Legislature(2003 - 2004)
06/26/2003 06:10 PM Senate JUD
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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
JOINT MEETING
SENATE JUDICIARY STANDING COMMITTEE
HOUSE FINANCE SUBCOMMITTEE ON
PERCENTAGE OF MARKET VALUE PAYOUT
Fairbanks
June 26, 2003
6:10 p.m.
MEMBERS PRESENT
SENATE JUDICIARY
Senator Ralph Seekins, Chair
Senator Gene Therriault
Senator Hollis French
HOUSE FINANCE SUBCOMMITTEE ON PERCENTAGE OF MARKET VALUE PAYOUT
Representative Jim Whitaker
Representative Reggie Joule
MEMBERS ABSENT
SENATE JUDICIARY
Senator Scott Ogan, Vice Chair
Senator Johnny Ellis
HOUSE FINANCE SUBCOMMITTEE ON PERCENTAGE OF MARKET VALUE PAYOUT
Representative Kevin Meyer
Representative Mike Chenault
Representative Mike Hawker
Representative Eric Croft
COMMITTEE CALENDAR
Percent of Market Value Briefing by Bob Storer, Executive
Director, and Bob Bartholomew, Chief Operating Officer, Alaska
Permanent Fund Corporation
WITNESS REGISTER
Professor Rich Seifert
University of Alaska Fairbanks
475 Panorama Drive
Fairbanks, AK 99701
Mr. Eleazar Baker
Fairbanks, AK 99701
Mr. Jerry Macbeth
1777 Red Fox Dr.
Fairbanks, AK 99701
Ms. Mary Nordale
Private Attorney
No address provided
Mr. Cary Dewit
1812 Whippoorwill
Fairbanks, AK 99701
Ms. Mary Bishop
1555 Gus's Grind
Fairbanks, AK 99701
Mr. Dan Revero
2709 Park Way
North Pole AK 99705
ACTION NARRATIVE
TAPE 03-54, SIDE A
CHAIR RALPH SEEKINS called the joint meeting of the Senate
Judiciary Committee and the House Finance Subcommittee on
Percent of Market Value Payout to order at 6:10 p.m. Present
were Senators Therriault and Seekins and Representatives Joule
and Whitaker. The Chair announced that Bob Storer, Executive
Director, and Bob Bartholomew, Chief Operating Officer, Alaska
Permanent Fund Corporation (APFC), would testify.
MR. BOB STORER, Executive Director, APFC, said he would speak
from a handout called "The Need For Change" and that Mr.
Bartholomew would speak to the actual language of the proposed
amendment, which is to memorialize inflation proofing in the
constitution. He said it has been a time-honored tradition of
the Permanent Fund Board of Trustees to insure that the fund is
inflation-proofed so that all generations are treated equally.
What we propose to do in this change is protect the
entire fund against inflation. The key issue here is
an option on an annual fund payout and it should be
assured in the amount that should be more stable and
not only are we memorializing, or suggesting
memorializing, inflation proofing in the constitution,
it increases the stability of the payout from year to
year and we'll show a slide to emphasize that a bit
later. We're doing this by limiting the amount that
can be distributed to the real earnings of the fund
over time. The solution is what we call the Percentage
of Market Value Payout.
If I could ask everyone to go to slide three. What is
the percentage of market value payout? It is actually
a formula that most of the endowment funds have
adopted in terms of methodology for payout. It's a
limit to the amount of funds that can be appropriated
at any given time to the real earnings of the fund.
The proposal to do this would be to limit the fund to
no more than 5 percent payout, based on a five-year
moving average of the fund.
When the stakeholders depend on the fund today, the
proposal that the permanent fund trustees are
suggesting is the entire fund is not protected from
inflation as it is now structured and the change would
adjust that. We also believe that this methodology is
consistent with the fund's long-term investment
strategies.
Currently, we use a realized income methodology to
compute distribution. That was fine 26 years ago when
the fund was created; and most public funds were
invested only in fixed income where virtually all the
earnings were the realized income or the interest
payments based on those investments.
Modern funds - public, private, etcetera - are far
more mature and have a substantial weighting towards
the equity market and most of the appreciation in
equities is not based on current income - dividends,
in fact, are quite small, but on the appreciation of
the asset and may be turned over or may be sold in the
near term. Or it may be held for the very long term
and the income would not necessarily be realized but,
in fact, the fund and the citizens of Alaska and the
state would have benefited from that appreciation.
The fund currently cannot assure that the annual
payments are available. If we were having this meeting
about early October of last year, we would have told
you there's about a 10 percent probability that there
would be no dividend payout and that's because of what
had happened in the market over the last few years. If
we'd have had this meeting last March, I would have
told you the same thing. There's about a 10 percent
chance there would be no payout. That's because our
income of dividends and interest was being dwarfed by
losses in the securities that were held. It's not just
the permanent fund, every fund in the country and
individuals were suffering as well. I can tell you now
over the last three or four months that there will be
a full dividend payout. I noted as of last night for
the fiscal year with only a few days to go, the fund
has earned a positive 4.5 percent real rate of return.
So, we've had a dramatic rebound in the stock market
over the last few months.
The size of the payouts in the current methodology is
far more unpredictable and less stable from year to
year than if we would move to the percentage of market
value payout.
MR. BARTHOLOMEW, Chief Operating Officer, APFC, said he wanted
to make sure that they understood that this proposal does not
directly affect the dividend or compute how big it should be.
Before they get to the question of how big the dividend check
should be, they should answer how much money should come out of
the permanent fund each year.
The proposal for a percent of market value - its whole
purpose is to say the rules we have today for
determining how big the pie is and how much money
should come out or should be available isn't the right
way to do it and there's a better way...
CHAIR SEEKINS clarified that is not what they are considering
under SJR 18. They are considering a maximum of 5 percent, but
that is not a fixed number.
MR. SHORER said that the question was asked which formula best
protects the fund against inflation. His answer is that the
current formula is in statute and is discretionary.
While the fund has been fully inflation-proofed in the
past that is not to suggest that it will be inflation-
proofed in the future. We're suggesting that it be
done constitutionally although it's implicit. It's
implicit because the amount of inflation, the residual
remains in the fund and only the real earnings are
paid out. That's the 5 percent.
The current formula inflation-proofs principal only.
There's a formula in the statutes that follows the
dividend, that instructs how you compute the inflation
and then you inflation-proof the principal every year.
The proposed methodology would inflation-proof the
entire fund over some long period of time. Granted,
with a 5 percent payout, some years you're paying out
more and some years you're paying out less. I like to
call it a disciplined approach. People think about can
you achieve it in a bear market. What I think is
important is it provides the discipline in the bull
market to stay the course. There are many people, if
you went back a couple of years ago, that would say
that 5 percent was way too conservative. Now, in the
throes of a bear market that we hope has just ended,
you'll hear 5 percent is way to optimistic.
This formula can best assure an annual payout. The
current realized earnings base formula can vary in
size from - I've got a slide later on that will show
you that one year we had $2.5 billion in realized
earnings. The potential, somewhat limited, but the
potential exists that there could be zero realized
earnings in a given year. The 5 percent of the moving
average assures that every year we have this known
payout...
I didn't say this is a limit - up to 5 percent, but
that would be available from year to year. So, the
amount of funds that would be available would be far
more predictable than the current methodology.
The earnings reserve, the realized earnings reserve
has varied from as much as $3 billion to several times
your special appropriations and that will include this
July 1 of $100 million - as I noted, a spending limit
in the good years, but it assures spending in the bad
years as well...
A realized earning base really absorbs all the market
volatility from year to year and the principal is
intractable. But the 5 percent limit, while it's
smooth, the payout would vary from the market value of
the fund over time. Markets are volatile; anytime it's
volatile; it's been more volatile of late; but in
recent years realized earnings in a given year - I
said $2.5 billion. It was as high as $2.7 billion; a
year ago we were about $257 million in realized income
for that year. I think we saw this morning about $350
million this year. The percentage of market value
smoothed out the volatility; it's far less volatile
than realized income and does provide the stability.
MR. SHORER used a graph to accentuate the point on page 8. He
noted that slide 9 shows the current statutory payout to date,
which has been dividends only. There has been a high of $1.2
billion, but there was as much as $3 billion that could have
been available for appropriations [in the realized earnings
reserve - it was not used].
MR. BARTHOLOMEW explained that the slide shows under the current
rules what happens in bull and bear markets. The $3 billion that
was not used - one of the problems with that is that the
permanent fund was invested in long-term assets and if they know
that money is available, maybe they should invest it
differently.
Historically, they haven't taken out as much as is
available. The flip side is in the low markets, which
is where we're headed right now, what we are headed
into in the next few years, we're showing - and we're
using a model that we used to the project into the
future if you had continued low markets - there would
only be $175 million to $300 million available for the
dividends. That's a much smaller number. If you had
extremely low markets, after you paid out the
dividends, there wouldn't be anything else left. There
would be zero available for other appropriations...
SENATOR THERRIAULT asked if that is one reason the trustees feel
moving to the percentage of market value payout (POMV) is
beneficial - you always keep up with inflation, never letting
the value of the principal be eroded.
MR. SHORER replied that word "guarantee" might be too strong,
because in the short term there might be some down markets where
you don't earn enough to fully cover inflation in the short term
(a year or two). The trustee's proposal over the long term will
earn enough in the good years to make up for inflation that may
not have gotten covered when you had one or two down years. Over
the long term, inflation has a higher priority because you're
going to limit the spending to earnings after inflation over
time.
MR. BARTHOLOMEW added that it's important to know that the fund
will grow under this scenario for two reasons, because it would
retain enough of the earnings to cover the effects of inflation
so the fund will grow at the rate of inflation. It also grows
because you get $250 to $300 million a year in deposits from oil
revenues.
MR. SHORER explained that the proposal limits the payout of real
rate of return over time and on a realized income base, there
are times when it will be very low, but there are times when
there has been over $3 billion in realized income and all of
that money could be appropriated well beyond inflation-proofing,
if deemed appropriate. The POMV does insure over time that the
fund is inflation-proofed.
He reminded them that the existing formula is 26 years old and
while it has served the fund well, the reality is that a 15-year
bull market masked what is a very serious issue - changing the
payout methodology. The National Association of College and
Universities Business Offices (NACUBO) conducts a study every
year. They surveyed 574 foundations and found that 85 percent of
the members use some form of payout methodology based on a POMV.
Some use three years, others use more or less. Larger funds tend
to have a bit of a smaller payout. He guessed that was because
they tend to have a lot more new donors coming in every year so
they can be a bit more conservative, but it's going to grow and
grow.
SENATOR THERRIAULT asked if they computed a scenario based on
the history of the fund if a POMV methodology had been in place
and how that would affect the current value of the fund.
MR. SHORER replied that they had, but it is difficult to
compare, because the payouts have been less than the 5 percent
moving average of the fund. Because it's always been less and
because the Legislature has always inflation-proofed, the
problem becomes a compounding issue. If you started paying out
the entire 5 percent way back in 1983, then the fund would be
smaller simply because there would have been greater payouts.
MR. BARTHOLOMEW added that when the fund was invested 100
percent in bonds 20 years ago, there was a year when the formula
for payout of the dividend exceeded 5 percent of the total value
of the fund. Since the fund has been invested in equities, in
1983 the earnings of the fund have grown faster than they did
under the fixed income bonds. Since 1983, the amount paid out
for the dividend has actually been quite a bit less than 5
percent. For the most part it's been around 3 percent. The fund
would probably be the same size today if the POMV had been in
place. If you split the dividends as proposed, they would have
been smaller than under the existing formula.
One of the reasons we are proposing this is that it
keeps the dividend or any distribution from the fund
from going really high in the good years and going
really low in the bad years...
REPRESENTATIVE WHITAKER asked what they expect the dividend to
be this year under the current methodology.
MR. SHORER replied that he thought it would be below 3 percent
of the fund value, about $690 million.
REPRESENTATIVE WHITAKER said his question was about the
individual check.
MR. SHORER replied that it would be about $1,100.
REPRESENTATIVE WHITAKER asked what it would be under the
proposed POMV methodology.
MR. SHORER replied that he really couldn't answer, because if
you take 5 percent of the five-year average of the market value,
you would have roughly $1.2 billion available to spend. It would
be up to the Legislature to decide how much of the $1.2 billion
would go to the dividend as opposed to other purposes. If he
knew what percentage of the pie he was going to use, he could
estimate a rough dividend. The amount available for distribution
would be about 2.5 percent. They project about $690 million to
$700 million would be available, divided by 620,000 people.
REPRESENTATIVE WHITAKER asked how they transition from one
formula to another.
MR. SHORER replied:
If we went to the payout methodology and stayed with
the 2.5 percent for dividends, what would happen is
over the next few years, if you went to the POMV
approach, it would actually be slightly higher than
what we're projecting under the existing formula.
REPRESENTATIVE WHITAKER asked if it would be fair to say there
would be adequate funding to pay an equivalent dividend to what
is paid out today.
MR. SHORER replied yes.
REPRESENTATIVE JOULE asked if the Legislature had ever chosen to
not inflation-proof the fund and how much is it in terms of
dollars.
MR. BARTHOLOMEW replied by giving them a perspective on how they
do inflation-proofing today. They look at the change in the
national consumer price index from one year to the next. They
take that amount and multiply it by the size of the permanent
fund's principal. Last year it took $600 million; this year it
will take $350 million. They will move that amount from the
earnings pool to the principal where it can no longer be spent.
MR. SHORER explained that the Legislature always inflation-
proofed in the past and excess earnings were appropriated to the
principal as well.
CHAIR SEEKINS asked if those appropriations amounted to about $7
billion.
MR. SHORER replied that is correct and added that the fund is
divided equally between mineral contributions, inflation
proofing and special appropriations. The principal of the fund
is about $22.2 billion today.
SENATOR THERRIAULT confirmed that the inflation proofing is done
as an appropriation by the Legislature.
MR. SHORER agreed.
SENATOR THERRIAULT asked if it was true then of the $22.2
billion that the Legislature put two-thirds of it there.
MR. SHORER replied that is correct.
SENATOR THERRIAULT noted that under the proposal, the 5 percent
is all that's available for appropriations and dividends and
asked if the only change they are making is not to the
calculation, but to the amount that is available for
distribution.
MR. SHORER replied that is correct and they have always said it
is the prerogative of the Legislature to determine how the money
is used. They recognize there is a benefit to creating a
dividend payout formula that is also based on the POMV approach,
but they are proposing to memorialize inflation proofing by
limiting the amount of money that can be appropriated in any
single year.
SENATOR FRENCH asked how many years the other funds have been
using a POMV formula according to the NACUBO study.
MR. SHORER said it is a phenomenon over the last 20 years, but
he would have to do research for a precise answer.
SENATOR FRENCH asked to what extent our vision is skewed by the
recent bull market and what would happen if a long period of
stagnant returns were to occur.
MR. SHORER replied the permanent fund decision is independent of
any market, including the recent bull market. One of the
benefits of the 5 percent limit is that you don't get caught up
in the bull market. The permanent fund has not achieved a 5
percent real rate of return over the last 3 to 5 years. Over the
last 15 years, they benefited in excess of the 5 percent. "Our
look forward is naïve. It doesn't have a bull market and it
doesn't have bear market scenario, but it recognizes that both
will probably occur in our expectation."
SENATOR FRENCH asked which funds were using the POMV market
prior to 1983, before the long bull run and what payout were
they using based on the models they formulated before it began.
MR. SHORER replied he would have to research that question.
CHAIR SEEKINS said he didn't think the permanent fund took
advantage of that bull market starting in 1983. They started
increasing the asset allocation in the early 1990s to take
advantage of the equities market.
MR. SHORER said that is right. There was a strong bias at the
time to be conservative to maintain the confidence of the
citizens of Alaska. "But from 1983 to 1993, it didn't matter
whether you held stocks or bonds; you were going to earn about
13.5 percent with either one. So, it was actually a fortuitous
period to own bonds."
REPRESENTATIVE MEYER asked what would happen if they said the
payout would be 5.5 percent.
MR. SHORER replied that to achieve that goal, the permanent fund
would have to have a more aggressive asset allocation. They
might even have to change the current constraints on what it
must invest in to allow it to exceed its existing limits in
terms of equities. A 5.5 percent payout under the current
scenario is spending 5 percent of the real income and .5 percent
of the inflation proofing. Ultimately, it would erode the
principal.
REPRESENTATIVE MEYER said he had been asked why they inflation-
proof, because the stock market will inflation-proof itself over
time. Stock values go up with inflation.
MR. SHORER replied if they change the legislation to POMV, he
would agree with that statement. However, they are not double
inflation-proofing as the stock market appreciates over time,
because assets must be converted into realized income and be
appropriated by the Legislature. Using the POMV would allow them
to make purely investment decisions based on asset allocation.
REPRESENTATIVE MEYER said in 1999 the House passed a bill to use
the permanent fund earnings in some sort of fashion and asked
him how the two plans differ.
TAPE 03-54, SIDE B
[Indiscernible answer because tape was turned over manually.]
MR. BARTHOLOMEW said there was a handout with an analysis of SJR
18 setting forth six bullets. He wanted to make sure they
understood what changes to the constitution were being proposed.
Page 1, line 10 adds a second paragraph, (b), to the
constitutional provision on the permanent fund.
Page, line 11 removes the word "principal" from the
constitution. That leaves the earnings reserve, which had
different rules. Under the POMV proposal, "principal" would be
deleted and the fund would be one pool of money. Today they are
all invested as one; it's simply an accounting mechanism that
they do. This is a significant policy question, as it's become
known that the principal is off-limits and is protected. The
protection that is being proposed by the POMV is the spending
limit of 5 percent a year of the total fund value. What it means
today is if there are a couple more down years, the earnings
reserve could spike down for a short term when the markets do.
That's what leads to the possibility of a zero payout being
available in any one year.
By eliminating it and replacing it with a spending
limit, you will be able to have money each year and
the policy question is balancing the benefit of having
a controlled limited distribution every year against
the risk of having no distribution.
Page 1, lines 13 - 14 say that all the income from the permanent
fund shall be deposited into the general fund unless otherwise
provided by law and for the last 21 years the Legislature has
provided that all the earnings of the permanent fund will remain
there until it's appropriated. It has not been going
automatically into the general fund. This language is being
removed, because under POMV there will one pool of money and all
the earnings of the permanent fund will stay in until it's
appropriated. The legal guidance they have says they don't have
to refer to the "income" of the permanent fund anymore, because
it will stay there.
Page 2, lines 2 - 6, adds a long sentence that says they are
going to protect the permanent fund from inflation and assure
that the real value of it will be preserved over the long term.
Lines 4 - 5 describe how that will be accomplished. Line 5 says,
"of the average market values of the fund on June 30 for the
first five of the six fiscal years immediately preceding the
fiscal year."
MR. BARTHOLOMEW explained:
There is a reason we had to put that wording in there.
If we just said - take the average market value of the
last five years - that includes the year that you're
in. So, the Legislature just completed their work and
they've appropriated next year's budget, but they
still don't know how much will be available from the
permanent fund until we get to June 30. So, they start
their work in January and we're doing the budget, but
we don't know what's available. That's why we're
saying go back one more year - going back six years so
that we know a year early. So, a year ahead of time
the Legislature and the administration would know
what's going to be available from the permanent fund
in the future. It's to give a whole level of surety
and not have to do all these projections.
Page 2, lines 9 - 12, is a transitional provision. It says that
right now the permanent fund is two pools of money, the
principal and earnings reserve. Attorneys wanted to make it
perfectly clear that the earnings of the permanent fund at the
time people vote on this becomes part of the permanent fund and
is subject the constitutional protection.
The last change is on page 2, line 13, that says since this is a
constitutional amendment, it will go before the voters of the
state of Alaska at the next general election which is in
November 2004.
REPRESENTATIVE WHITAKER said he was comparing SJR 18 and HJR 26
and the only difference he could see is on page 2, line 2 and
asked if that is the only one.
MR. BARTHOLOMEW replied that is exactly right. Lines 2 - 3 are a
policy statement and the House version doesn't have that.
MR. RICH SEIFERT, Professor at UAF, endorsed the POMV idea as a
sound approach. About a year ago, he brought up his concerns
about corporate crime and the erosion of the permanent fund to
the board and he didn't think it had been adequately dealt with
at the national level.
If our equity is 50 percent in the stock market, it's
all right to have the prudent investor rule hold sway,
but it's only a prudent investment if you're not being
defrauded.
He said that people voted to protect the fund's principal
originally. One of the best ways they could protect it is to
invoke an income tax. "What would be the incentive to inflation-
proof the fund if the Legislature has available to it a fixed
well known amount of money, maybe half of the 5 percent, every
year?"
He also wondered if changing to this formula would change the
IRS status.
CHAIR SEEKINS said he likes the predictability of the POMV
regardless of what other sources of revenue there might be out
there.
MR. ELEAZAR BAKER, Fairbanks resident since territorial time,
said he will be retiring soon and will need to depend on the
dividend as part of his fixed income.
SENATOR THERRIAULT asked him if he took the long-term view that
inflation proofing should always be assured or the shorter-term
view of a higher dividend.
MR. BAKER replied he doesn't care about a higher dividend, but
he does care about the stability of the fund.
SENATOR THERRIAULT asked if he would like to see a more
predictable payout as opposed to widely divergent amounts.
MR. BAKER replied that the more they can put the formula in the
constitution, the safer it will be from attack.
MR. JERRY MACBETH, Fairbanks resident, said he works at the
University and looked at the financial spreadsheet projection
comparison of the status quo versus POMV. The projection from
2003 to 2012 under the status quo has the fund growing from $24
billion to $40 billion; and under the POMV, the fund would grow
from $24 billion to $33 billion - $7 billion less. He wanted to
know where that $7 billion is.
MR. BARTHOLOMEW explained that this particular scenario shows
that the Legislature appropriated for usage of the dividend.
So, the top half just shows each year how much we
earned, payment of dividend and then we go to the next
year. Under POMV, we assumed the entire 5 percent
that's available - we wanted to show that scenario.
It's not an apples and apples.
MR. MACBETH said he is undecided about whether it is wise to
amend the constitution to provide the POMV payout. He doesn't
see the need based on the Legislature's performance of
inflation-proofing it since it was established. He was concerned
about predictability and volatility of the fund. If you decrease
the volatility, you also increase the culture of dependence on
the permanent fund dividend, which he thinks is unhealthy for
the state's development over the long term.
MS. MARY NORDALE, private attorney, said she was the
Commissioner of the Department of Revenue from 1984 - 1986 and
was a member of the Permanent Fund Board of Trustees. She
commented:
In 1986 what we had anticipated within the department
during 1985 happened and that was the big crash in the
price of oil. And we had to scramble around and try to
figure out how to dig about $800 million out of the
budget for FY87. That faced legislators when they came
to Juneau in 1987 and it was a very, very, painful
period, as you well know. At the time, in 1984, as has
been noted earlier, the constraints on investment
opportunities for the fund were very severe. As a
consequence, inflation proofing as an element that
needed to be taken into account was extremely
important because the bulk of the fund was invested in
fixed income. The effects of inflation were more
severe at that time on those investments than it would
be in the equity market - this would be over time. So,
I am very much supportive of the Senate Resolution. I
hope if it does pass, that it incorporates the
language of the policy statement because that is both
a pledge to the people and a constraint on the
investment technique opportunities available to the
trustees. It's a joint effort to retain the fund -
permanently retain its integrity and keep it growing.
When you are considering, however, opportunities to
fund our state, I hope you will not dismiss lightly an
income tax. I served on a long-range financial
planning commission in 1995, which recommended an
array of spending cuts and revenues to avoid the crash
that we predicted in 2005. That is when we figured the
state would hit the wall if no changes were made in
both spending and in revenues. The problem is not that
the permanent fund earnings are not available; the
problem is that most of the programs that absorb a lot
of the state's revenues are population driven -
schools, welfare payments, support of Medicaid -
whatever. But, you will see that most of the large
items in the budget are population driven and the only
income source available to the state at this time is
an income tax. If you go to a sales tax, all you're
doing is taking out of the pockets of smaller
communities and putting it in the hands of the state
which is not a fair exchange at all, because in the
long run, it's a benefit to the state to strengthen
local government. Getting back to the original point,
I firmly support the resolution and I hope the
Legislature will adopt it...
SENATOR THERRIAULT said an income tax sort of supercharges the
redistribution of wealth by, for instance, taxing his and his
wife's $2,000 worth of dividends at their tax rate and not
necessarily taxing his neighbor who might not be in a taxable
category at all and who has access to all the different sorts of
welfare available.
MS. NORDALE replied that might be true, but if you own a share
of stock in General Motors and she owns a share, you will pay
federal income tax at a different rates because the incomes are
different. That is part of the whole system.
I don't see how we can make an adjustment in terms of
the dividend to affect some sort of super equality, a
negative income tax, just to protect the person who
might, because of a higher income, pay more income
tax. I think one of things you need to realize is that
the dividend is taxable by the federal government. If
it were taxable as income here in the state, it would
be money that would stay in the state and not go to
the federal government.
CHAIR SEEKINS said that only the portion that came to the state
couldn't be taxed by the federal government.
MS. NORDALE responded that under the old system of taxation, 16
percent of federal tax went to the state treasury and that is
better than nothing, basically.
MR. CARY DEWIT said he thinks the POMV makes sense particularly
the part that allows the Legislature to predict how much money
is coming in ahead of time. However, he is concerned if this is
in the form of a constitutional amendment. He suggested that the
5 percent figure not be fixed there, but be made to reflect the
actual market growth. He also read something in the Fairbanks
paper about including a cap on government spending.
CHAIR SEEKINS said that is in a separate bill that Senator Dyson
had introduced.
MR. DEWIT said he also supports an income tax. It is the fairest
and most sensible way of providing a long-range source of
revenue for the state.
SENATOR THERRIAULT remarked that it's acceptable public sport in
America to distrust anyone who has anything to do with spending
a public dollar. He asked why an income tax would magically
transform that.
MR. DEWIT replied when a person sees a solid connection between
money going out of their pocket into government revenue, they
are going to be much more interested in how that money is spent.
TAPE 03-55, SIDE A
SENATOR THERRIAULT commented there isn't that dynamic when he
and thousands of other people write their property tax check.
MR. DEWIT said maybe there is a public apathy problem.
MS. MARY BISHOP, Fairbanks resident, said she is on a fixed
income and definitely supports inflation proofing. She also
supports the Legislature and the administration knowing the
amount available for appropriation one year in advance. She
wondered if that would also mean knowing the amount of the
dividend ahead of time as well.
MS. BISHOP said that this proposal seems to allow the state to
use some of the money for their regular budget, which she
doesn't think happened before.
CHAIR SEEKINS clarified that every year millions of dollars are
spent out of the permanent fund on things like public safety and
hold harmless agreements. This year it amounts to around $40
million.
MS. BISHOP asked who decides how much of the 5 percent goes to
pay dividends and how much will pay for government.
SENATOR THERRIAULT replied all that is under discussion. Current
wording is just up to 5 percent and the Legislature could have a
statutory scheme on how the dividend would be calculated. The
current statutory computation of the rolling five-year average
could be retained.
CHAIR SEEKINS added that currently the Permanent Fund Board of
Trustees is able to determine the size of the dividend to a
degree by deciding whether or not to sell or retain shares.
Right now the size of the realized income is a function of what
the board and the executives instruct the managers to do. "You
can play god with the size of the earnings now."
MR. BARTHOLOMEW said their goal is to earn 5 percent over
inflation. Their consultants estimate that going forward for the
next five years they are going to do 8 percent or a little less
and inflation is going to be 3 percent or a little less. If you
leave 3 percent in the fund, you have 5 percent to spend and
they don't know what the capital markets might do. Inflation
might go up, which could affect how much interest you get from
bonds.
SENATOR THERRIAULT commented that it would be very handy to be
able to know how much money they are working with and the only
thing that would give the Legislature surety would be if all
state revenues went into the permanent fund and the percentage
draw off limited every year. This was originally known as the
Cremo Plan after the person who developed it years ago. Right
now, corporate taxes, rents and royalties still need to be
projected.
MR. DAN REVERO, North Pole resident, said he opposes a state
income tax, but is inclined to favor a sales tax to spread the
money to municipalities. He supports the POMV.
CHAIR SEEKINS asked further questions or further questions or
comments.
SENATOR THERRIAULT said this year the Legislature used 17(b) of
the constitution to get access to the constitutional budget
reserve with a simple majority, but to do so, they had to make
an advance appropriation for the next year's inflation-proofing,
leaving $100 million in the earnings reserve. At the time, it
was projected to have $360 million; the $260 million was moved
in advance. He asked Mr. Bartholomew what the advance deposit
would be under the proposal. Currently, everything in excess of
$100 million is moved into the principal of the permanent fund.
MR. BARTHOLOMEW responded that one of the components in the
letter of explanation is that the Legislature would take money
out of the earnings reserve and move it into the principal,
earmarking that for next year's inflation proofing. At the same
time next year's inflation proofing appropriation is repealed
and moved ahead one year.
To give you the perspective of inflation, last year it
took $600 million to fully inflation proof. This June
30 that will end here in less than one week, we're
predicting it's going to take $350 million to
inflation proof. Looking forward to next year, I think
we're looking at about $550 million to fully inflation
proof. All of these are projections. At the time that
the Legislature made the decision, we projected the
sweep to be $250 million. So you would have paid a
little less than half of next year's inflation ahead
of time. The only change since then as the markets
have changed and as our managers have made decisions,
the amount of realized income has risen and we expect
that transfer or sweep, now, to be roughly $350
million. So, we're going to sweep more and we're going
to - if you apply that to inflation proofing, then
there will be less needed next year. And the only
other comment is when we get to next year it is the
balance that is in the earnings reserve, which will be
the $100 million that we're going to start with. What
we will earn next year in realized earnings, when we
get to the end of the year - that will determine how
much is available for the Legislature for dividends or
inflation proofing.
SENATOR THERRIAULT asked him to explain the inflation proofing
at $600 million, going down to $350 and that they are projecting
it to go back up to $580 million. He questioned whether they
overestimated what's going to be needed.
MR. BARTHOLOMEW answered that he could make a statement like
that looking at just next month or next year, but they try to
get away from one year windows. When the trustees talk to their
consultants, they look at five years and over five years they
are projecting inflation to be 2.6 percent. "So, when I estimate
to you that it's going to cost $550 million for inflation
proofing, it's based on a five year average."
MR. SHORER added that the inflation number is based on a
calendar year and we are six months through that for this year.
CHAIR SEEKINS thanked everyone for their comments and adjourned
the meeting at approximately 8:00 p.m.
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