Legislature(2003 - 2004)
03/22/2004 01:42 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE JOINT RESOLUTION NO. 26
Proposing amendments to the Constitution of the State
of Alaska relating to and limiting appropriations from
and inflation proofing the Alaska permanent fund by
establishing a percent of market value spending limit.
Co-Chair Harris MOVED to ADOPT Work Draft Version U of HJR
26 dated 3/19/04. There being NO OBJECTION, it was so
ordered.
PETE ECKLUND, STAFF TO REPRESENTATIVE WILLIAMS, explained
the incorporation of Representative Stoltze's Amendment #1
in Version U. He said that it simply shortened and amended
the title of the resolution.
In response to a question by Co-Chair Williams, Mr. Ecklund
commented that Amendment #2 is not in Version U.
Co-Chair Williams announced that he would move HJR 26 to the
bottom of the agenda until Representative Stoltze arrived to
address it.
HOUSE JOINT RESOLUTION NO. 26
Proposing amendments to the Constitution of the
State of Alaska relating to and limiting
appropriations from and inflation proofing the
Alaska permanent fund by establishing a percent of
market value spending limit.
Co-Chair Williams again brought HJR 26 before the committee
to discuss Work Draft Version U that was adopted earlier in
the meeting. He noted that Amendment #1 by Representative
Stoltze was adopted and incorporated into Version U.
Representative Stoltze MOVED to ADOPT Amendment #2.
Representative Hawker OBJECTED.
Representative Stoltze explained the amendment reflects his
concern about protecting the principal from invasion in the
event a POMV is implemented in the Constitution. He had the
amendment drafted after listening to testimony from the
Mental Health Trust and Permanent Fund Corporation staff.
Amendment #2 reads:
Page 2, line 3:
Delete "five"
Insert "four"
In response to a question by Co-Chair Harris,
Representative Stoltze explained that the amendment changes
the percentage, on line 2, page 3 of the new version. It
proposes to make it 4% of the value.
Representative Hawker agreed with the intent of the
amendment to ensure protection of the value of the Permanent
Fund over time. The issue has been given a great deal of
technical analysis and consideration, but he was personally
convinced that 5% would protect Fund over time. He discussed
the ten-year rolling real rate of return for the Permanent
Fund and why 5% is appropriate. He reminded the committee
of statutory enabling language in HB 298 that provides that
if the 10-year real rate of return drops below 5%, the
Legislature would be limited to that lower number for draws.
He concluded that there is a compelling argument to keep it
at 5%. He noted that the constitutional amendment states
"up to 5%." He could not support Amendment #2.
Vice-Chair Meyer commented that in the community meetings on
POMV, people constantly returned to the 5%. He is
comfortable with 5% and up to the 5%. He expressed that
adequate safeguards are already in place.
Representative Croft commented that 4% is a more prudent
number. He supported erring on the side of caution and
conserving more for Alaska's children and grandchildren. He
said 5% is defensible, but "on the outer edge of what most
endowments take."
Co-Chair Harris expressed support for Amendment #2.
Co-Chair Williams stated that he objected to Amendment #2
for the reasons that Vice-Chair Meyer and Representative
Croft expressed. After working on the Percent of Market
Value for the past six years, he believes that 5% is a good
and proven payout. He would vote against the amendment.
A roll call vote was taken on the motion.
IN FAVOR: Joule, Stoltze, Chenault, Croft, Harris
OPPOSED: Fate, Foster, Hawker, Meyer, Williams
Representative Moses was absent.
The MOTION FAILED (5-5) and Amendment #2 was not adopted.
Co-Chair Harris MOVED to ADOPT Amendment #3. Co-Chair
Williams OBJECTED for purposes of discussion.
TOM WRIGHT, STAFF TO REPRESENTATIVE HARRIS, explained that
Amendment #3 would establish an earnings reserve account to
ensure that the corpus of the Fund would not be touched and
would be a separate entity. Language was inserted on page
2, beginning on line 4, to provide a mechanism within this
amendment to appropriate funds for the operation of the
Permanent Fund Corporation. There is also language providing
to distribute a program of dividend payments for state
residents and public education after paying the costs of
operation. Conforming language on page 2, subsection (b),
line 19, provides that after the effective date, the costs
up to June 30, 2004 prior to the passage of this amendment
will be appropriated.
Co-Chair Harris asked if this constitutional language
protecting the corpus of the Fund provides that if the
earnings are less than 5%, the payout would be less than 5%
for the first five of six fiscal years. Mr. Wright
affirmed.
Amendment #3 reads:
23-LS1006\V
Cook
3/22/04
CS FOR HOUSE JOINT RESOLUTION NO. 26( )
IN THE LEGISLATURE OF THE STATE OF ALASKA
TWENTY-THIRD LEGISLATURE - SECOND SESSION
BY
Offered:
Referred:
Sponsor(s): HOUSE RULES COMMITTEE BY REQUEST OF THE LEGISLATIVE BUDGET AND
AUDIT COMMITTEE
A RESOLUTION
Proposing amendments to the Constitution of the State of
Alaska relating to the Alaska permanent fund, establishing
the earnings reserve account, and permitting distribution
from the account only for permanent fund dividends, costs of
administering the permanent fund, and public education.
BE IT RESOLVED BY THE LEGISLATURE OF THE STATE OF ALASKA:
* Section 1. Article IX, sec. 15, Constitution of the State of Alaska, is
amended to read:
Section 15. Alaska Permanent Fund. (a) At least twenty-five per cent
of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral
revenue sharing payments and bonuses received by the State shall be placed in a
permanent fund, the principal of which shall be used only for those income-
producing investments specifically designated by law as eligible for permanent
fund investments. The earnings reserve account is established as a separate
account in the fund. All income from the permanent fund shall be deposited in
the earnings reserve account as soon as it is received. Appropriations may
only be made from the earnings reserve account as provided in (b) of this
section [GENERAL FUND UNLESS OTHERWISE PROVIDED BY LAW].
* Sec. 2. Article IX, sec. 15, Constitution of the State of Alaska, is amended by adding
a new subsection to read:
(b) Appropriations from the earnings reserve account for a fiscal year may
not exceed five percent of the average of the market values of the fund on June 30
for the first five of the six fiscal years immediately preceding that fiscal year.
Appropriations from the earnings reserve account may be made only for the
following purposes:
(1) costs of administering the permanent fund;
(2) a program of dividend payments for State residents established
by law together with costs of administering that program; and
(3) public education.
* Sec. 3. Article XV, Constitution of the State of Alaska, is amended by adding a
new section to read:
Section 30. Transition. (a) On the effective date of the 2004
amendments relating to the Alaska permanent fund (art. IX, sec. 15), the
unencumbered, unappropriated balance of the earnings reserve account
established under AS 37.13.145(a) is added to the earnings reserve account
established in the Alaska permanent fund.
(b) Section 15(b) of Article IX first applies to appropriations for fiscal
year 2006. Appropriations from the permanent fund for fiscal year 2005 are
subject to Section 15 of Article IX as that section read on June 30, 2004.
* Sec. 4. The amendments proposed by this resolution shall be placed before the
voters of the state at the next general election in conformity with art. XIII, sec. 1,
Constitution of the State of Alaska, and the election laws of the state.
Representative Croft asked if the language on page 2, lines
9-10 protects the current dividend structure in law. Mr.
Wright clarified that it states a program of dividend
payments for state residents, and it doesn't prescribe a
percentage or an amount. In response to a question by
Representative Croft, Mr. Wright said it would apply to the
current statute.
Representative Croft asked if the Legislature could change
the current statute on the dividend program under this
language. Mr. Wright pointed out that the Legislature
always has the authority to change the dividend program.
Co-Chair Harris explained that Amendment #3 would establish
in the Constitution three things that the Legislature can do
with the earnings of the Permanent Fund: pay the costs of
administering the Fund, pay the dividend, and appropriate
for public education. It doesn't give percentages.
Representative Croft commented that the amendment language
looks like a dividend protection but it could be anything
established by law.
Co-Chair Harris observed that the Legislature could spend
all the earnings of the Permanent Fund if it so chose, but
this amendment provides some small protection to the
dividend.
Co-Chair Williams asked if Amendment #3 changes everything
and gives a new direction to HJR 26. Co-Chair Harris replied
that it's not a complete change, but it is a lot more
specific.
Co-Chair Williams requested that the committee not vote on
Amendment #3 at this time in order to have time to review it
before the next hearing.
Representative Hawker asked Co-Chair Harris to consider
dividing Amendment #3 into the two distinct issues embodied
in Section 1 and Section 2 of the amendment.
Representative Joule commented that there is currently an
earnings reserve account and he asked how this would be
different. Mr. Wright pointed out the only difference is
that this amendment states there is a separate earnings
reserve account and places it in the Constitution.
Representative Fate MOVED to ADOPT Amendment #4. Co-Chair
Williams OBJECTED for purposes of discussion.
Representative Fate expressed concern over the ability of
the Legislature to fulfill its prime purpose of
appropriating money. He expressed that any percentage is
subject to a warranted change, and the ten-year rolling
average has been well researched. He said he is one of the
few members who can recall the Great Depression that lasted
12 years, with double-digit inflation. He reiterated that
the prime responsibility of the Legislature is to
appropriate, and if it can't, its function has been eroded.
Representative Fate explained that Amendment #4 changes six
words. On line 2, instead of saying a percentage of 5%, it
codifies in the Constitution that there will be a percentage
determined by law.
Amendment #4 reads:
*Sec.2. Article IX, sec. 15, Constitution of the State of
Alaska, is amended by adding a 01 new subsection to read:
02(b)Appropriations from the permanent fund for a fiscal year shall be
03 a percentage of[on may not exceed five percent of] the average of the
04 market values of the fund on June 30 for the first five of the six
fiscal years
05 immediately preceding that fiscal year as determine[d] by law.
MR. BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA
PERMANENT FUND CORPORATION, DEPARTMENT OF REVENUE, compared
Amendment #4 to Work Draft U. The proposed work draft puts a
spending limit on the Permanent Fund equal to the Board of
Trustees' recommendation of no more than 5%. The proposed
amendment maintains the concept of basing appropriations on
market value, but states that the spending limit would be
put into statute instead of the Constitution, on an annual
basis.
Representative Croft noted previous discussions of the limit
of 5%, which would allow lower appropriations but not
higher. This amendment would allow higher appropriations.
The trade-off for POMV is the spending limit discipline of
5% in good years in order to reserve for the bad. He
expressed concern that in a year when oil prices and the
market are up, the inclination to ignore an income tax or
oil tax and the pressure to spend up to 6% or 7% might be
irresistible. This amendment gets rid of the needed
discipline.
Representative Hawker agreed with Representative Croft and
expressed concern that Amendment #4 clearly allows
overspending in the good years. He pointed out that it
violates three of the five reasons the Permanent Fund
Corporation argues for Percent of Market Value: maintaining
the purchasing power of the Fund, preventing overspending in
good years, and making payout amounts more stable from year
to year. He observed that the purpose of the POMV set
percentage is to stabilize the amount of appropriation from
the Fund and give absolute guarantee of the long-term value
of the Fund. He respectfully did not concur with the
amendment.
Representative Fate informed the committee that his
amendment was drafted in concurrence with the spending limit
bill [HJR 9] before the Committee. For him, it does not
come down to a short, or even a 25-year term consideration
of the growth of corpus of the Fund. In his view, although
he agreed with the concept of the measure, passage of HJR 26
would erode the prerogative and responsibility to
appropriate by the Legislature. It is not his concern
whether the Fund even grows, but putting from zero to 5% in
the Constitution establishes an appropriation. He introduced
the amendment because of the basic question of the functions
and responsibilities of the Legislature, not in order to
allow 7% or 8% in the future.
Co-Chair Harris asked if the fiscal note for $700 thousand
dated 3-16-04 is still in effect with the bill. Mr.
Bartholomew affirmed, and explained that there are two
additions to the FY 05 budget that the Board of Trustees and
Permanent Fund staff is requesting. Once the Legislature
adopts the constitutional amendment, the Corporation would
fall under the restrictions of the Alaska Public Offices
Commission (APOC) on the authority to advocate. The requests
in the operating budget are for additional authority to
educate and advocate for Percent of Market Value; and if the
Legislature supported that request, to be able use radio,
television and print media to carry out those functions.
A roll call vote was taken on the motion to adopt Amendment
#4.
IN FAVOR: Foster, Fate
OPPOSED: Hawker, Joule, Meyer, Stoltze, Chenault, Croft,
Williams, Harris
Representative Moses was absent.
The MOTION to adopt Amendment #4 FAILED (2-8).
Representative Croft questioned if the Fund would educate in
a non-partisan manner or advocate for POMV. He asked how it
would be found in a fiscal note. Mr. Bartholomew stated that
in talking with the APOC, the definitions of education and
advocacy are unclear. He said that if there were specific
lines to draw, the PFC would work with legal counsel on the
authority to comply, as well as the authority language. He
noted that if the language in the operating budget did not
pass, the PFC couldn't spend the $700 thousand.
Co-Chair Harris thought that it would be a "slap in the
face" to the public for the Permanent Fund Corporation,
which is entrusted with the dividend to advocate for POMV.
He questioned using $700 thousand dollars of the Permanent
Fund on advocacy when another entity could assume that role.
Mr. Bartholomew agreed that it would be the preferred way.
He explained that the "feed-back" from the public on the
Percent of Market Value approach indicates that a broad
segment of the public does not understand it. The public is
educated through mass media. The Permanent Fund needs the
authority to speak publicly. To reach the public, you must
go after them, he said.
Co-Chair Harris voiced concern that the Just Say No campaign
gets the message out to many Alaskans who may not be
educated on the issue but are hearing the message. He asked
if people would be "turned off" by the use of $700 thousand
of Permanent Fund money to tell Alaskans what they need to
do. He asked if that had been considered.
Mr. Bartholomew replied that even as the request was written
up, the Board discussed a negative public reaction.
TAPE HFC 04 - 63, Side B
Mr. Bartholomew continued discussing the use of state money
for advocating for the POMV, expressing that the Board of
Trustees believes there is the obligation to educate and
that the benefits outweigh the risks.
Vice-Chair Meyer pointed out that $300 thousand is in the
Supplemental Budget and asked if the $700 thousand is
additional. Mr. Bartholomew addressed the $1.4 million
advocacy, pointing out that the amount could be determined
by campaign parameters. Costs would be split between FY 04-
FY 05, with $900 thousand in FY 05 and $700 thousand derived
from the fiscal note. He said that $200 thousand would come
from other parts of the budget. He expressed that the Board
was very sensitive to the potential negative reaction and it
urged the Corporation not to proceed without legislative
guidance.
Vice-Chair Meyer asked if there would be other than public
sources of funding available if there were only General Fund
money. Mr. Bartholomew answered that the Corporation had not
pursued other sources, and private groups had not contacted
it. The Board would not seek private funding, and as a
public entity, it wouldn't want to have "strings attached."
Vice-Chair Meyer noted that there are opposing groups
raising private money. He suggested a grassroots effort to
be a "Just Say Yes" group, but he acknowledged that it would
be a challenge.
Representative Hawker referred to the fiscal note. He
thought that the opposition groups would not be held to the
same standard of truthfulness and impartiality of the
Permanent Fund Corporation, and he commented that it is easy
to tell people what they want to hear. He voiced concern
over the Legislature's leadership role and responsibility,
and said that if the Legislature lacks faith in its own
convictions on the POMV being the right thing to do, an
inappropriate message could be sent to the public. He
expressed that the dialogue before the public should be
objective, factual and truthful.
Representative Stoltze felt that there is no legitimate
reason to use government money and it would erode public
confidence. He recommended looking at it from a strategy
point of view, and he lauded all the effort that has been
expended.
Co-Chair Williams noted that he agreed with the Permanent
Fund Corporation's approach. He stressed that this is an
important issue for the State of Alaska, and the public
needs to make an informed decision.
Co-Chair Williams stated that HJR 26 would be HELD in
Committee for further consideration.
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