SJR 18-CONST. AM: PF APPROPS/INFLATION-PROOFING  CHAIR GARY STEVENS announced his intention was to introduce the bill and take initial testimony. LAURA ACHEE, aide to the Legislative Budget and Audit Committee and Representative Ralph Samuels, introduced Mr. Bartholomew. BOB BARTHOLOMEW, Chief Operating Officer for the Alaska Permanent Fund Corporation, highlighted why the board believes this is a good public policy issue to be brought to a vote of the people in November 2004. · For 23 of the last 27 years the board's number one objective has been to manage the Permanent Fund so that it is protected against inflation. · The second objective is to ensure there is an annual dividend distribution. · The board believes the proposal to change the statute would better protect the Permanent Fund against inflation. · The proposal changes how to determine what is available from the Permanent Fund by going to a payout based on market value (POMV). · POMV provides a limit on what can be spent from the Permanent Fund. · In good years POMV stops overspending and in down years it makes an annual distribution available. · Currently, the annual distribution could go to zero. SENATOR JOHN COWDERY understood the proposal didn't include the previous year and he asked why not simply average from the last five years. MR. BARTHOLOMEW explained the amendment recommends not counting the current fiscal year so in January the Legislature would know how much money would be available. For example, to determine how much money should be available for FY04, which is the budget currently before the Legislature, you would take a five-year average that ends June 30, 2002. SENATOR COWDERY asked how much would be available. MR. BARTHOLOMEW replied $1.2 billion would be available under a five percent limit. SENATOR COWDERY asked if the entire $1.2 billion would be distributed as dividends. MR. BARTHOLOMEW said it would not. Current statute determines that one-half of what is available goes to the dividend then inflation proofing is paid. It is silent with regard to the balance and, historically, the balance hasn't been appropriated other than out of the earnings reserve into principal. SENATOR COWDERY asked if the one-half would result in a $1,000 dividend check. MR. BARTHOLOMEW replied that if the financial markets were to stay flat between now and June 30, the dividend would be approximately $1,100. However, if the markets were to correct downward, it could be lower due to the limitations. SENATOR COWDERY commented there is a chance of a zero dividend this year or next without the amendments, but with the amendments there would be a $1,000 dividend. MR. BARTHOLOMEW agreed provided the formula remained unchanged. CHAIR GARY STEVENS announced he would like to hear from Ms. Griswold at the Homer LIO before adjourning the hearing. MARY GRISWOLD from Homer testified in support of the bill. SJR 18 constitutionally inflation proofs the entire Permanent Fund. It sets a spending limit to prohibit excess appropriations in flush years while making distributions available in lean years. POMV is compatible with the fund's diversified portfolio that is managed for long-term value over short-term gains. A five POMV payout protects the value of the fund and provides a limited and predictable and sustainable revenue stream. This is a management tool and not a distribution plan, but the two are inherently linked. The use of a payout shouldn't be set in the constitution because it's an appropriation issue. AS 37.13.140 and AS 37.13.145 relating to the Permanent Fund income and income distribution must be amended to conform to five POMV because they would no longer apply as written. Establishing a comparable dividend formula when the statutes are changed is advisable because five POMV is too valuable an asset to risk voter rejection by threatening their dividend checks. For the purposes of a model, assume an eight percent total return, three percent inflation and a five percent real return. Under existing statute, 50 percent of the income available for distribution goes to the dividend program. Inflation proofing then takes three percent, leaving one percent for other legislative appropriations, which has never been touched. For this distribution to work under POMV, 80 percent of the five percent payout must be allocated to the dividend program to provide a comparable amount of money. Inflation proofing of three percent has already been accounted for by establishing a five percent payout limit, leaving 20 percent of the payout for other legislative appropriations, which is the same as the one percent under existing distribution statutes. Fifty percent of the money available for distribution before inflation proofing equals 80 percent of the money available for distribution after inflation proofing. Fifty percent of eight translates to 80 percent of five. This constitutional amendment, combined with a change to the statutes, securing 80 percent of the annual payout for dividends is a critical step and a three- way win. The Permanent Fund gets a better management framework, the Legislature gets a predictable revenue stream, and the people keep their dividend formula. CHAIR GARY STEVENS remarked this isn't an easy issue to comprehend or explain. He asked what kind of response she receives as she explains this to her friends and neighbors. MS GRISWOLD told him most people don't understand POMV; they just want to know how it would affect their dividend. When she explains that if the payout is allocated 80/20, their dividend check won't be affected and they're pleased. It's interesting that they don't understand the rest and her main concern is "the rest of it." A 50/50 split would require voter approval and she's sure it would be defeated. SENATOR DYSON asked if she believes that funds should be allocated to educate voters. MS. GRISWOLD said voter education is very important. SENATOR DYSON noted that if care isn't taken, this could be interpreted as jeopardizing the status quo, which is perceived to be a golden goose. MS. GRISWOLD said she believes the Alaska Permanent Fund Corporation has hired a communication specialist who could provide educational services. SENATOR DYSON wasn't sure it was legal for the corporation to use money from the earnings to lobby the public. SENATOR COWDERY commented the Legislature could appropriate the earnings to educate the public. MR. BARTHOLOMEW advised he would return for the next hearing and concluded his comments by restating the board's two objectives: · Inflation proof the Permanent Fund constitutionally rather than with an annual statutory appropriation · Remove the word "principal" from the constitution so it assures an annual distribution and that protection is provided through the spending limit CHAIR GARY STEVENS stated this is an important issue that everyone should understand and feel comfortable with before it moves. With that, he announced he would hold SJR 18 in committee for further discussion.