HOUSE JOINT RESOLUTION NO. 46  Proposing amendments to the Constitution of the State of Alaska relating to the principal of the Alaska permanent fund; limiting appropriations from the Alaska permanent fund to amounts equal to that part of the market value of the fund that exceeds the principal based on an averaged percent of the fund market value. Co-Chair Harris summarized that in addition to the Percent of Market Value (POMV) provision, the legislation would incorporate in a constitutional amendment the value of $22,988,000,000 plus deposits made between June 30, 2003 and the date of the principal is determined. PETE ECKLUND, STAFF, CO-CHAIR WILLIAMS, noted that the intent is to define principal. Any deposits after June 30, 2003 will increase the principal. The principal would be protected and could not be appropriated. Only the value of the fund that exceeds the principal amount could be appropriated. He noted that the principal amount as of February 29, 2004, was $23,195,500,500. Co-Chair Harris questioned if the Earnings Reserve Account would remain. BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA PERMANENT FUND CORPORATION, DEPARTMENT OF REVENUE, provided information relating to the legislation. He clarified that there would be an account that would record the value in excess of principal. He did not know what the account would be called. Income or value from investments earned above principal would be accounted for. Co-Chair Harris noted that 5 percent of the earnings would be the maximum amount that could be appropriated in any one year. Mr. Bartholomew explained that there would be a two- step process: calculate based on the total value of the Fund a five percent payout; and determine if there is enough in the account to make the appropriation. The payout would be reduced if there were insufficient funds to an amount above principal. In response to a question by Vice-Chair Meyer, Mr. Bartholomew observed that the Alaska Permanent Fund Corporation Board had not met on the new proposal, but observed that it would meet their number one priority to establish a spending limit. A proposal that retains principal would be a workable solution. Short-term drops in the stock market could reduce what is available for spending, which would remove the benefit of a stable, predictable payout amount. Vice-Chair Meyer observed that if the average earnings were only 2 percent, there would only be 1 percent for government and 1 percent for dividends. He noted that people want at least $1,000. He questioned if the pure POMV method would provide the safest manner to insure a $1,000 dividend. Mr. Bartholomew agreed and noted that [the constitutional protection of the principal] adds the risk of less than a full payout during a short-term down market. Vice-Chair Meyer asked how many years the Fund has been below the 5% threshold in earnings. Mr. Bartholomew observed that the balance in the account has been less than 5 percent a couple of times "intra-year" or during the year. However, there was a rally during 2003, the year in which they were most at risk, and funds were available to pay the 5%. He observed that, last year, the amount in the available spending account of the Permanent Fund grew by $3.5 billion, which is more than enough to fund a 5 percent payout. Vice-Chair Meyer supported the "pure" Percent of Market Value method; at times earning 12-15% so he believes in long run, always would get average 8%. He thought this method would be "separate buckets" and would be easier to explain to the voters. Mr. Bartholomew observed that the Permanent Fund is invested as one fund. It is not separated into buckets of principle and the value above principal. There is one pool of money, which is only treated differently for accounting purposes. He observed that under HJR 26, it would be accounted and invested as one fund. Representative Croft asked re the new language on page 1, lines 13-15 through line 2, page 2 and asked if envision it would rise over time. Mr. Bartholomew, said under this proposal it would be accounted for under what is not principal, and it is not envisioned to appropriate it for inflation-proofing while not losing that option. Appropriations from any source would go into the principal. Representative Croft asked what would happen to the 3 percent used for inflation proofing; would it be appropriated each time. Mr. Bartholomew understood that the 3 percent, which would be retained over time to offset inflation, would be kept in the Permanent Fund. Under the proposal it would be accounted for in the account that is not principle. There is no intent to annually appropriate a portion of this to principal, but the option of a special appropriation would remain. Any appropriation from any source or an appropriation of earnings within the Fund would be principal. Representative Croft asked if a deposit to the Fund would be an appropriation made to the principal. Mr. Ecklund explained that the constitutional 25 percent royalties occur automatically under subsection (1). Subsection (2) applies to any other appropriation to principal. Since June 30, 2003 there have been appropriations to the principal for inflation proofing. Any appropriation, along with the 25 percent automatic deposits will help the Fund grow. Mr. Bartholomew observed that the 25 percent automatic deposits are between $200 and $400 million. The FY04 fiscal year is anticipated to be about $350 million. Last year's appropriation under the current law was $400 million. MR. Ecklund explained that the payout is limited to five percent of the 5-year average of the earnings. Any accruing of profits or value that rises would be in excess of principal. The spending appropriation limit would still be up to 5%. A future legislature could put money back into the principal. Representative Croft asked if the January 30, 2004 principal amount was with realized gain. Mr. Bartholomew clarified that it is without both the realized and unrealized gains. Under the proposal, both the realized and unrealized earnings would start in the account that is not principal. Representative Croft asked if there was an opinion by Attorney General Renkes that the realized gains should be included in the principal amount. Mr. Bartholomew affirmed, result of that opinion was the realized earnings went into available to spend account and the unrealized gains and losses were attributed to the principal. The proposal would go back to the definition used prior to the Attorney General's opinion, which placed all earnings accounted for outside of that principal. Co-Chair Harris MOVED to report HJR 46 out of Committee with the accompanying fiscal note. There being NO OBJECTION, it was so ordered. HJR 46 was REPORTED out of Committee with individual recommendations and with two fiscal impact notes.