HJR 10-CONST AM: PERMANENT FUND; POMV;EARNINGS  1:02:32 PM CHAIR GRAY announced that the first order of business would be HOUSE JOINT RESOLUTION NO. 10, Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund and to appropriations from the Alaska permanent fund. 1:02:57 PM REPRESENTATIVE CALVIN SCHRAGE, Alaska State Legislature, as prime sponsor, presented HJR 10. He paraphrased the sponsor statement [included in the committee packet], which read as follows [original punctuation provided]: When the Permanent Fund was created, it was structured as two accounts: the Principal and the Earnings Reserve Account (ERA). The Alaska Constitution prohibits the spending of the Principal without a vote of the people. However, profits generated by the fund are deposited into the ERA, which is entirely available for the Legislature to appropriate and spend. The current value of the ERA is approximately $16 billion. Overdraw of the ERA depletes the value of the entire Permanent Fund and leaves Alaska worse off. In 2018 the Legislature adopted statutes that allow appropriation up to an amount that maintains the growth of the fund. This plan is commonly known as the "Percent of Market Value" ("POMV") draw. Still, those statutes do not stop the Legislature from passing budgets that spend Permanent Fund earnings beyond than those sustainable limits. This resolution would send a proposed amendment to Alaska voters to enshrine this policy in the constitution. The proposed constitutional amendment would combine the Permanent Fund Principal and the Permanent Fund Earnings Reserve Account into a single constitutionally protected account. Under this proposed amendment, the Legislature would be allowed to appropriate each year a maximum of five percent (5%) of the market value of that new constitutionally safeguarded account as calculated over the first five of the preceding six fiscal years. Experts have told the Legislature that these limits make that spending rate sustainable. The Permanent Fund's Board of Trustees have recommended this change since 2003, and this constitutional amendment was also urged by the Fiscal Policy Working Group, a bipartisan and bicameral group of legislators that issued a report in 2021. This measure is not and should not deal with the size of the Permanent Fund Dividend or what specific percentage of this appropriation is spent on state services. It neither encourages nor prevents legislators from pursuing those plans in the future. This merely prevents the state from overspending our renewable financial resource which ensures the permanence of our Permanent Fund. 1:06:12 PM DEVEN MITCHELL, Executive Director, Alaska Permanent Fund Corporation (APFC), referred to a PowerPoint, titled "Trustees' Paper Volume 10 Modernizing the Alaska Permanent Fund: A Single- Fund Endowment Model." He summarized slide 2, "A Legacy of Intergenerational Resource Contribution," which read as follows [original punctuation provided]: In 1976 Alaskans chose to permanently forgo immediate use of at least 25% of oil and mineral revenues, saving instead to create a renewable financial resource for generations the Alaska Permanent Fund. Today, the Fund - • Leads the Nation The largest U.S. sovereign wealth fund, globally recognized as a model for converting finite natural resources into lasting wealth. • Supports Alaska Provides over 50% of the state's unrestricted general fund revenue for dividends and essential services through the annual Percent of Market Value (POMV) draw. MR. MITCHELL said the structural change before the committee has been advocated for since the Knowles administration in the 1990s, and each iteration of the APFC Board of Trustees since then. He said the primary reason for considering HJR 10 is to ensure that the percent of market value (POMV) draw is transferred each year and eliminate the ability for one generation to spend more than its fair share. 1:11:57 PM The committee took an at-ease from 1:11 p.m. to 1:13 p.m. 1:13:17 PM CHAIR GRAY questioned the major opposition to this proposal and why it has never been enacted. MR. MITCHELL said change is hard. He shared his belief that there's been a legacy of concern about impact to other things, like the permanent fund dividend (PFD) program, and fear that the POMV transfer may result in a gradual drain on the Alaska Permanent Fund ("the fund"). He said there's been a lack of ability to adequately educate policy makers and allow them to embrace the idea and its strengths. 1:15:02 PM MR. MITCHELL explained that the benefits of switching to a single-fund endowment structure is to ensure the ability for the state to provide for a dividend and its operating needs, and avoid a potential overdraw by the legislature or governor. It would also eliminate the need for inflation proofing, as all earnings would be retained and reinvested in the single fund. He referenced the historical performance of the fund in 10-year lookbacks. The takeaway, he said, is that the target rate of return is a challenge to hit on a long-term basis, but achievable at 5 percent. 1:19:58 PM MR. MITCHELL referred to slide 3, which showed the current two- account structure, which is far more complex than the proposed solution and involves more risk. He explained that there is significant levels of unrealized gains in the fund's portfolio that cannot be spent under the current construct without selling an investment that's increased in value or receive revenue from a stock or bond in the form of interest, which illustrates the concern about the ability to provide for the POMV transfer on an ongoing basis. He recalled that the Division of Legislative Finance ("LFD")) had modeled a scenario that showed insufficient money in the Earnings Reserve Account (ERA) to provide for the POMV draw. 1:22:33 PM REPRESENTATIVE VANCE asked Mr. Mitchell to respond to the concern that transitioning to a single model would take away the flexibility to draw from the ERA in a tight year. MR. MITCHELL said the question encapsulate the current discussion about overdrawing the fund for one generation's benefit at the expense of others. He indicated that the inability to impose fiscal restraint is made harder with more options, so from a conservative fiscal perspective, the proposal would eliminate the ability to overspend from this resource. 1:25:25 PM REPRESENTATIVE VANCE asked whether LFD and APFC had provided an assessment on the status of the ERA and how it might change in the coming years, given the state of the economy. MR. MITCHELL said Callan's market assumptions are extrapolated to project future balances, but it's difficult to predict. He acknowledged that HJR 10 would limit the state's flexibility and force the state to maintain fiscal discipline. However, he shared his belief that if boundaries are never set, available resources will always be used. REPRESENTATIVE KOPP asked about the risk to the state in a volatile market with a single-fund endowment. He shared his understanding that under the current structure, the ERA absorbs the losses, as well as the gains, for the entire fund. MR. MITCHELL clarified that it used to be that way; however, during the 2008 financial crisis, it was modified so that gains losses are pro-rata allocated between the two accounts. REPRESENTATIVE KOPP asked whether the single-fund endowment model would better protect the state against a volatile market. MR. MITCHELL said shifting to a single fund could have marginal benefits; however, it would not significantly adjust the risk tolerance. He reiterated that the goal of investment staff is to maximize total return for the long-term benefit of the state and worry less about unrealized or realized gains. 1:34:51 PM REPRESENTATIVE KOPP surmised that the greater fear is overdrawing the fund. He posited that the single-fund endowment would allow for more control over risk and increase the state's safety by prohibiting an overdraw. MR. MITCHELL agreed that, although not verbatim, that is generally APFC's sentiment. 1:36:20 PM MR. MITCHELL resumed the presentation on slide 4, which gave a comparative look at the fund's value in a two-account structure and the proposed endowment model as of January 31, 2025. Slide 6 charted the volatility of oil revenue, the dividend payment, and POMV transfer. It's intended to show the stability of the POMV draw on revenue and its benefit to the state. Slide 7 show the story of the ERA and the declining realized earnings from almost $13 billion in Fiscal Year 2019 (FY 19) to a deficit of $400 million in FY 25. He summarized slide 9, "Proposed: Single-Fund Endowment Model," which read as follows [original punctuation provided]: Adopting this model, which would include a Constitutionally established spending limit, would strengthen the Fund's long-term stability and purchasing power for future generations. • Merge the Principal and the ERA into a Single- Fund. • Limit annual distributions through a Constitutional POMV Rule. • Ensure automatic inflation proofing by adhering to a long-term sustainable withdrawal rate. MR. MITCHELL continued to slide 10, "Benefits of the Single-Fund Endowment Model," which read as follows [original punctuation provided]: Aligned with global best practices, strengthening Alaska's financial position through sustainable withdrawals & limited to the Fund's long-term real return. Alignment with Prudent Investor Standards Follows best fiduciary and prudent practices for endowments and trusts. Total-Return Investing Maximizes long-term growth without liquidity constraints. Predictable & Sustainable Spending A maximum draw POMV rule prevents overspending. Automatic Inflation Proofing Eliminates the need for manual and ad hoc legislative adjustments. MR. MITCHELL advanced to slide 11, "Constitutional Amendment," which read as follows [original punctuation provided]: The Board of Trustees has been on record for more than twenty years supporting the transition to a Single- Fund endowment to protect its intergenerational sustainability and ensure that it provides for all generations. Board Resolutions 2000-13, 2003-05, 2004-09 • Supporting a constitutional amendment to limit the annual Fund payout to not more than a 5% POMV averaged over a period of 5 years. • Implementing a constitutional POMV spending limit has the accompanying benefit of assuring permanent inflation-proofing of the Fund. MR. MITCHELL summarized the Trustees' Paper Volume 10 on slide 10, which highlighted the benefits of moving to a single account structure. 1:43:15 PM CHAIR GRAY expressed some concern that moving to an endowment model would take away the flexibility that the ERA provides; however, he expressed opposition to a spending cap. For someone who wants to maintain flexibility without a spending cap, he said he supports the bill because he wouldn't want to be in a situation where there's nothing in the ERA. 1:44:43 PM CHAIR GRAY opened public testimony on HRJ 10. 1:45:13 PM BENJAMIN COOK, representing self, gave testimony unrelated to the bill. 1:46:41 PM MIKE COONS, representing self, testified in opposition to HJR 10. Commented on his disapproval of the 5 percent draw, and the 75/25 dividend split. 1:49:57 PM CARRIE HARRIS, representing self, gave testimony unrelated to the bill. CHAIR GRAY closed public testimony on HJR 10. 1:53:50 PM REPRESENTATIVE VANCE asked why Legislative Legal Services included the language on page 2, lines 1-5, to be included in the Constitution of the State of Alaska ("the Alaska Constitution"). REPRESENTATIVE SCHRAGE reasoned that it would allow certain expenses associated with the management of the fund to be considered outside that 5 percent because it's related to the sustainability of the fund. REPRESENTATIVE VANCE sought to confirm that the [appropriation to pay for management expenses] would happen before the money is deposited into the general fund (GF). REPRESENTATIVE SCHRAGE deferred the line of questioning to Legislative Legal Services. 1:57:13 PM CHAIR GRAY said some of the value of the Alaska Constitution is its broadness. He expressed concern about constitutionalizing specific numbers that may need to be changed in the future. REPRESENTATIVE SCHRAGE expressed concern that about the legislature taking a disproportionate share of the ERA given the sacrifice of past generations. He acknowledged that HJR 10 would put a specific cap on the draw; however, he opined that a limit needs to be implemented to prevent today's generation from overdrawing the fund. He said 5 percent is viewed as being on the high end of sustainable while still allowing the legislature the flexibility to draw less. 2:01:12 PM CHAIR GRAY said he fundamentally disagreed with the notion of trusting the market more than "ourselves." He asked why the legislature would take away its decision-making power to be governed by the market. 2:02:00 PM REPRESENTATIVE KOPP pointed out that specific numbers were used in 1976 and opined that [5 percent] is reasonable. CHAIR GRAY raised the concern about the legislature not being able to bail itself out in an emergency situation. REPRESENTATIVE KOPP contended that in an emergency, the Alaska Constitution would allow the governor to break any spending rule. 2:05:18 PM REPRESENTATIVE SCHRAGE agreed that the legislature has historically shown discipline in building up the Constitutional Budget Reserve (CBR), but on the flip side, it also spent down the CBR. He reiterated that a 5 percent cap would allow flexibility in spending while avoiding the erosion of the fund's value. 2:07:42 PM REPRESENTATIVE VANCE asked about the impact of the language on page 2, lines 2-5. 2:08:27 PM EMILY NAUMAN, Director, Legislative Legal Services, Legislative Affairs Agency (LAA), said currently, Article IX, Section 15, of the Alaska Constitution does not provide for costs associated with the investments made by APFC to come out of the corpus or Principal of the fund. HJR 10 makes a policy decision that would allow the legislature to appropriate from the Principal to pay those [administrative] costs associated with investments. REPRESENTATIVE SCHRAGE referred to page 2, line 3, and asked whether the appropriations for those expenses would fall outside the 5 percent limit. MS. NAUMAN answered yes. 2:10:49 PM REPRESENTATIVE VANCE asked why the legislature would want to pay these costs from the corpus and not the GF. REPRESENTATIVE SCHRAGE said either would be appropriate and a policy call for the legislature to make. REPRESENTATIVE VANCE sought to confirm that it's keeping with current practices. REPRESENTATIVE SCHRAGE answered yes. 2:11:53 PM REPRESENTATIVE MINA pointed out that HJR 10 had been a unanimous recommendation from the 2021 Fiscal Policy Working Group in conjunction with numerous other policy solutions for addressing the structural deficit. This is not the only lever for addressing state funding, she added. 2:12:33 PM REPRESENTATIVE UNDERWOOD asked whether HJR 10 would be considered a constitutional amendment or a revision. MS. NAUMAN opined that it would not constitute a revision, which would require a constitutional convention, because it meets the four-pronged test for constitutional amendments: the proposal is simple and easy to understand, complete within itself, relates to one subject, and substantially affects only one section of the Alaska constitution. 2:14:51 PM REPRESENTATIVE UNDERWOOD asked whether the 5 percent draw is a spending cap, and if so, why not change the constitutional spending cap instead of the POMV draw. REPRESENTATIVE SCHRAGE said it's a revenue cap, which he characterized as one of the best forms of spending cap because it limits the amount available for appropriation. He said adjusting the spending cap would not protect the fund from overdraw, which is the aim of the resolution. REPRESENTATIVE VANCE asked whether the inclusion of more than 25 percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments, and bonuses received by the State, as well as a portion of renewable resources, into the Alaska Permanent Fund had been discussed in the Fiscal Policy Working Group. REPRESENTATIVE SCHRAGE said not that he recalled. 2:18:31 PM REPRESENTATIVE VANCE said she would appreciate a fiscal analysis on the impact of this proposal. 2:20:35 PM CHAIR GRAY announced that HJR 10 was held over.