Legislature(2021 - 2022)SENATE FINANCE 532
02/04/2021 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing - Commissioner of Revenue | |
| Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 4, 2021
9:01 a.m.
9:01:19 AM
CALL TO ORDER
Co-Chair Bishop called the Senate Finance Committee meeting
to order at 9:01 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman
Senator Donny Olson (via teleconference)
Senator Natasha von Imhof
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Lucinda Mahoney, Commissioner of Revenue, Juneau; Angela
Rodell, Executive Director, Alaska Permanent Fund
Corporation.
SUMMARY
CONFIRMATION HEARING - COMMISSIONER OF REVENUE
ALASKA PERMANENT FUND CORPORATION
^CONFIRMATION HEARING - COMMISSIONER OF REVENUE
9:02:46 AM
LUCINDA MAHONEY, COMMISSIONER OF REVENUE, JUNEAU, provided
the committee with her background and education.
9:11:44 AM
Co-Chair Stedman asked for information about the
testifier's spouse, and his cooperation in the "Chinese
wall" that was created to make it clear that there was a
separation.
Acting Commissioner Mahoney replied that she was originally
hesitant to accept the role of commissioner due to her
husband's role as an oil and gas attorney. She stated that
it was determined that an ethics screen would be
established to screen her from any decisions made by the
Department of Revenue (DOR) related to any case where her
husband was the attorney.
Senator Wielechowski remarked on the issue regarding the
Coronavirus Aid, Relief, and Economic Security (CARES) Act
provision, which allowed corporations to apply for refunds
on the net operating losses. He wondered when the
department became aware of that issue, and asked about the
expected costs to the state.
Acting Commissioner Mahoney responded that as soon as the
provision was announced by the federal government, the
department began analytics to estimate the impact. She
recalled a presentation to the committee in 2019 where Dan
Stickel [Chief Economist, Economic Research Group, Tax
Division, Department of Revenue].
9:14:54 AM
Senator Wielechowski wondered whether any action should be
taken to for a correction.
Acting Commissioner Mahoney replied that it was currently
under evaluation. She shared that there were different
options available for assistance, and stressed that it was
more related to timing. She stated that there would be a
potential positive revenue impact in 2022, but it would
then be reduced in future years.
Senator Wielechowski remarked that it had been almost a
year since the initial presentation, and wondered how much
more time was needed for evaluation.
Acting Commissioner Mahoney replied that there may see a
result from the evaluation offered in the coming weeks.
Co-Chair Stedman shared that his staff was currently
engaging with DOR to bring forward a presentation on the
issue.
Senator Wielechowski remarked that there was a new
producer, HilCorp, which paid no corporate income tax. He
queried an estimate of the cost to the state, as opposed to
BP.
Acting Commissioner Mahoney responded that the current
corporate tax estimate was $23 million that the state would
not receive.
Senator Wielechowski wondered whether HilCorp should pay
the $23 million.
Acting Commissioner Mahoney replied that there may be a
future addressing of that issue.
Senator Wielechowski queried an estimate of the cost to the
state when oil producers write off their development costs
on state land on their taxes.
Acting Commissioner Mahoney agreed to provide that
information. She furthered that there was a plan to do an
order of operations presentation on the production tax.
9:20:00 AM
Senator Wielechowski wondered whether the issue should be
corrected. He asserted that the development of Alaska
National Wildlife Refuge (ANWR) would cost the state
billions of dollars in revenue.
Acting Commissioner Mahoney replied that DOR would provide
assistance, but would not come forward with that type of
change.
Senator von Imhof remarked that there was an order of
operations.
Senator Wielechowski wanted to know the position on raising
revenue, and queried a plan on additional revenue measures.
Acting Commissioner Mahoney replied that the revenues
needed to be addressed using a phased approach. She felt
that taxes should be supported by a vote of the people.
Senator Wielechowski remarked that there was a recession, a
deficit, and a forecast of a deficit and recession. He
assumed that the plan was to use the Permanent Fund for the
state costs, which meant lower Permanent Fund Dividends.
(PFD).
Acting Commissioner Mahoney replied that the governor's
position was that it was an anomaly year due to the
pandemic. Therefore, it was not the time to raise new tax
revenues.
Senator Wielechowski wondered whether the governor believed
that taking part of the PFD was considered a "tax."
Acting Commissioner Mahoney felt that the question should
be directed toward the governor.
Co-Chair Stedman FORWARDED the appointment of Lucinda
Mahoney for consideration in accordance with Alaska
Statute. He relayed that this did not reflect an intent by
any member of the Senate Finance Committee to vote for or
against the confirmation of the individuals during any
further sessions. There being NO OBJECTION, it was so
ordered.
9:26:14 AM
AT EASE
9:28:27 AM
RECONVENED
^ALASKA PERMANENT FUND CORPORATION
9:29:16 AM
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, (APFC) discussed "Senate Finance Committee,
The Alaska Permanent Fund, February 4, 2021" (copy on
file). She looked at slide 2, "1969 The Debate Begins":
Alaska receives $900 million in Prudhoe lease sale.
FY 1970 state budget: $173 million.
Ms. Rodell highlighted slide 3, "The Alaska Constitution":
In 1976, Alaskans voted, 75,588 to 38,518, in favor to
amend the Constitution of the State of Alaska and
created the Alaska Permanent Fund.
Alaska Constitution Article IX, Section15
Alaska Permanent Fund
At least twenty- five percent of all mineral lease
rentals, royalties, royalty sale proceeds, federal
mineral revenue sharing payments and bonuses received
by the state shall be placed in a permanent fund, the
principal of which shall be used only for those
income-producing investments specifically designated
by law as eligible for permanent fund investments. All
income from the permanent fund shall be deposited in
the general fund unless otherwise provided by law.
Ms. Rodell addressed slide 4, "The Corporation":
Four years after the Alaska Permanent Fund was
approved by voters, the Alaska State Legislature
passed SB 161 in 1980, establishing the Alaska
Permanent Fund Corporation.
APFC's Mission
To manage and invest the assets of the permanent fund
and other funds designated by law in accordance with
AS 37.13.010-37.13.190.
Alaska Permanent Fund
-Principal Constitution and AS 37.13.010
-Earnings Reserve Account AS 37.13.145 (a)
Amerada Hess Fund AS 37.13.145 (d)
-AK Capital Income Fund AS 37.05.565
Alaska Mental Health Trust Fund AS 37.13.300
-Alaska Mental Health Trust Authority
Ms. Rodell looked at slide 5, "Board of Trustees":
A six-member, governor-appointed Board of Trustees is
entrusted with the fiduciary oversight of the Fund.
As the fiduciaries, the Trustees have a duty to
Alaskans in assuring that the Alaska Permanent Fund is
managed and invested in a manner consistent with
legislative findings in AS 37.13.020.
-The Fund should provide a means of conserving a
portion of the state's revenue from mineral resources
to benefit all generations of Alaskans.
-The Fund's goal should be to maintain safety of
principal while maximizing total return.
-The Fund should be used as a savings device managed
to allow the maximum use of disposable income from the
Fund for the purposes designated by law.
A fiduciary is a person or organization that acts on
behalf of another person or persons to manage assets.
Essentially, a fiduciary owes to that other entity the
duties of good faith and trust. The highest legal duty
of one party to another, being a fiduciary requires
being bound ethically to act in the other's best
interests. -Investopedia
Ms. Rodell pointed to slide 6, "Investment Management":
Constitutional and Statutory Mandates
-Principal provides permanent savings
-ERA holds the investment income for appropriation
-Prudent rules govern Saving, Spending, and Growth
APFC Stewardship
-Quasi-independent
-Long-term horizon Prudent Diversification
-Accountability
-Resources
A robust, healthy Permanent Fund is important to all
generations of Alaskans.
Ms. Rodell looked at slide 7, "Key Questions?":
-How much do we make?
-How do we invest?
-How does Principal grow?
-How does the ERA grow?
-How much can we draw?
9:35:02 AM
Ms. Rodell highlighted slide 9, "Monthly Reporting":
-Accountability and transparency have driven our
operations from our very beginnings as an independent
state corporation accountable to the public.
-Financial and performance reports are produced
monthly to ensure point-in-time accuracy of data and
compliance with policies and laws.
-APFC finance staff reconcile values for the Principal
and ERA accounts at the close of each month. The Fund
has more than 700 investment accounts, each represents
anywhere from one private investment to hundreds of
public equity holdings.
Ms. Rodell looked at slide 10, "Values in Billions." She
shared that on December 31, 2020, which was the mid-year
point of fiscal year 2021, the total principal was $57.8
billion. She explained that it was comprised of $46.7
billion of contributions. The contributions came from
royalties, inflation proofing, and special appropriations.
She explained that there was $11.1 billion included as
unrealized gain.
Senator Hoffman looked at the $3.1 billion, which was the
statutory amount in law. He wondered why there was no
reflection of the additional draw proposed by the governor.
Ms. Rodell replied that proposals were not included in the
financial statements. She stated that the display showed
liabilities and responsibilities. She explained that the
auditors included the amount, because the statute was
written to use a one-year gap. Therefore, there was an
exact amount prediction using the statute. She stated that
the trustees did not want any ad hoc draws.
Ms. Rodell pointed to slide 11, "Sources of Change in
Value." She remarked that the market had been helpful to
the fund over the previous six months.
Senator von Imhof wondered whether $2.9 billion had been
moved to the ERA or the general fund.
Ms. Rodell replied that it was the ERA.
Senator von Imhof wondered how much had been moved to the
general fund of the normal POMV draw for the current year.
Ms. Rodell replied that $1.5 billion had been moved, and
the next payment would be in March.
Senator von Imhof surmised that the state taking half of
the POMV draw was in cadence with taking equal increments
throughout the year.
Ms. Rodell agreed.
9:45:17 AM
Senator Wielechowski wondered how much was made with the
recent Gamestop issue.
Ms. Rodell replied that Gamestop experience caused an
increase of about $30 million.
Senator Wielechowski wondered whether the corporation
invested the POMV assets in cash, and assumed that they
were invested at a much lower risk.
Ms. Rodell replied that it was an incorrect assumption. She
stated that all assets were invested together in one
allocation. She explained that every asset was owned at a
pro rata basis by the principal and ERA.
Ms. Rodell looked at slide 12, "Financial Statements":
APFC issues monthly financial statements for the Fund
that reconcile values for the total Fund, the
Principal, and ERA.
Includes monthly values for -
-Contributions to Principal
-Known commitments from the ERA, and the net
realized earnings that remain unspent
-Unrealized gains for both accounts
-Statutory net income to the ERA
-Asset valuations
-Revenues and expenditures
Ms. Rodell highlighted slide 13, "Performance":
Monthly performance report includes 6 pages of
-Market Values
-Performance:
1mo, 3mo, FYTD, CYTD, 1Yr, 3Yrs, 5 Yrs
-Total Fund
-Benchmarks
-Asset Classes
-Holdings
-Index Comparisons
9:50:26 AM
Ms. Rodell discussed slide 14, "Performance as of December
31, 2020." She explained that FY 20 generated a 2.01
percent return.
Co-Chair Stedman asked whether the 2.01 percent was gross
or net of fees.
Ms. Rodell replied that it was net of fees.
Ms. Rodell pointed to slide 16, "Fund Total Value and
Returns in millions":
1977 Initial Legislation permitted an investment list
that included only fixed income securities such as
treasury bonds.
1983 Following changes to the statutory investment
list, the Fund makes its first investment in the stock
market, and later that year, indirectly held real
estate.
1990 After the Legislature expands the statutory
investment list, the Fund begins to invest in stock
and bond markets outside the United States.
2005 The Legislature makes a significant change in how
Permanent Fund investments are determined, by removing
the allowed investment list from state law.
The Trustees will make investment decisions under the
guidelines of the prudent investor rule.
Co-Chair Bishop wondered whether there was an anticipation
of another market correction.
Ms. Rodell replied that, fundamentally, there was no
anticipation of a correction. She explained that there
would be an entering of a period of very slow growth.
9:55:50 AM
Senator Wilson asked about the regulatory changes related
to real estate investments.
Ms. Rodell replied that the funding was gaining in assets,
so there was more comfort with investment strategies. She
also stated that there was a need to seek out returns in
other ways that the traditional assets.
Senator von Imhof remarked that there were significant cash
reserves, which might overheat the market after the
pandemic. She pointed out that the U.S. was in debt, so
taxes might increase. She felt that there may be a volatile
and steep counterforce, which could significantly affect
the fund.
10:00:05 AM
Senator Wielechowski wondered whether the Permanent Fund
engaged in short sales.
Ms. Rodell replied that it did not.
Co-Chair Stedman asked for a definition of short sale.
Ms. Rodell replied that short sales were when there was a
belief that a stock was overvalued, so there was a belief
that the stock would decline in price. Therefore, the stock
was borrowed at the high price in anticipation of selling
it at the lower price. She explained that it would make the
profit on the bet. She felt that maybe she explained it
incorrectly. She stated that there was an investment in
hedge funds, which were designed to be market neutral
Senator Wielechowski recalled that the governor had
suggested that the state maybe not invest in banks that did
not invest in Arctic oil exploration. He wondered whether
the Permanent Fund invested in any banks that did not
invest in Arctic oil exploration.
Ms. Rodell replied that that the Permanent Fund and the
Permanent Fund Corporation relied on worldwide
partnerships, which included partnerships with banks that
had made statements about not investing in Arctic oil. She
felt that it would be difficult to conduct business without
those banks.
Co-Chair Bishop wondered how much of the portfolio was
moving into renewable energy.
Ms. Rodell agreed to provide that information.
Ms. Rodell pointed to slide 17, "Asset Allocation." She
noted how the asset allocation had changed over time. She
pointed that, currently, there was exposure to eight
different asset classes, including 2 percent for cash. She
pointed out that the asset allocation was the Board of
Trustees statement on return and risk.
Ms. Rodell discussed slide 18, "Projections FY 21." She
stated that the slide showed a low- mid- and - prediction.
She remarked that a long-term ten-year return was also
included in the projections.
Co-Chair Stedman remarked that there was a statutory 5
percent draw rate on the POMV, but noted that the real
return on the slide was 4.23 percent. He wondered how that
related to the 5 percent POMV.
Ms. Rodell replied that the POMV was 5 percent, but was
over an average, therefore the effective rate was different
than the 5 percent.
Ms. Rodell looked at slide 19, "History and Projections":
Issued monthly in conjunction with financial
statements.
Values based on historical actuals, current fiscal
year status, and projections for
-Principal, ERA and Total Fund Balances
-Principal contributions: royalties, inflation
proofing, special appropriations
-ERA statutory net income, dividend and POMV
withdrawals, transfers to Principal
-AK Capital Income Fund Amerada Hess
-Callan's 10-year capital markets forecast
-Forecasted Total and Real Returns
-POMV Distribution Calculations
-Statutory Dividend Transfer Calculation
-YTD Statutory Net Income Tracking
10:10:53 AM
Co-Chair Stedman wondered whether the target value for 2030
was $80 billion.
Ms. Rodell replied in the affirmative.
Ms. Rodell looked at slide 20, "Callan's Long-Term Capital
Market Projections." She noted that there were assumptions
used on the slide used for the returns.
Co-Chair Stedman felt that Callan should present to the
committee to discuss the expectations looking forward in
the upcoming years.
Ms. Rodell noted that there would be a real return of 4.2
percent POMV for ten years.
Ms. Rodell addressed slide 22, "Principal":
-Constitutionally established as the permanent part of
the Fund
-Grows through
-royalty contributions
-special appropriations
-inflation proofing
-Is to be used only for
-income-producing investments
Ms. Rodell pointed to slide 23, "Principal Contributions":
$17.7 Billion Royalty Deposits -AS 37.13.010 (a) (1)
and (a) (2)
The constitutionally minimum required 25 percent of
royalty proceeds, and the statutorily mandated
deposits of 50 percent for leases after 1979.
$18.0 Billion Inflation Proofing -AS 37.13.145 (c)
The inflation proofing calculation is based on
deposits into the Principal of the Fund and the
inflation rate as calculated per statute.
$11.0 Billion Special Appropriations AS 37.13.010 (a)
(3)
Legislative Deposits from both the General Fund $2.7 B
and the ERA $8.3 B.
10:15:01 AM
Co-Chair Stedman wondered whether the funds that were
allocated by the committee, representative on a display
check in the committee room, were utilized into fruition.
Ms. Rodell replied in the affirmative.
Co-Chair Stedman wondered whether the amount was "locked up
on the corpus."
Ms. Rodell replied in the affirmative.
Co-Chair Stedman may have another discussion about issuing
more funds depending on the budget and will of the
committee.
Co-Chair Bishop will help keep the oil well pumping after
the oil well is gone.
Ms. Rodell stated that it was almost 45 years since the
creation of the Permanent Fund.
Ms. Rodell looked at slide 25, "Earnings Reserve Account
(ERA)":
-Statutorily established under AS 37.13.145 (a) as a
separate account in the Fund to hold the investment
income
-Is to be invested in investments authorized under AS
37.13.120
-Grows through receipt of statutory net income
-Is available for Legislative appropriation
Ms. Rodell pointed to slide 26, "Renewable Resource":
Historically, the Alaska Permanent Fund has been used
as a savings device to generate revenues and pay
dividends to eligible Alaskans.
Today, the Fund is used to support the State's General
Fund through the POMV Draw for statewide services and
programs, including the dividend.
Ms. Rodell addressed slide 27, "ERA: Statutory Net Income":
AS 37.13.140 (a) directs the net investment earnings
of the Fund to the ERA and excludes unrealized gains
and losses.
Statutory Net Income is the direct result of
investment activity, and includes:
-Monthly cash inflows from stock dividends, bond
interest, and real estate
-Realized Capital Gains/Losses: All the net
income (i.e., realized gains minus realized
losses) generated by the sale of investments.
FY21 as of December 31, 2020
-Statutory Net Income = $2,880,800,000
10:20:54 AM
Ms. Rodell looked at slide 29, "Earnings Reserve Account."
She explained that the slide detailed the current image of
the ERA.
Co-Chair Bishop queried the reason for the downgrade.
Ms. Rodell replied that the numbers were from the DOR oil
production forecast.
Senator Wielechowski surmised that the legislature forward
funded inflation proofing for several years.
Ms. Rodell replied that the $4 billion had intent language
for eight years of inflation proofing. She explained that,
due to the veto action, the amount was closer to four years
of inflation proofing.
Co-Chair Stedman announced that the intent language was a
part of the marketing of the large transfer. He felt that,
in retrospect, it was possibly not necessary.
Ms. Rodell remarked that only earning four to five percent,
with an eight percent draw would cause larger draws more
quickly.
Ms. Rodell pointed to slide 30, "Percent of Market Value -
AS 37.13.140 (b)":
-Based on market value, rather than realized income
-Subject to annual appropriation
-Predictable
-average market value of the Fund for the first
five of the preceding six fiscal years
10:31:40 AM
Senator von Imhof stressed that FY 23 and FY 24 showed the
POMV growing at $3.21 billion and $3.29 billion, but there
was an assumption that there was no 9 percent draw. She
remarked that the POMV would decrease with high draws.
Ms. Rodell agreed.
Senator von Imhof felt that the slide showed that the
deficit would widen without revenue.
Co-Chair Stedman furthered that there was not a
consideration of the management impact on the Permanent
Fund and its total numbers.
Co-Chair Bishop noted the effective rate on the out years
with the proposed draw, and assumed that rate would
increase over time.
Co-Chair Stedman asked for a modeling of that impact.
Senator von Imhof felt that Legislative Finance Division
could do that model.
10:35:28 AM
Ms. Rodell replied that there was work with the Legislative
Finance Division to review the modeling assumptions.
Ms. Rodell addressed slide 31, "Trustees' Resolution 18-4":
In providing guidance on withdrawals for the Fund and
to help ensure the long-term sustainability of using
Fund earnings for the benefit of all generations of
Alaskans, the Board passed Resolution 18-04 at a
special meeting on October 17, 2018.
-This resolution affirms the importance of
formulaic management of transfers into and out of
the ERA to ensure sustainability and long-term
growth of the Fund, by identifying four key
principles: Adherence Sustainability Inflation
Proofing Real Growth
Sustainability ? requires annual formulaic withdrawals
from the Earnings Reserve Account at an amount that
the long-term balance of the account is able to fund.
The Board has long supported the percent of market
value (POMV) concept, including a constitutional
amendment that would ensure no more than a sustainable
amount was taken from the annual earnings of the
Permanent Fund (Resolutions 00-13, 03-05 and 04-09).
Ms. Rodell pointed to slide 32, "Primary Source of UGF
Revenue-POMV."
Ms. Rodell looked at slide 33, "ERA Monthly Values since
POMV."
Ms. Rodell discussed slide 34, "20 Year Look back."
10:40:44 AM
Ms. Rodell addressed slide 35, "Use of Fund Earnings."
Senator Wielechowski wondered whether the Permanent Fund
was investing more in Alaska.
Ms. Rodell replied that the Board of Trustees set aside
$200 million in the private equity asset allocation for an
"Invest in Alaska Program", which was different than any of
the other types of money that might be rolled into the
state. She remarked that there was a deployment of
approximately $50 million.
Co-Chair Stedman wondered whether the reports included the
Alaska investment comparisons.
Ms. Rodell replied in the affirmative.
Senator von Imhof queried the length of the deployment.
Ms. Rodell replied that it could range as high as five
years.
Senator von Imhof wondered why the deployment was slow.
Ms. Rodell replied that it was slower as a result of the
due diligence required for the pipeline.
10:45:56 AM
Ms. Rodell pointed to slide 37, "Evolving Role of the
Fund":
Successful SWFs operate within a rules-based system
that allows them to perform a combination of saving,
stabilization, and income-generation functions.
In Alaska, the latter function has come into sharper
focus, as the Fund income supports the State budget in
an era of lower oil revenues.
This paper proposes a number of reforms that will
strengthen the stability and sustainability of
Alaska's Permanent Fund:
LESSON 1: MISSION CLARITY
LESSON 2: THE IMPORTANCE OF RULES
LESSON 3: SUCCESSFUL ENFORCEMENT OF SAVING RULES
LESSON 4: DESIGNING A POMV SPENDING RULE
LESSON 5: REFORMING THE ERA
Co-Chair Stedman stressed that there was a concern about
the temptation to use the ERA for appropriation.
Ms. Rodell remarked that the ERA was fully invested in all
the asset classes, so as it was drawn down, its portion of
unrealized gains would also down.
Ms. Rodell discussed slide 38, "Revenue Generation":
Now, more than ever, the State is dependent upon
APFC's effective management and investment of the
Alaska Permanent Fund, one of Alaska's primary sources
of renewable revenue.
-The POMV draw from the Earnings Reserve Account
now supports 70 percent of Alaska's undesignated
general fund budget.
APFC's stewardship fulfills dual roles
-Protecting the Principal of the Fund for the
benefit of current and future generations of
Alaskans.
-Providing a predictable revenue stream to help
balance the State's budget.
Ms. Rodell stated that there was information about the APFC
on its website.
Co-Chair Stedman discussed the following day's agenda.
ADJOURNMENT
10:53:55 AM
The meeting was adjourned at 10:53 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 020421 SFIN APFC Presentation.pdf |
SFIN 2/4/2021 9:00:00 AM |
APFC |