA would no longer be allowed. Furthermore, the deadline
would drive negotiations, he said. Slide 14 addressed timing,
emphasizing that the future would become less bright every time
this plan was delayed. He noted that the legislature could
continue to work on a comprehensive fix; however, regardless of
what else were to happen, he argued that the fund needed to be
treated sustainably. Accordingly, he urged the passage of SSHJR
1.
12:37:17 PM
MR. LANG concluded by addressing constitutional changes on slide
15. He opined that some make the mistake of treating
constitutional amendments similar to the conventional law-making
process; however, he argued that it was different because a
higher bar of consensus must be sought. He stated that the
constitution was a sacred document that spoke to the values that
constitute all Alaskans. In the context of the permanent fund,
he challenged legislators to ask themselves whether they
believed in sustaining the future of this state and whether they
would deal with their own problems or pass them along to future
generations. He believed that everyone would like to answer
those questions the same way; nonetheless, they would be
answered one way or another, either through action or inaction.
12:38:57 PM
ANGELA RODELL, Chief Executive Officer, Alaska Permanent Fund
Corporation (APFC), stated that SSHJR 1 was incredibly important
to the Board of Trustees. She reiterated that the idea was not
a new one, as highlighted by Mr. Lang. She explained that a
constitutional POMV would allow the fund to benefit all
generations of Alaskans; provide a predictable payout; and
protect the fund's opportunity for real growth. Additionally,
the payout would be compatible with the investment strategy and
policies adopted by the Board of Trustees. She recalled that
significant changes were made to accounting rules in 1997, which
spurred the efforts by the trustees in the early 2000s. She
said implementing a constitutional POMV, as contemplated in
SSHJR 1, was something that the trustees supported and had
supported for many years.
12:41:33 PM
REPRESENTATIVE WOOL inquired about the form of the prior
resolutions that pertained to constitutionalizing the POMV.
12:42:36 PM
MS. RODELL said all the resolutions recommended a 5-year
"smoothing," or average, of the market value and a 5 percent
draw on the average market value. Therefore, SB 26 was
consistent with the trustee's constitutional recommendation.
12:43:03 PM
REPRESENTATIVE WOOL believed that many legislators supported the
statutory POMV in SB 26. He pointed out that presently, the
state was in a unique position wherein the incoming revenue was
paying for the budget; therefore, absent a PFD, budget and
revenues were aligned. He said the issue was that the amount of
the dividend had been determined by the legislature, as opposed
to formula. He surmised that if a resolution were to
constitutionalize a 5 percent draw, some people would also want
to constitutionalize a dividend amount. He referenced one of
the governor's proposed constitutional amendments, which would
constitutionalize the 5 percent POMV draw, as well as a 50/50
split. He argued that such a distribution would leave the
budget "short." He questioned how the dividend would fit in to
this resolution and what the proposed solution might be.
12:45:45 PM
MR. LANG agreed that the dividend was at the heart of the
politics surrounding this issue. He stated that the Institute
of the North's coalition, which was composed of many significant
organizations, had taken an agnostic stance on the dividend. He
said he would support anything that two-thirds of the House
would support. He reasoned that the agnostic stance was to
avoid alienating people with different philosophies on the
dividend. He believed that no matter the outcome, some version
of this proposal needed to move forward, as any version would be
better than the alternative.
12:47:16 PM
REPRESENTATIVE EASTMAN referred to the language "designated by
law" on page 1, line 9, of SSHJR 1. He remarked:
I'm seeing that under the current language, that that
would apply to the principal. Now under this
amendment, it seems like it would apply to the entire
fund, which, if I'm looking at the verbiage, seems to
be limiting decisions that the corporation might make
that don't involve the principal.
REPRESENTATIVE EASTMAN asked Ms. Rodell to speak to that.
12:47:52 PM
MS. RODELL explained that under this construct, there would be
no need to identify the principal, as everything would stay in a
common fund. She stated that should SSHJR 1 pass, the permanent
fund would become one fund without a principal or ERA.
12:48:59 PM
REPRESENTATIVE EASTMAN asked whether APFC would benefit from the
language "designated by law" applying only to the principal.
12:49:12 PM
MS. RODELL said she did not understand the question. She
explained that the existing constitutional amendment made the
income available for spending. Initially, she said, the income
flowed straight to the general fund unless otherwise provided by
law. Later, legislation was implemented that created the ERA,
which became the new receptacle. She added that if the ERA
statutes were repealed, the income would be transferred in its
entirety to the general fund, per the constitutional provisions.
MS. RODELL, in response to the same question from Representative
Eastman, stated that the language continued to benefit APFC
because current law allowed for investment under the prudent
investor rule. She believed that there was value to retaining
[the legislature's] capacity to direct the investment of the
fund should it ever be necessary.
12:52:15 PM
CHAIR SPOHNHOLZ addressed the issue of the dividend and whether
it needed to be referenced in the constitutional amendment. She
asked whether the Institute of the North had conducted any
polling to consider different strategies for passing a
constitutional amendment. She emphasized the importance of
viability in passing a constitutional amendment.
12:54:25 PM
MR. LANG answered no. He noted that the last polling conducted
[by the Institute of the North] was in 2018. He stressed that
regardless of someone's thoughts on the dividend or the
structure of the constitutional amendment, preserving the
dividend meant protecting the fund's real value. He reiterated
that even if the dividend was not constitutionalized, the asset
value that created the dividend would be protected.
12:55:42 PM
CHAIR SPOHNHOLZ asked whether the 2018 polling included testing
with regard to constitutionalizing the dividend.
12:55:54 PM
MR. LANG stated that the 2018 polling was not specific to a
constitutional amendment.
CHAIR SPOHNHOLZ asked whether the polling included any reference
to the dividend.
MR. LANG answered yes; however, he pointed out that the
conversation had shifted since then.
12:56:21 PM
REPRESENTATIVE EASTMAN directed attention to page 2, line 8,
which specified that the unencumbered balance of the ERA would
be deposited in the permanent fund and become part of the
principal. He asked what would happen to the encumbered
balance.
12:56:56 PM
REPRESENTATIVE KREISS-TOMKINS deferred to Mr. Painter.
12:57:29 PM
ALEXEI PAINTER, Director, Legislative Finance Division, said the
encumbered balance would be the POMV draw and the amount for the
Alaska Capital Income Fund from the Amerada Hess settlement
[Alaska v. Amerada Hess]. He explained that those amounts would
be transferred according to the existing schedule. He said that
on June 30, there should be no encumbered funds left; however,
if something failed to be transferred on its effective date,
this language would ensure that the appropriation could still
take place.
12:58:16 PM
REPRESENTATIVE EASTMAN referred to page 2, line 12, and asked
when, historically, the legislature made decisions on
appropriations for the fiscal year ending June 30, 2023.
12:58:40 PM
MR. PAINTER said it would typically be part of the budgeting
process in calendar year 2022. He noted that supplemental
budgets could be made through the end of the fiscal year in
calendar 2023.
12:59:05 PM
REPRESENTATIVE EASTMAN pointed out that the constitutional
amendment proposed by SSHJR 1 would not be placed before the
voters until the November election in 2022, per Section 4 of the
resolution; consequently, he asked how the outcome of that vote
could be applied to the appropriation process in 2022.
12:59:39 PM
REPRESENTATIVE KREISS-TOMKINS acknowledged that he had
contemplated that question personally. He believed it was a
fundamentally solvable problem; however, it would be an exercise
in conditional planning. He expressed his hope that
organizations, such as the Institute of the North, would conduct
polling to indicate the likelihood of ratification. He noted
that if the legislature committed itself to a constitutional
POMV, there could be a compromise made in which a certain amount
of money in excess of the draw was taken out and set aside to
provide a fiscal buffer for the legislature. Essentially, the
buffer would act as "transition money" to help the legislature
ease into the new budgeting reality, he suggested.
1:01:38 PM
REPRESENTATIVE EASTMAN observed that the first five of the
preceding six fiscal years were being considered in the
calculation. He sought to clarify whether the present fiscal,
which had not yet ended, should be included in that calculation.
Additionally, he remarked:
Obviously, the first five of the six means you're not
including the sixth, so if you have a down year, we
don't include that until next year, but then if we
have an up year following the down year, we include
the down year, but we don't include the most recent up
year, which is going to limit our ability to draw.
1:02:29 PM
REPRESENTATIVE KREISS-TOMKINS offered his understanding that the
smoothing mechanism was relatively standard. Further, he
believed that a five-year window was broad enough to
sufficiently smooth any year-to-year budgeting volatility.
Regarding the exclusion of the current fiscal year, he deferred
to Ms. Rodell or Mr. Painter.
1:03:46 PM
MS. RODELL explained that the language in question was currently
used in the POMV calculation under SB 26. She explained that it
generated a smoothing effect in addition to removing uncertainty
from the appropriation process with the use of the POMV. She
indicated that it allowed the legislature to enter budget
debates knowing exactly how much revenue was available to spend
with regard to the POMV.
1:05:38 PM
REPRESENTATIVE WOOL referring to slide 11, recalled that Mr.
Lang had stated that he was "agnostic" when it came to the
dividend, as long as the POMV was constitutionalized. However,
he expressed concern that the governor's proposed 50/50 split
could not feasibly protect against higher taxes, protect the
dividend, and protect services, as indicated on slide 11, while
protecting the permanent fund. He worried that if 50 percent of
the POMV were to go to dividends, it would create a larger
"hole" in state services, which would require a high tax
compensate. He believed that at some point, the Institute of
the North may have to take a stance on the dividend.
1:08:01 PM
MR. LANG acknowledged that the institute may need to take a
position on the dividend eventually. In the meantime, he said,
the goal was to make this a higher priority for the legislature
and the public.
1:08:21 PM
REPRESENTATIVE PRAX opined that presently, there was less
optimism about economic growth in Alaska and more concern about
federal default. He questioned whether the Institute of the
North had considered that.
1:09:49 PM
MR. LANG asked Representative Prax to clarify the meaning of
"federal default."
REPRESENTATIVE PRAX suggested that there was increased concern
about the federal government defaulting on its debt or
hyperinflation, which had not been as concerning in 1976.
MR LANG answered no, the Institute of the North did not consider
that in its analysis.
1:10:27 PM
REPRESENTATIVE PRAX shared his belief that if the fund was
looked at as an endowment for government services, it would
result in a substantial wealth transfer to the beneficiaries of
those services at the expense of the people who were not
availing themselves of those services.
CHAIR SPOHNHOLZ clarified that the proposed resolution was
"silent" on the issue of the dividend.
REPRESENTATIVE PRAX agreed; however, he opined that [the issue
of the dividend] would have to be resolved as part of this
decision. He recalled that the dividend was not an "outright"
part of the law that created it. Nonetheless, he believed that
the dividend was the primary reason that the permanent fund was
established.
CHAIR SPOHNHOLZ contended that the permanent fund was created in
1976 for the purpose of making a finite resource renewable. The
dividend, she recalled, was added to statute in 1980. She
emphasized that the dividend had not been part of the original
constitutional amendment.
1:13:20 PM
REPRESENTATIVE KREISS, in response to Representative Prax,
reiterated that the language in SSHJR 1 was agnostic on the
dividend. He stated that if it were the wisdom of future
legislators to spend 100 percent of the POMV draw on dividends,
so be it, adding that in no way was the resolution meant to
preclude the dynamic balance between legislative appropriation
decisions and the voters who hold the legislators accountable.
He expressed his concern that the legislature's default plan was
to spend down state savings, which would result in a losing
situation for everyone regardless of their different priorities.
1:15:29 PM
REPRESENTATIVE EASTMAN referred to page 1, line 6, and inquired
about the sponsor's thoughts on expanding the annual resource
revenues.
1:16:18 PM
REPRESENTATIVE KREISS-TOMKINS said he had never considered
annexing a royalty expansion into the resolution.
Philosophically, he said he was supportive of setting more
short-term revenue aside for the long-term benefit. However,
was unaware of any additional revenue streams of significance
that could be annexed into the language on page 1, line 6. He
further noted that the biggest lever for "short-term pain/long-
term gain" was the annual draw. He said he would not be opposed
to a more conservative annual draw, which according to
literature on the subject, would be more responsible and make
the long-term future of the state objectively brighter.
1:18:02 PM
REPRESENTATIVE SCHRAGE asked whether anything would preclude
future legislators from making an additional contribution to the
fund.
1:18:11 PM
REPRESENTATIVE KREISS-TOMKINS answered no. Additionally, there
was nothing to preclude future legislators from spending a value
less than 5 percent of the market value.
1:18:27 PM
CHAIR SPOHNHOLZ announced that SSHJR 1 was held over.
1:20:09 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
1:20 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 165 Sectional Analysis 4.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HB 165 |
| HB 165 Sponsor Statement 4.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HB 165 |
| HJR 1 Background - APFC Resolution POMV 2003-05.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - APFC Resolution POMV 2004-09.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - APFC Resolution POMV 2020-01.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - APFC Trustees’ Paper Volume 9 1.15.2020.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - Institute of the North Position Paper.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Presentation by Institute of North 4.13.2021.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| SSHJR 1 Sponsor Statement 3.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| SSHJR 1 Sectional Analysis 3.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Additional Document - APFC POMV Statement.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |