HOUSE JOINT RESOLUTION NO. 1 Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund and to appropriations from the Alaska permanent fund. 9:47:52 AM REPRESENTATIVE JONATHAN KREISS-TOMPKINS, SPONSOR, thanked the committee for hearing HJR 1. He commented that the mechanics of the resolution was relatively simple. He explained that HJR 1 placed the Percent of Market Value (POMV) in the state constitution and collapsed the Earnings Reserve Account (ERA) into the Permanent Fund (PF) principle so that the entire fund was constitutionally protected from being overspent. The POMV draw would remain 5 percent. He voiced that HJR 1 left all other questions on the table. He thought that the resolution aspired to protect the PF from being spent down. He stressed that everyone would lose if the fund was spent down regardless of differing priorities. He viewed that the policy embodied in HJR 1 was a necessary component of any fiscal plan; that the PF was protected from overspending and preserved for future generations as the cornerstone of Alaskas fiscal future. His motivation was to force a fiscal plan and by hardening the draw it necessitated that the legislature figured the pieces out. The policy forced the legislature to figure out the budget problem. He was available for questions. Co-Chair Merrick indicated Ms. Rodell was available to provide comments. 9:51:35 AM ANGELA RODELL, CHIEF EXECUTIVE OFFICER, ALASKA PERMANENT FUND CORPORATION (APFC), indicated the trustees had been on the record since 2000 in support of a constitutional amendment that would enact a 5 percent POMV spending limit and protect the entire fund for future generations of Alaskans by eliminating the distinction between the principle and earnings. She elaborated that the percent of market value structure in the resolution allowed the fund to benefit all generations and limited payouts. It protected the funds value through constitutional inflation proofing and eliminated a separate appropriation for inflation proofing. Finally, it provided a payout that was compatible with APFCs investment policy and allocation strategy. She furthered that in 2003 and 2004 the board of trustees adopted resolutions that advocated for a constitutional POMV of 5 percent based on a 5-year average. In 2018, the board of trustees adopted Resolution 1804 that promoted the same concepts. Additionally, in 2020 the board reaffirmed the statements made in the prior resolutions. She believed that HJR 1 affirmed the long-term stability of the fund. 9:53:40 AM Representative Rasmussen asked if the 5 percent POMV was still sustainable if only 25 percent of the constitutionally mandated royalties were deposited into the fund and the 25 percent statute was repealed. Ms. Rodell replied that the royalties were important to the fund but did not impact the ability to withdraw the 5 percent POMV amount. She expounded that currently the statutory 25 percent was approximately $90 million and would be deposited into the fund. It was a very important amount but a very small amount and would not meaningfully affect the 5 percent POMV. 9:55:20 AM Representative LeBon asked if the fund was earning approximately 6.5 percent to 7 percent averaged over a reasonable timeline and added the royalties whether it would inflation proof the fund over the long-term. Ms. Rodell clarified that the 25 percent constitutionally mandated royalties had been around $300 million to $350 million and vary with the price of oil. The additional 25 percent had to do with oil development after 1979, was a more limited pool of money, and equated to the roughly $80 million to $90 million. The two generated different contributions to the fund. She elaborated that royalty was not inflation proofing and did not cover inflation. Royalty was a non-renewable resource that the state was attempting to create inter-generational equity with. Royalty had no tie to inflation. The inflation proofing came about based on the current constitutional construct. The principle did not get any inflation benefit from the increase in market value that might occur due to inflation because all the gain went to the ERA once its realized, which was why inflation proofing was necessary. A POMV structure would eliminate the need for inflation proofing because the total fund would benefit from all the gain and in effect constitutionalize inflation proofing. 9:58:00 AM Vice-Chair Ortiz asked whether there would be any leeway for the ERA outside of the 5 percent draw if a 5 percent draw was in the constitution. Ms. Rodell explained that how it worked mechanically was the unencumbered balance in the ERA would be deposited into the corpus and the ERA would be eliminated. She informed the committee that the legislature would need to conform statutes to the new constitutional amendment. There would not be an ERA after a certain date once it was constitutionalized. 9:59:29 AM Representative Carpenter referenced the statement that HJR 1 would protect the fund. He asked which portion of the fund was not currently protected. Ms. Rodell responded that it depended on how protection was defined. She elucidated that the principle was not protected from inflation without an appropriation by the legislature. The ERA was not protected to ensure intergenerational benefit because the entire balance was subject to appropriation. She maintained that from the viewpoint of the trustees, protection meant that the fund was saved and would keep up with inflation without the need for active involvement by the legislature other than appropriating up to 5 percent of the POMV. Representative Carpenter appreciated the clarification. He believed that there were two different types of protection; one is inflationary protection of the principle, and the other was spending of the ERA. He stated that there was not a mechanism to spend from the corpus. He asked if he was correct. Ms. Rodell responded in the affirmative. Representative Carpenter hypothesized that if inflation was outpacing the 5 percent draw over several years, then in those years the corpus would not be inflation-proofed. He asked whether he was correct. Ms. Rodell responded that the trustees had an investment policy with a long-term objective of 5 percent plus the Consumer Price Index (CPI). Therefore, if there was a period of high inflation of 3 percent then the trustees would want a nominal return of 8 percent. If the investment performance was below 5 percent then inflation was not quite getting the fund to the same spot but was not falling as far behind as a scenario with zero inflation and flat growth. A period of negative losses meant the fund was falling further and further behind. She determined that if the fund had negative losses it would have to perform better than 8 percent. She reasoned that the smoothing affect was invaluable to the POMV. She explained that in years of off the chart growth the fund would produce a benefit over the next 5 years as the boom years fed into the calculation. However, there would not be a windfall amount if it was taken all in one year. She hypothesized that if in FY 22 to FY 24 there was 1 percent or minus 5 percent growth it would get factored in and the numbers would trickle down. Looking back over a 10 to 15 year period it would be a smooth ride and not create wild swings. It was the corporation's philosophy to stay invested to keep pace with the 5 percent POMV. 10:05:30 AM Representative Carpenter had heard that a percentage of real earnings already accounted for inflation. He asked if it would be a more traditional way to inflation proof. Ms. Rodell responded that it was a possibility. She delineated that another way other jurisdictions had handled it was to make the POMV a range of percentage points like 3 percent to 5 percent and factor in the inflation rate and withdraw accordingly to leave an inflation adjustment. She stated that the mechanism was a policy call and from the trustees standpoint HJR 1 was consistent with what the trustees had adopted. She thought that the HJR 1 mechanism was very simple and straightforward. 10:06:56 AM Co-Chair Merrick apologized to Mr. Laing for not being able to hear his presentation, as the committee was out of time. He would be invited back to the committee at a later hearing. Co-Chair Merrick reviewed the agenda for the afternoon. HJR 1 was HEARD and HELD in committee for further consideration.