Legislature(2019 - 2020)SENATE FINANCE 532
01/20/2020 10:00 AM Senate BICAMERAL PERMANENT FUND WORKING GROUP
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| Audio | Topic |
|---|---|
| Start | |
| Overview: Working Group Draft Report | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
BICAMERAL PERMANENT FUND WORKING GROUP
January 20, 2020
10:05 a.m.
MEMBERS PRESENT
Representative Jennifer Johnston, Co-Chair
Representative Jonathan Kreiss-Tomkins
Representative Kelly Merrick
Representative Adam Wool
Senator Click Bishop, Co-Chair
Senator Shelley Hughes
Senator Donald Olson
Senator Bert Stedman
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Sara Hannan
Representative Andy Josephson
Representative Bart LeBon
Senator Cathy Giessel
Senator Josh Revak
COMMITTEE CALENDAR
OVERVIEW: WORKING GROUP DRAFT REPORT
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
ACTION NARRATIVE
10:05:55 AM
CO-CHAIR JENNIFER JOHNSTON called the Bicameral Permanent Fund
Working Group meeting to order at 10:05 a.m. Present at the call
to order were Representatives Wool, Kreiss-Tomkins, Merrick, and
Co-Chair Johnston.
10:06:31 AM
CO-CHAIR CLICK BISHOP stated that Senators Olson, Hughes,
Stedman, and Co-Chair Bishop were present at the call to order.
10:06:36 AM
CO-CHAIR JOHSTON recognized that Representatives Josephson,
Hannan and LeBon, and Senators Giessel and Revak were also
present.
^OVERVIEW: Working Group Draft Report
OVERVIEW: Working Group Draft Report
10:07:11 AM
CO-CHAIR JOHNSTON announced that the business before the
bicameral working group was to review the Working Group Draft
Report, dated January 20, 2020.
She explained that the report represents a summary of the work
the working group has done over the last seven months, including
a history of the creation of the working group, a brief history
of the Alaska permanent fund dividend (PFD), a synopsis of each
of the working group's meetings, the working group assignments
that were completed, and the models the working group evaluated.
She said House Concurrent Resolution 101 created the working
group and charged it with making policy recommendations on the
future use of the earnings of the Alaska Permanent Fund. The
report does not make a recommendation on changes to the PFD
formula or the size of the PFD check. However, the group was
able to establish and recommend that the permanent fund should
be protected from inflation and the legislature should not
utilize more of the earnings reserve than is outlined in Senate
Bill 26 from 2018, otherwise known as percent of market value
(POMV).
She pointed out that at the last meeting, the working group
evaluated several different scenarios related to the use of the
earnings reserve and the size of the dividend check. She said
she was pleased that the working group developed a framework for
modeling the options heading into the second session of the
Thirty-First Alaska State Legislature. She reminded listeners
that the models represent a snapshot in time. They assumed a $50
million supplemental and were based on the Alaska Department of
Revenue Spring 2019 Revenue Forecast. Since then, the Fall 2019
Revenue Forecast was released resulting in an additional
shortfall of approximately $200 million and a preliminary
supplemental of approximately $230 million.
CO-CHAIR JOHNSTON asked if any working group member had a
comment.
SENATOR HUGHES thanked the individuals that worked on the
working group report. She highlighted that one of the edits she
suggested was in the first paragraph of the executive summary
regarding what the working group was tasked to do. Originally,
the report stated that the working group was tasked with
submitting a report to the legislature in January 2020. However,
the resolution (HCR 101) tasked the working group with making
policy recommendations. She asked the co-chairs what policy
recommendations the working group was making in the report.
CO-CHAIR JOHNSTON opined that the strongest policy
recommendation is that the legislature needs to adhere to the
structured draw no matter what kind of formula is used for the
PFD and what revenue the legislature is looking for, for the
state.
10:10:54 AM
SENATOR HUGHES highlighted a recommendation she made that was
not included in the final draft. She said she suggested striking
the phrase "To that end," from the last sentence of the
executive summary and insert:
A majority of members agree that use of permanent fund
earnings must stay within draw limits established by a
structure like the percent of market value law enacted
in 2018.
She said the phrase "To that end," is not an appropriate
conjunction because it implies that the structured draw itself
takes care of inflation proofing and it doesn't. It might do so
indirectly because some funds outside of the structured draw may
inflation proof the corpus, but a limited structured draw does
not provide automatic inflation proofing.
SENATOR HUGHES said she also expressed concern and made a
suggestion regarding the POMV but it did not have support.
Because her concern remains, she prepared an amendment she hopes
other members agree with.
10:13:14 AM
She suggested striking the last sentence of the executive
summary and inserting:
Also, members agree that use of permanent fund
earnings for state services and dividends must be
limited in order to protect the permanent fund.
She said the executive summary will still say that the working
group agrees that there must be a limit to avoid willy-nilly
spending. She added that if the group does not want to change
the language, at least replace the phrase "To that end," with "A
majority of members agree".
10:13:56 AM
At ease.
10:20:29 AM
CO-CHAIR JOHNSTON called the committee back to order.
10:20:38 AM
SENATOR HUGHES withdrew her previous suggestion and offered a
conceptual amendment to strike the words, "To that end," and
insert, "A majority of members agree that". The last two
sentences of the executive summary would read:
While agreement on the size of a dividend may still be
difficult to attain, members agree that the permanent
fund must be protected from inflation so that future
generations of Alaskans may benefit from it. A
majority of members agree that use of permanent fund
earnings must stay within draw limits established by a
structure like the percent of market value law enacted
in 2018.
SENATOR STEDMAN asserted that there is a huge misconception
within the working group. Quite a bit of time has been spent
debating the POMV concept, going back to Governor Murkowski's
administration. A couple of years ago the legislature
established a POMV structure that limited the draw to 5.25
percent and then to be 5.00 percent. The comment that it does
not take care of inflation is inaccurate; that is precisely what
it does. The endowment-style structure is proven over decades of
use all over the world.
SENATOR STEDMAN explained that what drives the inflation
proofing is a draw rate lower than the consumption of all the
earnings, including what is lost in purchasing power. The 5.25
percent and then 5.00 percent draw is set by the permanent
fund's asset allocation which is set by market returns. That is
what drives the 5 percent draw. It's not 8 percent because
historic global returns cannot produce the income to inflation
proof and protect the purchasing power of the Alaska Permanent
Fund to sustain that draw. He continued to say:
To miss that point, to me, is phenomenal. It is
fundamental to the structure, and to have language
that may give flexibility and cover to the
legislature, the appropriating body, to appropriate
funds above what the portfolio can return with
inflation and protect itself, and protect the future
Alaskans is a fundamental abrogation of our
responsibility for future generations of Alaskans.
10:24:20 AM
SENATOR STEDMAN emphasized that the current generation should
not be consuming all the revenue and wealth created from
Alaska's oil basin. Some of the wealth created by the current
generation must be left for future Alaskans. He said he does not
want to see weasel-words in the working group report. He
emphasized that he wants to see the legislature, regardless of
the size of the PFD, protect the current and future value of the
permanent fund. He opined that the PFD will just default out.
He stressed that the permanent fund must be protected against
the legislature spending it, and noted that both political
parties have made motions on the floor of the bodies to do just
that. The issue does not reside on one side of the political
spectrum or the other. He said the legislature worked very hard
to build the Constitutional Budget Reserve (CBR) to well over
$10 billion. Assuming the proposed budget passes this session,
it has been depleted to $500 million. He said he disagrees with
those who do not think the legislature will spend down the
permanent fund if the window is open. The depletion of the CBR
over the last several years is proof of that.
He stated that he would like the working group to hold firm on
the language in the final report to make it very clear to the
public that regardless of the financial demands over the last
several years, the purchasing power of the permanent fund will
not be depleted. Spending the entire earnings reserve only takes
a majority vote of bodies and a signature by the governor.
10:26:53 AM
CO-CHAIR BISHOP pointed out that the POMV is an important piece
of legislation that gives the legislature the predictability for
building future budgets.
SENATOR HUGHES said she appreciates Senator Stedman's comments
and generally agrees with his concern that the permanent fund
should truly be protected for future generations. However, the
fact is that the court ruling and the legislature can go outside
the POMV draw with a simple majority vote. She opined that the
only way to inflation proof the permanent fund is to do what was
done in fiscal year 2020 and that is to put funds from the
earnings reserve into the corpus. She reiterated that taking a
limited draw does not secure inflation proofing for the
permanent fund.
10:28:40 AM
REPRESENTATIVE KREISS-TOMKINS agreed with Senator Stedman that
the permanent fund must be protected. He opined that the order
of priority is that without a permanent fund there isn't a
permanent fund dividend. He said as somebody who is passionate
about the future, integrity, and intergenerational solvency of
the permanent fund, he also believes in the PFD as an
institution.
He said he appreciates the report, including Senator Hughes'
amendment, and believes that every member supports the integrity
and protection of the permanent fund, but it does not create an
orb of protection for the permanent fund into the future.
REPRESENTATIVE KREISS-TOMKINS opined that as much as Senate Bill
26 was a watershed moment in terms of how the state is going to
manage the permanent fund asset, there is ongoing risk to the
permanent fund and it will always exist. Statute alone or a
consensus that may evaporate from legislature to legislature or
decade to decade into the future is not sufficient to protect an
asset that is the best thing Alaska has going.
REPRESENTATIVE KREISS-TOMKINS said he appreciates the work the
working group has done but he believes the legislature
ultimately has to rely on the constitution to provide protection
that is inviolate. A report and executive summary cannot make
the permanent fund truly permanent as whims change and political
winds blow.
10:31:06 AM
He said his second comment is that the executive summary does
not address the permanent fund dividend formula. He expressed
appreciation for Senator Hughes' comments last year about what
the formula can look like. He opined that all members know that
the PFD needs to be reexamined. However, so long as the PFD
formula is unresolved, there is going to be political risk to
the permanent fund, not because there are people who want to
raid the permanent fund, but because there is huge unresolved
business in Alaska. So long as there is unresolved business
regarding the PFD formula, then the permanent fund becomes the
potential collateral damage.
REPRESENTATIVE KREISS-TOMKINS opined that there is a lot of
potential for the working group to work on the PFD formula. He
said even though he has a different perspective than Senator
Hughes on what the PFD formula should look like, it is important
for there to be resolution in order to protect the permanent
fund.
SENATOR OLSON commented that Senator Stedman has a very good
understanding of what the nuts and bolts are for some of the
financial situations the state finds itself in and POMV is one
of those issues.
He shared that his constituents do not have a clear
understanding of what the POMV says or does so it's easy for it
to be misinterpreted. The POMV methodology may be interpreted as
being detrimental to the future of his constituents' sacred cow,
the PFD.
SENATOR OLSON offered his belief that the working group is
trying to agree that the permanent fund should be protected. He
said he is in favor of the amendment because it makes it very
clear for people to understand without having a strong financial
background.
10:34:41 AM
SENATOR HUGHES pointed out that the POMV is a percentage off the
value of the entire fund. Over a number of years the POMV draw
works, and that is why a lot of people skilled in fiscal matters
recommend it. However, a 5 percent draw in a series of bad years
could eat into the corpus of the permanent fund.
SENATOR HUGHES remarked that the working group has not discussed
other options to the POMV methodology. She suggested that
another option would be to go back to the original formula but
subtract inflation proofing and put it in the corpus prior to
the 50:50 split for the PFD and state services. The original
formula only deals with earnings and avoids having to worry
about dipping into the permanent fund corpus during bad years.
10:37:06 AM
SENATOR STEDMAN reiterated that the POMV looks at the entire
portfolio market to market. The liquidation value of all assets
is calculated every year and averaged over a four to six year
period to smooth the revenue stream for the predictability of
not only dividends but for monies used in a budget. He opined
that for this legislature to reinvent how to manage its
portfolios for the long-term best interest of Alaskans would be
ludicrous.
He emphasized that the POMV methodology has been implemented on
virtually all the large endowments and sovereign wealth funds on
the planet. If the POMV methodology was structurally flawed, it
would have showed up in the financial meltdown of 2008-2010 when
most of the banking industry got wiped out and the industrial
base got crippled. There was also the dot-com meltdown in 2000,
the huge selloff in October 1985, and the collapse in 1929.
He maintained that the legislature does not need to reinvent the
wheel in some politically expedient way. The legislature needs
to protect its wealth fund and the way to do that is to run and
manage a POMV. Inflation will take care of itself over time if
the POMV draw rate is low enough to allow gross earnings to
exceed inflation plus the draw.
He conceded that there will be several years of bear markets
where the overall value of a portfolio moves down. However, the
portfolio value is smoothed out by looking back and averaging.
Bear markets cannot be avoided in the financial markets, even
bonds held to maturity fluctuate daily due to interest rates and
economic conditions.
10:40:23 AM
SENATOR STEDMAN pointed out that the permanent fund portfolio is
well diversified and continues to diversify even further. The
asset classes within the permanent fund keep spreading out every
decade to protect the state from economic shocks. The
legislature has multiple meetings in both finance rooms on asset
allocation of the permanent fund to address asset-class
weighting. The responsibility of sitting in the legislature
necessitates the need to rely on experts in particular fields. A
consultant for the permanent fund, Callan, confers with the
legislature and permanent fund personnel about the permanent
fund.
SENATOR STEDMAN opined that having the legislature experiment
with how to run the Alaska Permanent Fund would be an absolute
disaster. Alaska knows how to run its sovereign wealth fund by
allowing other sovereign wealth funds around the world to lead
the way. The intent is to not be overly complicated but to
simplify so that the public, as Senator Olson said, can
understand. Alaska does not need to lead. What the state needs
to do is follow and allow the permanent fund to grow, hopefully
to get the fund to $80 billion to $100 billion and on.
He noted that there are communities in the state that run a
similar POMV model. The City of Sitka has run a POMV model for
over 20 years. The methodology is nothing new. However, having
too heavy a POMV draw is as detrimental to Sitka's POMV model as
having too large a POMV draw is to the permanent fund for the
State of Alaska.
SENATOR STEDMAN said the other comment he has is that the
earnings reserve is of such a significant size that the account
will continue to grow and become an ever increasing spending
target. The earnings reserve is spendable with a 21 and 11 vote
in each body and a signature by the governor. The more that can
be transferred from the earnings reserve to the constitutionally
protected permanent fund corpus the better. Last year the
legislature moved $5 billion to the corpus and his hope is that
more is moved because if there are billions of dollars sitting
in the earnings reserve to be easily spent, the account is a
target.
10:43:14 AM
CO-CHAIR JOHNSTON pointed out that the Alaska Permanent Fund has
won multiple international awards and other sovereign wealth
funds are looking at Alaska's fund as a source of how to best
operate. The state is very fortunate to have excellent fund
managers.
CO-CHAIR JOHNSTON opined that the legislature forgets that its
lane is a lane of appropriation and not a lane of asset
allocation. The legislature's lane is not the lane of management
of the permanent fund, it is a lane of how to appropriate the
earnings reserve account.
REPRESENTATIVE WOOL opined that the initial directive for the
working group was to talk about how to deal with the earnings of
the permanent fund and not the PFD, specifically. Last year was
a big sea change in that for the first time in history the state
used earnings from the permanent fund to fund state government,
so state government needs now compete with the PFD.
Traditionally, the permanent fund funded the PFD and oil funded
state government. Recently, the legislature used savings to fund
state government. However, the legislature is now at the point
that it can no longer use savings.
REPRESENTATIVE WOOL opined that the use of earnings from the
permanent fund for state government is the crux of the problem.
The legislature needs to protect the permanent fund indefinitely
because nobody knows what the future holds for oil revenue. No
one is going to predict oil is going to come back and save the
day. Saudi Arabia just decided to sell their oil company to
create an endowment to live on in perpetuity, a decision that is
the responsible thing to do.
10:45:57 AM
He noted that Representative Kreiss-Tomkins and Senator Stedman
alluded to enshrining the permanent fund draw in such a way that
it cannot be violated; that is a rule of an endowment to stick
with its rules and not overdraw. Then the endowment should live
in perpetuity to fund the things that the state needs to fund.
How the legislature splits up permanent fund earnings for state
government and other things is another discussion. He concurred
with previous comments that hard and fast rules must be placed
on the permanent fund to not exceed the draw.
REPRESENTATIVE WOOL said also mentioned in the working group
document is the $1.5 billion in the earnings reserve which is
money that was not used to pay the statutory PFD formula. There
are people on different sides who look at the $1.5 billion as
being available to pay a onetime surplus PFD. Doing so would
exceed the permanent fund draw and place the legislature on a
slippery slope. The $1.5 billion should stay in the fund and be
locked in.
REPRESENTATIVE WOOL noted that Representative Kreiss-Tomkins
mentioned constitutionalizing the POMV draw as the only way to
safeguard the earnings from 51 percent of the legislature
suddenly deciding to access the funds to pay out a bonus check.
Hopefully the legislature will figure out a way to stick to
that, he said.
CO-CHAIR BISHOP opined that the answer is in the executive
summary and historical look back; the legislature almost had it
in 2018 but was not able to get it over the top.
10:49:03 AM
CO-CHAIR BISHOP moved to adopt and finalize the Bicameral
Permanent Fund Working Group Report, as amended.
SENATOR HUGHES said she appreciated the motion that Co-Chair
Bishop made. She referred to page 9 in the report regarding
earnings versus market value, noting that she disagreed with the
tone in the section. She said she would not make any suggestions
for editing the section, but she didn't believe the original
formula was inherently wrong and volatile. She opined that if
the state had done a better job of living within its means and
been more careful with savings, the legislature would not be
facing a situation that pits the PFD against paying for state
services.
REPRESENTATIVE WOOL pointed out that on page 4 of the report,
the $10 million motor fuel tax in 1970 accounted for 6 percent
of the state's revenue.
10:51:31 AM
CO-CHAIR JOHNSTON announced that there being no objection, the
motion to adopt and finalize the report, as amended, passed.
She thanked the working group and the staff members who worked
on finalizing the report.
10:52:31 AM
There being no further business to come before the committee,
Co-Chair Johnston adjourned the Bicameral Permanent Fund Working
Group meeting at 10:52 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Draft Permanent Fund Working Group Report, 19 January 2020.pdf |
JPFG 1/20/2020 10:00:00 AM |
Bicameral Permanent Fund Working Group |
| Bicameral Permanent Fund Working Group Report, 20 January 2020.pdf |
JPFG 1/20/2020 10:00:00 AM |
Bicameral Permanent Fund Working Group |
| Bicameral Permanent Fund Working Group Report With Title Page, 20 January 2020.pdf |
JPFG 1/20/2020 10:00:00 AM |
Bicameral Permanent Fund Working Group |