SENATOR LEMAN introduced SB 29 (APPROP: EARNING RESERVE TO PF PRINCIPAL) and invited the prime sponsor, SENATOR BERT SHARP, to join the committee at the table. SENATOR SHARP explained SB 29 proposes to appropriate $600 million dollars from the Permanent Fund Earnings Reserve for deposit into the Permanent Fund's Principal Account. The last special appropriation into the principal of the fund occurred in 1987 when $1,264,000,000 was moved from the Permanent Fund Earnings Reserve by the legislature into the Permanent Fund Principal Account. SB 29's proposal to move $600,000,000 will leave an estimated balance of $235,000,000 in the Earnings Reserve Account. This balance should prove more than adequate to meet other needs and be a cushion for assuring that inflation proofing obligations are met through the 1990's. Number 175 SENATOR SHARP explained that the $835 million projected balance got a lot of legislators, administrators and advocates of various programs eyeballing it pretty strongly for their various projects. He suggested that appropriating some funds into the principal balance portion of the reserve may be a way that the public perception would accept using some of the other funds for education or whatever. He said that the projections assume that there would be no other withdrawals from the earnings reserve and that was a very optimistic assumption for the next five, six or seven years. JIM KELLY, representing the Permanent Fund Corporation, testified their job is to manage the money, keep it safe, earn as much income as they can and leave the decisions about what to do with the use of the earnings up to the legislature. The only time the Corporation's board of trustees would take a position is if the legislature were proposing some kind of a change that was going to adversely affect the corporation's ability to do it's job. The analysis that has been provided is strictly the corporation's best estimate about what the impacts are going to be on growth principal in the future, what's going to happen to income if something like this is done, what will be the impact on the statutory uses that exist for it right now. Mr. Kelly said, right now $835 million is the amount that will be in the fund at yearend. However, that amount is subject to change with still five months to go. Number 250 JIM KELLY said the board meets once a year to discuss asset allocation. Those decisions are based on what the board thinks the different markets are going to earn over the next five-year period. JIM KELLY distributed a packet that included various reports, charts and miscellaneous information on the permanent fund. SENATOR LEMAN asked how the Alaska Permanent Fund ranked in terms of funds, such as pension funds, etc. When the fund moves assets around, does it have a significant impact on the market? JIM KELLY answered that although the fund was one of the 50 largest funds in the world, when assets were moved, it did not have a significant impact on the market. SENATOR LEMAN said, if $600 million is put into the principal, that will affect inflation proofing because there is a larger principal to inflation proof and there is a time coming soon where we are going to have trouble meeting our inflation proofing. I assume that shifts the date somewhat, if so, when does it shift and how will if affect future inflation proofing. Number 375 JIM KELLY explained that based on the capital market assumptions, and one he did not mention was what the rate of inflation would be, the rate of inflation was going to be 4 percent on the average over the next four years. If inflation is at 4 percent and the fund is able to earn 8 1/2 percent, we should be able to make enough money each year to do both, even with the $600 million going to principal. If inflation jumps up dramatically or our earning go down, we will have to start drawing down that earnings reserve. SENATOR SHARP said he neglected to mention that there is some confusion currently where the permanent fund earning reserve comes into play. Classification under the constitutional budget reserve statute says all other funds have to be exhausted before getting into the constitutional reserve, and according to legislative legal there is a possibility that the permanent fund earnings are labeled as other funds. Unless clarified by statute, which he thinks no matter what we do, we might want to see that that's clarified depending on the will of the body. If that's the case he felt that its more imperative than ever to protect some of the reserves.