Legislature(2005 - 2006)SENATE FINANCE 532
04/05/2005 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB100 | |
| SB151 | |
| SB88 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 141 | TELECONFERENCED | |
| += | SB 100 | TELECONFERENCED | |
| + | SB 88 | TELECONFERENCED | |
| *+ | SB 151 | TELECONFERENCED | |
| + | SB 70 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 5, 2005
9:10 a.m.
CALL TO ORDER
Co-Chair Green convened the meeting at approximately 9:10:37 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: BILL DOOLITTLE, Project Manager, Anchorage
Telephone System; WALT MONEGAN, Police Chief, Municipality of
Anchorage; JOHN FULLEMWIDER, Fire Chief, Municipality of Anchorage;
STAN HERREA, Director/Chief Technology Officer, Enterprise
Technology Services, Department of Administration; DAN DICKENSON,
Director, Tax Division, Department of Revenue; CHUCK HARLAMERT,
Juneau Section Chief, Tax Division, Department of Revenue; ROB
CARPENTER, Fiscal Analyst, Legislative Finance Division,
Legislative Affairs Agency
Attending via Teleconference: From Anchorage: JIM ROWE, Executive
Director, Alaska Telephone Association; From Offnet Sites: TIM
ROGERS, Alaska Municipal League; DON SAVICH, Wasilla Police
Department, City of Wasilla; From Anchorage: STEVE HEBBE,
Lieutenant, Anchorage Police Department; From Kenai: CHUCK KOPP,
Kenai Police Department
SUMMARY INFORMATION
SB 100-ENHANCED 911 SURCHARGES
The Committee heard from the sponsor and took public testimony. A
committee substitute was offered but withdrawn from consideration.
The bill was held in Committee.
SB 151-DECOUPLING FROM FED TAX DEDUCTION
The Committee heard from the Department of Revenue and the
Legislative Finance Division. The bill was held in Committee.
SB 88-POLICY ON GENERAL FUND REVENUE SHORTFALL
The bill's sponsor reviewed a power-point presentation and the bill
was held in Committee.
SB 141-PUBLIC EMPLOYEE/TEACHER RETIREMENT
This bill was scheduled but not heard.
CS FOR SENATE BILL NO. 100(L&C)
"An Act relating to enhanced 911 surcharges imposed by a
municipality."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Green informed the Committee that the forthcoming
committee substitute was developed as the result of public
testimony to a similar bill she had sponsored the previous
Legislative session. The committee substitute changes are detailed
in a Memorandum from her office, dated April 5, 2005 [copy on
file]. The Memorandum also corrects inadvertent language omissions
in Sections 4 and 5, as requested by the bill drafter. These
changes would allow the bill "to apply to all municipalities,
regardless of organization, equally".
Co-Chair Wilken moved to adopt the aforementioned committee
substitute, CS SB 100(FIN), Work Draft Version 24-LS0407\S as the
working document.
Co-Chair Green objected for purposes of explanation. She reviewed
the changes as outlined in the Memorandum as follows.
Work Draft to CSSB 100 (FIN) "Version S"
Section 1. AS 29.10.200(37) is amended to include the enhanced
911 system under Home Rule applicability.
Section 2. AS 29.35.131(a)911 surcharge
Page 2
square4 Line 11 - $1.50 surcharge for wireline and wireless
(from $2.00)
square4 Line 23 - requires notification by the municipality
when the surcharge is assessed and when it is
changed.
square4 Line 27 - links the 911 surcharge to the federal
definitions.
square4 Line 29 - requires the Borough to reimburse the
municipalities for their expenses first and that
reimbursement shall occur at least every three
months.
Section 3. AS 29.35 is amended to include Private Branch
Exchange (PBX) phone identification to ensure that responders
go to the actual location of the caller.
Section 4. AS 29.35 is amended to apply to home rule and
general law municipalities.
Section 5. AS 29.35.131(h) is repealed (home rule
applicability).
Co-Chair Green noted that the proposed change to lines four and
five of Section 1, are supported by the bill's drafter. The
customer notification language being proposed in Section 2, page
two, beginning on line 23 is included because, historically, the
telephone utility has borne the responsibility for explaining to
their customers that they did not increase the rate on their own;
the cost of providing Enhanced 911 (E-911) is allowed to be passed
on to the ratepayer. In addition, aligning state definitions with
federal definitions would further clarify to municipalities the
proper usage of the E-911 or 911 "funds for the purposes for which
they were intended". This is specified in Section 2(a), page two,
beginning on line 27. This expense reimbursement language would
clarify that Boroughs with multiple Public Safety Answering Points
(PSAPs) municipal service areas within their boundaries and in
which the Borough is the primary collector of the E-911 surcharge,
must distribute those funds to the municipalities. She noted that
the primary purpose of E-911 systems is to provide emergency
responders both the location of the caller and the caller's phone
number.
Senator Bunde, the bill's sponsor, noted that SB 100 was developed
at the request of municipalities who, while being required to
comply with E-911 service regulations, had no funding mechanism in
place through which to pay the associated expenses. This bill would
provide that funding mechanism. He noted that several testifiers
were available to further explain the situation.
9:16:36 AM
JIM ROWE, Executive Director, Alaska Telephone Association,
testified via teleconference from Anchorage in support of the
Version "S" committee substitute on behalf of the Association's
fourteen-member companies that serve Rural Alaska. The hope is that
the bill would be adopted this Legislative Session. While the
original version of SB 100 proposed a $2.00 maximum surcharge limit
for E-911 services, the Association is in support of the $1.50
surcharge proposed in Version "S". "This is double the amount that
is currently charged". Language in Section 2(a), line 16, page two
would address "parity in the payment between wireless telephone
service and wireline telephone system". This issue is very
important to the members of the Association because of the
competition between wireless and wireline service carriers.
"Competitive neutrality is important" and if one service is
required to implement a rate increase on its service, then "the
competing service should also be required to do that". The language
incorporated into line 24, page two of Section 2(a) that would
require a municipality to inform the utility's customers about the
rate increase is important, as it would further clarify the reason
for the increase.
Mr. Rowe stated that the PBX and other telephone system language
identified in Section 3, page three, is an area that could easily
invoke confusion. In layman's terminology, there are "dumb PBXs"
and "smart PBXs". Smart PBXs are systems that are able to
communicate both the caller's phone number and location. There
would be costs associated with upgrading or replacing the older
"dumb" PBXs. Consideration should be given to specifying a time
frame in this legislation in which entities that provide telephone
systems must implement the required upgrade. In conclusion, the
Association supports the bill.
9:20:35 AM
TIM ROGERS, Alaska Municipal League (AML), testified via
teleconference from an offnet site and noted that, while he does
not have access to a copy of the Version "S" committee substitute
and therefore could not address it specifically, AML does not take
issue with the customer notification process that would be required
of municipalities. AML is, however, concerned about the proposal to
reduce the surcharge from $2.00 to $1.50, as AML considers $2.00 to
be a more reasonable amount based on some of the local government
needs. Nonetheless, the bill would be acceptable.
DON SAVICH, Wasilla Police Department, City of Wasilla, testified
via teleconference from an offnet site in support of the bill.
9:23:09 AM
BILL DOOLITTLE, Contract Project Manager, Municipality of Anchorage
911 System, testified in Juneau and informed the Committee that two
components of the bill could generate "significant impediments to
911 programs within the State". The first, located in Section 2(a)
line 26, page two, is the language specifying that "The
municipality may only use the enhanced 911 surcharge for phase I
and phase II enhanced 911 services, as described in 47 CFR 10.18 as
revised?" That specific code of federal regulations "only applies
to wireless carriers". This would, in effect, "block using the 911
surcharge for even a basic 911 system within the State".
Mr. Doolittle explained that the initial step in developing a 911
system is "the basic" 911 system, which allows 911 calls to be
made. An E-911 system, which is built upon the basic system, would
provide both the phone number and the address of the caller.
Wireless phase I capability, which would provide the address of the
cell site transmitting the call, and Wireless phase II capability,
which would provide the latitude and longitude of the handset
making the call, are programs developed upon the basic 911 and E-
911 systems.
Mr. Doolittle noted that the second significant matter involves the
issue of reimbursement to the municipality, as specified in Section
2(a), line 28, on page two. The language specifies that "A borough
must use the enhanced 911 surcharge to fully reimburse each city
within the borough for expenses borne by the city for the enhanced
911 services before the enhanced 911 surcharge may be used for
other expenses of the enhanced 911 system". He noted that "there
are necessarily some area-wide types of expenses, such as the "the
database management piece", that must be put in place" prior to the
911 system becoming operational. "The database management piece
aggregates the subscriber records from all the carriers" for the
location identification capabilities for the E-911 system. "This is
generally a super-jurisdictional area", and in addition to its one-
time start-up fee, continuous monthly expenses would be associated
with the maintenance of those records.
Mr. Doolittle continued that trunking and circuitry from each of
the carriers to the primary PSAP would also be necessary. In a
situation where there might be multiple PSAPs, there could be the
opportunity to identify municipal-specific expenses; "but they
would be equally reimbursable to all municipalities or a borough's
911 center". He offered "as an alternative" the ability "to
determine precedence of cost" of such things as database costs,
infrastructure costs, and technology costs. These components would
be less expensive were they aggregated among agencies. Doing so
would allow for some of the surcharge revenues to reimburse call-
taking and operational expenses associated with the 911-program.
The current challenge is that the existing surcharge program does
not allow reimbursement for many of these costs, and, as a result
of an inadequate surcharge, many 911 programs are operating at a
deficit.
Co-Chair Green asked what specific changes would be required to
address these concerns. The purpose of this legislation is to
remind the collectors and the recipients of the 911-surcharge that
the funds are generated for "specific use", as defined in federal
law.
Mr. Doolittle pointed out that there are two classes of carriers:
local exchange carriers who are regulated at the local level and
wireless carriers who are regulated by the Federal Communications
Commission (FCC). Therefore, two sets of rules govern such things
as surcharges and collections. The federal government has allowed
each state to establish its own 911 program. As a result, 50 unique
programs exist in the nation, and 27 states impose differing rates
for the two carrier systems. Therefore, State "statute is what
directs or allows what a local level 911 program would be". As a
result of interaction with numerous municipalities and boroughs in
the State, it has been determined that "one of the challenges" is
achieving an inter-local agreement about the scope of services and
the scope of the 911 program. Current statutes provide wide
latitude to municipalities in that regard. "Many municipalities and
boroughs are challenged" in regards to specifying the roles and
responsibilities and the allocation of surcharges. "The priority of
those costs could be specified on a Statewide basis based on the
reality of how you make those expenditures. But really the needs
and configurations of dispatch centers within a borough or
municipality ? is a local selection". The local public safety
agencies "get to choose who will dispatch for them". This would
include decisions regarding whether to have a radio dispatch center
and 911-call taking and service area responsibilities.
Mr. Doolittle concluded that some alternative language regarding
these issues could be developed and provided to the Committee.
However, being unsure as to whether the Committee wished to further
delay the bill, he noted that there "is great support for the bill
as written today", and his comments could be viewed as cautionary
in regards to how some of the language is written and the
challenges it might create.
Co-Chair Green voiced the desire to correct the bill in Committee
rather than allowing it to move out of Committee "flawed".
Co-Chair Green noting that Mr. Doolittle's first concern dealt with
the federal regulations, asked for further clarification regarding
his second concern.
Mr. Doolittle verified that the federal concern involved tying the
surcharge to Phase I and Phase II. His second concern dealt with
"reimbursement to municipalities as a priority".
Co-Chair Green acknowledged and asked whether Mr. Doolittle
understood the issue the legislation was intended to address.
Mr. Doolittle assured that he understood, as he has worked with a
number of municipalities. There "is a question regarding program
scope and accountability to municipalities within boroughs", as not
all 911 programs hold monthly, quarterly, and annual meetings. The
scopes of many programs are not published and explicit. "It would
be very easy to have that requirement. It is very simple and
straight forward to do that on a local level."
Co-Chair Green asked how the issue could be addressed in State
Statute.
Mr. Doolittle suggested that there be a requirement "that a 911
program explicitly document the scope of the program and
reimbursement to agencies". This would establish "the groundwork"
for establishing a mechanism through which to address "a bona fide
request" for reimbursement from an agency.
9:31:15 AM
AT EASE 9:31:41 AM / 9:39:45 AM
Co-Chair Green stated that upon the conclusion of today's public
testimony, staff would work with "experts" to further develop the
bill's language.
Co-Chair Wilken voiced being pleased that the bill would be further
refined as he has a few problems with it; specifically whether a
surcharge level of $1.50 would be appropriate. Continuing, he asked
regarding the home rule city within second-class borough situation
that exists in Fairbanks; if the City of Fairbanks is responsible
for the 911/E-911 system and they wished to adjust the rate, the
question is who would vote on the issue: the residents of the City
or the residents of the Fairbanks North Star Borough.
Co-Chair Green asked for further clarification as to which entity
manages the 911-system.
Co-Chair Wilken affirmed that the City does.
Senator Bunde speculated that the vote would depend on who the
subscribers of the telephone utility system were: whether the
subscriber base was limited to the City or included other areas of
the Borough.
Co-Chair Wilken noted that he would ask the community to provide
the answer to this question.
STEVE HEBBE, Lieutenant, Anchorage Police Department, Municipality
of Anchorage testified in Juneau and agreed with Senator Bunde that
anyone assessed the surcharge would vote on it. Therefore, were the
surcharge borough-wide, there would be a borough-wide vote.
Allowing only the City subscribers to vote on an Areawide surcharge
would prevent the borough-wide subscribers from having a voice in
the matter.
Co-Chair Green understood therefore that anyone residing in the
telephone service area should be provided the ability to vote on
the issue. It should not be limited solely to the residents of the
City of Fairbanks.
Lieutenant Hebbe affirmed that anyone to whom the surcharge rate is
charged should have the right to vote on it.
Co-Chair Green asked Mr. Rogers his position on the issue.
Mr. Rogers concurred with Lieutenant Hebbe that the entire service
area should vote.
Co-Chair Wilken stated that his office would develop a definitive
answer to the question.
Co-Chair Green agreed, as she recalled the issue of whom should be
charged the surcharge was the crux of Fairbanks residents'
discussions last year during the discussions on her bill.
9:44:18 AM
Senator Bunde commented that the intent of the language, as
drafted, was to provide "that combination of flexibility for the
municipality and protection from the municipality" in that the
people in the service areas would be allowed to vote regarding the
surcharge assessment. How this would affect other divisions in the
area should be further clarified.
CHUCK KOPP, Kenai Police Department, testified via teleconference
from Kenai and recounted that, in 1985, the Kenai Peninsula Borough
included three home rule cities: Kenai, Homer, and Seward and one
first class city: Soldotna. Each had their own 911 program
supported by residents of that particular city. Eventually, all
four cities transferred their individual authorities to a singe
borough-wide authority to which all borough-wide residents paid a
surcharge. The situation in Fairbanks mirrors that of the Kenai
Peninsula in that the City of Fairbanks has agreed to manage the
911-program for the entire Borough, Therefore, the entire borough
would vote on the surcharge. A single unified 911 system should be
the preferred choice instead of a "fragmented" system, which was
originally the case in the Kenai Peninsula Borough. He appreciated
the Committee's work in addressing this complicated issue and he
supported moving the bill forward.
Mr. Kopp supported Mr. Doolittle' comments regarding the
establishment of program management guidelines. "Any borough that
has 911 authority must have a program, documented, that explains
how the program is managed", to include language addressing the
program's reimbursement methodology.
WALT MONEGAN, Police Chief, Municipality of Anchorage spoke in
Juneau in support of the bill. He noted that the Anchorage Police
Department is the manager of the Anchorage PSAP of which Lieutenant
Hebbe was the commander. He voiced appreciation for the efforts
being exerted regarding the surcharge. The bill is supported "in
that every dollar that is now being utilized to subsidize the
shortfall could be reallocated to its proper duties". Addressing
the funding shortfall "would effectively enhance all public safety
efforts within our municipality".
Senator Olson asked Mr. Monegan his position in regards to the
proposal to reduce the surcharge from two dollars to $1.50.
Mr. Monegan voiced the preference for a two-dollar surcharge.
Adopting a two-dollar levy would provide "more breathing room" for
managers and would negate the expense of possibility being required
to conduct an election to increase the fee over time.
Senator Olson asked whether "a significant decrease in service"
might occur absent that fifty-cents.
Mr. Monegan replied "not at this point".
JOHN FULLEMWIDER, Fire Chief, Municipality of Anchorage, spoke in
Juneau and stated that a great deal of discussion has occurred in
regards to the language in this bill and changes that should be
made. While he, like Mr. Monegan, supported the bill as written, he
opined that a few changes could be made to further enhance it and
make it a "little bit more palatable from the borough's
standpoint". He reiterated Lieutenant Hebbe's remarks to the effect
that the Municipality of Anchorage "does not have a dog in that
fight". Representatives of the Anchorage fire and police community
are testifying today "because of public safety issue". When people
call 911, they anticipate that the call would be answered and that
the response would be to the correct location, regardless of
whether the call is made from a hardwire or wireless phone. "That
is what this legislation is all about ? it's the ability to turn
the switch on so that we can find you or somebody else that has a
cell phone and go forward". Anchorage has been "the first" to
address the wireless issue, but the communities of Fairbanks,
Kenai, Nome, and Juneau "are right behind us". He asked the
Committee to support the legislation.
Co-Chair Green requested that those willing to work on revising the
bill's language to address the issues raised by Mr. Doolittle, work
with her and Senator Bunde's staff in that regard.
Senator Hoffman asked whether information could be provided in
regards to how the Alaska State Troopers' Department of Public
Safety, emergency services system operates on a statewide basis.
STAN HERREA, Director/Chief Technology Officer, Enterprise
Technology Services, Department of Administration responded that
the Department's role in the 911 program is two-fold in that the
Department of Administration and the Department of Military and
Veterans Affairs jointly house the coordinator for the Statewide
911 program. The Department's role with regards to the 911-
coordinator "is to ensure compliance with the law, or the statutes
that are established, for 911". This would include such things as
the collection of the surcharge and the compliance with the terms
within the legislation. The Department of Public Safety's
commissioner, William Tandeske, "has voiced concern about the
affects of the collection of 911 surcharges; specific ? to the Mat-
Su Borough and how that affects the PSAP and ? the role of the
Alaska State Troopers in that". The question is "who is actually
getting the funds verses who is having to provide the services". He
stated that a Department representative would work with Co-Chair
Green's staff to address language revisions.
Senator Hoffman commented that 911 programs must be operated 24
hours a day, seven days a week, year-round. To that point, the
question is how the Alaska State Trooper 911 program is manned and
funded, specifically as it applies to responding to Rural calls for
assistance from anywhere in the State. A response from the Alaska
State Troopers would be appreciated.
Co-Chair Green responded that the Troopers would be contacted for a
response.
Co-Chair Wilken asked to withdraw the motion to adopt Version "S".
There being no objection, the motion to adopt Version "S" as the
working document was WITHDRAWN.
Co-Chair Green ordered the bill HELD in Committee in order to
further modify its language.
9:56:29 AM
SENATE BILL NO. 151
"An Act excepting from the Alaska Net Income Tax Act the
federal deduction regarding income attributable to certain
domestic production activities; and providing for an effective
date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Green explained that this legislation would decouple a
federal tax deduction from the Alaskan Net Income Tax Act.
DAN DICKENSON, Director, Tax Division, Department of Revenue,
explained that, beginning in 2005, the Qualified Production
Activities Income (QPAI) section of the federal American Jobs
Creation Act of 2004, would phase in tax relief to certain tax
payers by excluding a specified percentage of their net income
earned from extraction, production, and manufacturing activities in
the United States. Several handouts, including "The American Jobs
Creation Act of 2004", the "Tax Analysis Special Report" dated
February 21, 2005, and the "Primer: IRC 199 Qualified Production
Activity Income (QPAI)" dated April 4, 2005, [copies on file] were
provided to Members to provide additional information.
Mr. Dickenson stated that QPAI is "an attempt" by the United States
(U.S.) Congress "to advantage these kind of activities" that occur
in the nation "relative to those activities occurring abroad". The
affected industries in this State would include the construction
industry, the fishing and fish processing industry, the mining
industry, and the refinery/production and marketing activities of
the oil and gas industry. The QPAI would allow a three percent
deduction of their QPAI for the specified activities in 2005-2006,
a six percent deduction in 2007-2008, and a nine percent deduction
thereafter.
Mr. Dickenson stressed that the QPAI deduction would not be limited
to new activity. Companies would operate "exactly" as they had
before; however, under this new tax law, their "taxable income is
going to decrease", as a percentage of the specified activities
income "would be deducted, or excluded" from the calculation.
Alaska typically "adopts the federal tax code by reference" and, as
a result, the Alaska tax is based on the business's "worldwide or
U.S." taxable income. As of the year 2005, QPAI would lower a
business's taxable income by three percent. This would in effect
reduce the amount of money Alaska would collect in taxes.
Mr. Dickenson informed that the State has the option to decouple
from federal law. This has occurred in other areas of State law:
for example, Alaska's depreciation deductions differ from those of
the federal government. He pointed out that the impact of QPAI
would be more severe on Alaska than on any other state due to the
fact that "natural resources ? form the base" of the State's
taxable income. The State has limited service industry income in
its tax base.
Mr. Dickenson also observed that it is impossible for the State to
mirror the concept of the federal QPAI, which is to encourage
business activities in the United States rather than in other
countries, as the State is prohibited from passing a law that
would, in effect, lower a business's tax on an activity occurring
in Alaska rather than in another state.
Mr. Dickenson theorized that had the entire nine-percent deduction
been in effect in Fiscal Year (FY) 2004, the State would have
received approximately $24.7 to $27.4 million less revenue. He
reminded that the deduction would gradually increase from three
percent in the year 2005 to nine percent beginning in 2009. The
projected revenue loss, by year, is depicted on page two of the
aforementioned "Primer: IRC 199 Qualified Production Activity
Income (QPAI)" in the section titled "Projected State Revenue Loss
from QPAI Deduction". As reflected on that chart, the State would
lose approximately $100 million in tax revenues over the next
decade "as a consequence" of this federal tax.
Mr. Dickenson reiterated that this federal tax and its economic
policy goals could "not be replicated" by the State. In addition,
the income of foreign oil and gas corporations is viewed in terms
of corporations' worldwide income rather than their U.S. income. To
that point, the State is required to create a deduction table based
on those companies' worldwide income. "We believe that we would" be
required to allow QPAI-like deductions for activities done in
places outside of the United States such as Nigeria. The State
would be prohibited "from drawing that line between interior U.S.
and exterior U.S." activities in the same manner as allowed the
federal government.
Mr. Dickenson detailed that when the State audits a large
multinational oil company, it relies on the federal government to
conduct 95-percent of the work. While the State does not replicate
any audit work that the federal government conducts, it does audit
any income that might be attributed to Alaska or how a company
managed rules exclusive to Alaska. Were the State to accept the
QPAI deduction, it must be recognized that the federal government
would not be auditing a company's construction activities occurring
outside of the U.S.; therefore, the State would be required to
either conduct that audit or ignore it. To that point, the fiscal
notes accompanying this legislation do not reflect that, absent the
adoption of this legislation, more State resources would be
required as the State would be required to conduct audits "without
the support of the federal Internal Revenue System. This effort
would not be required were the legislation adopted.
[NOTE Co-Chair Wilken assumed chair of the meeting.]
10:04:50 AM
Mr. Dickenson noted that when this issue was discussed with
Governor Frank Murkowski, "his quick reaction" was that this was
"another unfunded federal mandate. Basically the feds have passed a
law, it has desirable policy goals for the federal government". The
State could recognize QPAI as being beneficial to taxpayers even
though the State would lose revenue. However, unlike most unfunded
federal mandates, the State, in this case, has the option to not
participate.
Mr. Dickenson clarified that were the State to decouple the QPAI
for State taxes, that action would "not make any changes to the
benefits the taxpayers receive when they file their federal income
taxes". The State's action would have no affect on the rules
governing a taxpayer and the federal government. Were the State to
decouple the QPAI section of the federal revenue code, the affect
on a taxpayer would be that the information filed on the taxpayer's
federal tax return would be used as the basis for their State
filing. This legislation would simply specify that one section of
the federal tax code would not apply in this State.
Mr. Dickenson qualified that this legislation would require some
transitional rules to be developed in order to avert confusion
regarding such things as estimated payments.
Mr. Dickenson remarked that the backup material in Members' packets
is extensive in comparison to "the brevity of the bill". The
aforementioned "The American Jobs Creation Act of 2004" handout
explains the history of the Act and briefly explains QPAI and the
other sections of the Act. Were this legislation adopted, with the
exception of the decoupling of the QPAI section, the other sections
of the Act would become part of State law. Another handout, titled
the "Tax Analysts Special Report" is a 24-page report that provides
information to companies about how to deal with the Act. The third
piece of material is a brochure notifying the Department's
Certified Public Accountants (CPAs), who are required to undergo
continuing professional education, about an upcoming conference
that would educate CPAs on how "to maximize U.S. tax benefits on
domestic production activities". Department participation in the
conference might be beneficial, as it would allow the State to
review tax codes and issues that could be relevant to the Alaska
Tax Code.
Mr. Dickenson stated that Chuck Harlamert with the Department's Tax
Code Division could address Members' technical questions.
10:09:26 AM
Senator Stedman voiced apprehension about whether this legislation
is "as simple of an issue as stated". His understanding is that
other than decoupling domestic production activities, no other
activity would be excepted from the federal Act. To that point, he
asked for further clarification regarding whether specific groups
of industries, such as the oil and gas industry for instance, have
been identified for exclusion.
Mr. Dickenson responded that the State has not identified any
particular industry: the oil and gas industry would be treated the
same as the fishing and construction industries. However, the
federal tax exemption's application to the oil and gas industry
would have significant impact as that industry "is paying the
majority of the dollars" under the State's tax system.
Senator Stedman asked for further information about how the State
would be affected by the federal nine-percent taxable income
reduction.
Mr. Dickenson explained that a company would calculate their
taxable income based on revenues less taxable expenses. The Act
would allow an additional deduction of up to nine percent of the
income derived from qualified production activity. This would
essentially allow some expenses to be "deducted twice". One
limiting factor is that expenses could not exceed 50-percent of the
business's W-2 wages.
10:12:02 AM
Senator Stedman asked whether this legislation would permit a
business to incorporate an appreciation schedule, referred to as an
Accelerated Cost Recovery System (ACRS), which would allow
appreciation to occur, for instance, over a 15-year period rather
than a 30-year period. Such compression would increase deductions.
Mr. Dickenson responded no, current appreciation schedules would
continue unaffected. The only other change specifically included in
this legislation would be an accelerated appreciation schedule in
regards to an Alaska gas plant "for federal purposes".
Senator Stedman asked, were this legislation to fail and the
federal Act to become effective in its entirety, whether a business
would be able to incorporate an ACRS instead of the regular
depreciation schedule.
Mr. Dickenson stated that neither the action of adopting or
rejecting this legislation would provide a business "access to
that".
10:13:38 AM
Senator Olson understood that the theory behind this federal Act
was to create jobs. He asked whether that theory would hold true
for Alaska, regardless of the outcome of this legislation.
Mr. Dickenson agreed that the purpose of the Act was to create jobs
in the U.S. There is "no sense" that this would result in jobs in
Alaska. The Act would essentially provide a "tax advantage if you
create jobs" in the United States. No tax advantage would be
provided were an entity to create jobs outside of the United
States. Alaska is prohibited "from drawing that same line". There
is no doubt that this legislation would provide the economic tools
to encourage new jobs in the nation; however, "the point is that it
doesn't help Alaska at all".
Senator Olson calculated that, absent this legislation, the State
would experience a $10,000,000 a year revenue loss for the next ten
years. He inquired to the cost associated with the implementation
of this legislation.
Mr. Dickenson expressed that this legislation would not incur any
expenses. To the contrary, costs would be incurred absent this
legislation, as the State would be required to conduct deduction
auditing on "QPAI-like activities that occur outside of the U.S".
Senator Bunde questioned the Department of Revenue indeterminate
Fiscal Note #1, dated March 22, 2005, [copy on file], as it does
not reflect the cost to the State were the legislation not enacted,
as specified in the Note's analysis on page two under the "Revenue
Discussion" heading.
Mr. Dickenson replied that the Department based its calculations on
FY 2004, "which was a very high" taxable income year. Future
taxable income level projections, which consider such things as
falling oil prices, are lower than FY 2004. Projections indicate a
range of losses from five million dollars in the initial years to
$16 million dollars in FY 2013. Losses could amount to $25 million
were a year similar to FY 2004 to occur.
Co-Chair Green commented that the fiscal note is "a little bit
misleading in that the information on page two must be brought into
consideration.
10:17:12 AM
Senator Stedman understood that this legislation would, in effect,
opt the State of Alaska out of this federal "economic stimulus
concept". To that point, he asked whether that action would affect
the accounting practices of such entities as "Sub-chapter "S"
corporations.
Mr. Dickenson reiterated that the State would be uncoupling from
only one section of a large multi-section piece of federal
legislation.
CHUCK HARLAMERT, Juneau Section Chief, Tax Division, Department of
Revenue, expressed that while the QPAI section is "a major piece"
of The American Jobs Creation Act of 2004, it does not have any
specific affect on "S" Corporations under Alaska law. "Basically
the affect of this bill would be to reverse in your Alaska tax
return", one line item in the Other Deductions category of your
federal tax return. "Only corporations who pay tax now would be
affected; S Corps would not".
Senator Stedman noted that the State has two options: to uncouple
from the QPAI or to incorporate the federal Act in its entirety
into State tax code. The question is, "from the corporate
standpoint and from the State standpoint" which of these two
options would encourage development of refineries and other large
capital projects in the State.
Mr. Harlamert voiced being unaware of any element in this federal
Act that would incentivize construction of a refinery in Alaska; as
regardless of the location, be it in Alaska, Texas, or any other
state, the company would benefit from the federal tax exemption.
This benefit would also be allowed under Alaska tax code were the
State to adopt the Act in its entirety.
Senator Stedman asked which state would be in a better position to
attract development of a refinery: a state that has chosen not to
opt out or one that opted out.
Mr. Harlamert responded that that would depend on a mix of economic
factors including the specific state's taxation. Texas's income tax
laws, for example, differ from Alaska's. However, were the tax laws
identical and Texas to accept the Act in its entirety and Alaska to
uncouple the QPAI, the tax rate for the refiner would be lower in
Texas. However, it should be noted that even were the refinery
built in Alaska, the refiner would receive the same tax deduction
in Texas; the refiner would not receive the tax deduction in Alaska
regardless of whether the refinery was built in Texas or Alaska. In
conclusion, regardless of where the refinery was built, the refiner
would receive the same result under the State tax law.
Senator Stedman stressed that the encouragement of economic
development in the State is important. The concern is, therefore,
that the State not position itself at a disadvantage in that
regard.
Senator Bunde asked whether any taxpayer would be testifying
regarding this legislation.
Co-Chair Green replied that none have, of yet, signed up to
testify.
Senator Bunde stated that that could be an indication of "a lack of
concern" as he doubted their being unaware of the issue.
Senator Stedman requested that the bill be held in Committee to
allow for further discussion.
Co-Chair Green agreed.
Senator Olson referenced the "Status of QPAI in Other States"
section on page three of the Department's "Primer: IRC 199
Qualified Production Activity Income (QPAI)" report, and asked
whether the desire is to move the State from the "Conform to
Federal QPAI Deduction" column to the "Decoupled from Federal QPAI
Deduction" column.
Mr. Dickenson responded that would be correct.
Senator Olson commented that none of the states in the "Decoupled
from Federal QPAI Deduction" column resemble the State of Alaska.
Alaska is an oil producing state and has no personal income tax. He
inquired to the reason that Alaska should consider decoupling when
other oil producing states such as Oklahoma and Louisiana were
listed in the "Conform to Federal QPAI Deduction" column.
Mr. Harlamert expressed that the information reflected on page
three was voluntary, was not all-inclusive, and was not up-to-date.
One issue on which the State "stands alone in the nation for
applying worldwide combined reporting" is that major industries in
the State, specifically oil and gas companies, represent "80-
percent of the State's tax base". There is no other state in which
the implications of the bill would be "as dramatic as they are in
Alaska".
Mr. Harlamert continued that there "is a good argument for staying
in conformity with federal law ? [it] keeps things simple". Minor
timing differences should be avoided, as they would "generate
headaches for taxpayers and the State for years to come". However,
this legislation addresses "a permanent difference" ? the State
"would never be able to recoup the revenue" once its gone. The
affect of this Act would be more dramatic for Alaska than for any
other state. Most states typically adopt federal standards in a
manner similar to how Alaska does as that is the easiest approach:
it "takes an effort to come forth and change it".
Mr. Dickenson observed that West Virginia, Montana, and North
Dakota, which are also considered resource states, have decoupling
legislation pending.
10:26:53 AM
Co-Chair Green recognized Arkansas, which has already decoupled
from the Federal QPAI Deduction, as a resource state.
Mr. Dickenson voiced that the Department would be available to work
with the Committee to address further concerns.
Co-Chair Green ordered the bill HELD in Committee.
AT EASE 10:27:37 AM / 10:30:35 AM
SENATE BILL NO. 88
"An Act relating to the policy of the state regarding the
source of funding used to cover a shortfall in general fund
revenue."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken, the bill's sponsor, informed the Committee that
this legislation is an enhanced and updated version of the
information that he presented during the June 2004 Legislative
Special Session. In addition to the bill, the sponsor statement,
and a zero Fiscal Note from the Department of Revenue, Members'
packets contain a copy of a March 2, 2005 letter he had received
from Chris Phillips, Director of Finance of the Alaska Permanent
Fund Corporation. A copy of the "Senate Bill 88 A Bridge to
Development A policy on General Fund Revenue Shortfall" power point
presentation titled dated April 5, 2005 [copy on file] has also
been provided.
Co-Chair Wilken read his sponsor statement as follows.
Senate Bill 88
A Policy on General Fund Revenue Shortfall
Senate Bill 88 reads as follows: It is the policy of the State
of Alaska that the amounts necessary to cover a projected
shortfall in general fund revenue during a fiscal year be
appropriated equally from the Constitutional Budget Reserve
fund and the Earnings Reserve Account. These few words adopt a
course of action that balances the state budget when a
shortfall in general fund revenue exists.
Senate Bill 88
• When needed, fills the potential fiscal gap in a way
that minimizes the financial impact on Alaska
families.
• When needed, provides a bridge over the gap between
general fund expenditures and general fund revenues
until our state's natural resources can be further
developed.
• Doubles the life expectancy of the Constitutional
Budget Reserve fund.
• May strengthen the State of Alaska bond rating, and
save millions of dollars on future bond offerings.
Senate Bill 88 affirms a policy of the state that provides
fiscal certainty when the general fund revenue is
insufficient to fully fund the state budget. Please join me
in support of this legislation.
Co-Chair Wilken pointed out that the term "'the bridge' is a
metaphor [meaning] to get us from here to there." "There are only
nine letters that describe economic development in this State: Oil
and Gas ? it's not mining, it's not fishing, it's not tourism, and
its certainly not taxes."
Co-Chair Wilken noted that the aforementioned power point
presentation is available on the Internet at
"www.akrepublicans.org/Wilken".
Co-Chair Wilken stated that were this legislation adopted, it would
be a component of the AS 37.07.010 Executive Budget Act as opposed
to being incorporated into State Statute. "It's policy and can be
ignored as needed". The fact that it would not be mandated is "an
important consideration".
Co-Chair Wilken stated that the pie chart on page three of the
presentation depicts the FY 06 $7,600,000,000 Operating and Capital
Budget, as proposed by Governor Frank Murkowski. 75-percent of the
State's revenue budget is attributed to three primary things: the
Permanent Fund (PF) equating to $1.42 billion or 19 percent of the
budget; federal funds of $2.52 billion or 33 percent of the budget;
and General Fund (GF) Revenue amounting to $2.63 billion or 34
percent of the budget. The General Fund "is the home of the fiscal
gap". He noted that Oil and Gas Tax Revenues typically comprise
between 68-percent and 90-percent of the State's GF revenues. It is
anticipated that they would amount of 87-percent of the GF revenue
in FY 06. It should also be noted that, in FY 06, the federal and
GF funding are expected to mirror each other. The State should "be
vary of any changes" that might alter federal funding support in
the future.
Senator Dyson asked for examples of what types of funding comprise
the "Statutory Restricted" component, which at $744 million, would
equate to ten percent of the proposed FY 2006 budget.
Co-Chair Wilken replied that those revenues consists of Department
of Fish and Game receipts or federal money that is considered "flow
through money" in that it is earmarked to support a specific
program.
Co-Chair Wilken remarked that the information on page four titled
"What's the problem?" presents three variables in graph form: the
State's General Fund Budget, the General Fund Baseline, and New
General Fund Revenue from the years FY 1990 through FY 2020. As
shown, the General Fund Baseline tapers downward as the years
advance; the General Fund Budget trends upward two percent per
year; and the New General Fund Revenue reflects the insertion of
new oil and gas development revenue in approximately FY 2013.
Co-Chair Wilken stated that this graph depicts the fiscal gap issue
facing the State: the General Fund budget would exceed the General
Fund Baseline beginning in approximately FY 2007; however, the
receipt of New General Fund Revenue is not projected until the year
FY 2013.
Senator Stedman asked for further information about the General
Fund Baseline".
Co-Chair Wilken responded that the General Fund Baseline reflects
general unrestricted revenues as calculated by the Division of
Legislative Finance. As mentioned earlier, 87-percent of the FY 06
General Fund Baseline component would be attributable to Oil and
Gas Tax revenue. The General Fund Baseline, as depicted on the
graph, is based "on current reserves and current production and
their forecast out to the year 2020".
Senator Stedman understood therefore that the General Fund Baseline
is General Fund revenue.
Co-Chair Wilken affirmed.
Senator Dyson asked for confirmation that the Division of
Legislative Finance based the forecast on oil prices.
Co-Chair Wilken confirmed.
Co-Chair Wilken stated that he valued the information in the "
and things can change quickly 'For the Good and the Bad'" graph
depicted on page five, so much that he had a small wallet size card
[copy on file] of the information made for distribution. The graph
depicts a variety of fiscal scenarios based on the price of oil
ranging from $25 to $50 per barrel. The graph indicates that, given
the Governor's FY 06 budget, the State's break even point would be
a North Slope Crude Oil price of $42 per barrel. The oil price
scenarios are accompanied by projections of the "Unrestricted
General Fund Revenue" as well as projected "Surplus" levels.
Co-Chair Wilken stated that, as exampled, the State's FY 06 budget
"would break even at $42 per barrel"; a price of $50 per barrel
would generate a surplus of approximately $450 to $500 million
dollars.
Co-Chair Wilken pointed out, however, that, "things can change
quickly for the good or for the bad." The price of oil on April 1,
2004 was approximately $32 dollars a barrel. The Legislature was
ecstatic at the time that the price had surpassed $30 per barrel.
"Money was rolling out of our pockets" at that price. However, were
that price applied to the Governor's FY 06 budget there would be a
$600 million shortfall. "That's how fast" the scenario changes. In
1999, the per-barrel price was ten dollars and the State was $1.3
billion out of balance. Therefore, when people bring up the subject
of how much money the State has, showing them the aforementioned
card would open the discussion to "what if" scenarios.
In response to a question from Senator Stedman, Co-Chair Wilken
calculated that the Governor's FY 06 budget would exceed the FY 05
budget by approximately $400 million. The current price of oil is
in the $33 range. A price of $42 per barrel would "essentially"
generate sufficient revenue to absorb the difference between the FY
05 and the FY 06 budget.
Senator Hoffman argued that the information conveys "only half the
story" as, while the per-barrel price has increased, oil production
has been experiencing "a steady decline" over the years.
Continuance of this trend would further increase the fiscal gap.
Co-Chair Green asked whether the Division had factored in the
reduction in oil production.
Co-Chair Wilken affirmed that the decline in production was
factored into the projections. The projection is based on a flat
930,000 barrels per day. Were the Trans Alaska Pipeline to operate
at full capacity the scenario would definitely change. The fact
that things do change is exemplified by the fact that the State has
had to withdraw a total of $5.5 billion from the CBR over eight out
of the last twelve years, in order to balance the budget.
Co-Chair Wilken stated that the information on page six specifies,
as authorized by Article IX of the Alaska Constitution, that the
CBR was established in 1990 as a separate fund to be used to
support the State budget when necessary.
Co-Chair Wilken stated that the chart on page seven reflects the
draws on the CBR since the initial draw in 1994. The chart depicts,
from FY 94 through FY 05, the "CBR Ending Balance", the "Draw"
amount, and the "Average Draw". $369,000,000 was drawn in FY 94, a
peak draw of $1,042,000,000 was drawn in FY 99, no draws occurred
in FY 97 or FY 01, and a low draw of $11,000,000 occurred in FY 04.
No draw is expected for FY 05. The "Average Draw" is approximately
$320,000,000. The CBR Balance is currently $2.1 billion and the
balance is expected to increase to $2.5 billion by June 2005.
Senator Bunde asked whether the presentation would address the ERA
balance.
Co-Chair Wilken assured that ERA information is forthcoming. He
reiterated that the current CBR balance is $2.1 billion.
Co-Chair Green understood therefore, that contrary to previous
projections, the CBR would not be depleted by the year 2006.
Co-Chair Wilken affirmed and recalled that, at one time, it was
thought that the CBR would be depleted by the year 2002. "It's like
the furniture store at the corner, it's been going out of business
in the same location for years." "The CBR is pretty healthy" today.
10:43:39 AM
Co-Chair Wilken noted that page eight of the presentation provides
samplings of press releases pertaining to the State's oil and gas
resource opportunities. Reiterating that Oil and Gas Tax revenue
would generate 87-percent of the FY 06 General Fund monies, he
noted that in order for the State to continue to pay for the
demands placed on State government, the State must develop its
natural resources.
Co-Chair Wilken stated that because new natural resource
development would evolve gradually rather than overnight, the State
must address the points in time between now and then. This scenario
is depicted in the " ? a bridge is needed from today to
development" chart on page nine. This page projects oil and gas
revenues from the years 2006 through 2016.
Co-Chair Wilken noted that the General Fund Budget on the chart
encompasses a two percent growth factor. The "Unfilled Fiscal Gap"
in the General Fund is depicted as is the "onset of the Gas
Pipeline" and new oil expected from the development of the Arctic
National Wildlife Refuge (ANWR). The projected unrestricted General
Fund Revenue is also included.
10:45:03 AM
Senator Bunde asked for further information about the "General Fund
Budget" variable depicted on the chart, as, oftentimes, the
argument is heard that the State's fiscal gap could be addressed by
reducing State expenditures. He commented that the inclusion of a
two percent per year growth factor in the General Fund Budget would
be less than the inflation rate that would be experienced.
Therefore, what is depicted in the information "is a very modest
budget growth prediction".
Co-Chair Wilken agreed. He shared that during his Special Session
presentation of this proposal, the General Fund Budget was
presented with no growth. "Many people took exception to that and
rightfully so". The two-percent growth included in this
presentation "is the literary license to just kind of throw a
number up there": three percent "is probably too high" and one
percent "is probably too low".
Senator Bunde pointed out that a two percent growth calculation
would be less than that proposed in separate spending limit
legislation proposed by Senator Dyson.
Co-Chair Wilken expressed that a two-percent growth in general fund
spending over a 15-year period would reflect "a great deal of
fiscal constraint."
Senator Stedman commented that a two-percent general fund growth
rate would be a lesser level than that proposed in the FY 06
budget.
Co-Chair Wilken agreed.
Co-Chair Wilken stated that, as portrayed on page ten, there are
seven possible sources or "pots" of money for the State: State
spending could be reduced; between $50 and $100 million dollars
might be raised through increased Corporate Taxes; between $200 and
$300 million might be raised by implementing a State Sales Tax;
$400 to $600 million dollars might be generated by a State Income
Tax; approximately $30 million could be raised under Other Revenue
by increasing such things as Tobacco Taxes, Alcohol Taxes,
Fisheries Taxes, Car Rental Taxes, and Studded Tire Fees; the
Constitutional Budget Reserve could provide $2.1 billion; and the
$2.1 billion in realized earnings of the Permanent Fund, referred
to as the Earnings Reserve Account (ERA), could be used, after
accounting for the Permanent Fund Dividends and Inflation-proofing.
Utilizing the ERA is the focus of this legislation.
Co-Chair Wilken stated that, as depicted in the chart titled "
why not just the CBR?" the CBR could be used to sustain State
Budget shortfalls for a finite time, as, absent another funding
source, the CBR would be deleted by FY 2010. However, at that
point, there would still be "a gap to bridge".
Co-Chair Wilken stated, therefore, that the question, as written on
page twelve, is " ? so what if ? The Legislature splits the future
fiscal gaps with equal contributions from the Constitutional Budget
Reserve and the Earnings Reserve Account?"
Co-Chair Wilken conveyed that the graph on page thirteen, titled "
? and we build a bridge" portrays the scenario were both an ERA and
CBR draw to occur. This scenario would provide "a bridge" of
funding that would support the State's budget until the time when
"Potential Resource Development Revenue" could support the budget
beginning in approximately the year 2013.
Co-Chair Wilken declared, "so, there's the bridge to development."
Senator Hoffman asked how, in this scenario, the capital needs of
State would be addressed.
Co-Chair Wilken clarified that capital projects are included in the
operating budget in the overall State budget.
Senator Hoffman understood therefore that the proposed FY 2006 $2.5
billion budget would include capital expenditures.
Co-Chair Wilken affirmed.
Senator Hoffman asked regarding the level of capital funding that
would be included in the FY 06 budget.
Co-Chair Wilken responded that it is embodied in the two percent
growth.
Senator Hoffman asked whether the amount would be above or below
$100 million.
Co-Chair Wilken stated that the Division of Legislative Finance
would provide specific information in that regard.
Co-Chair Wilken stated that the information presented on page
fourteen, affirms that the Legislature, by a simple majority vote,
could access the earnings of the Permanent Fund.
10:52:05 AM
Senator Bunde suggested that consideration be given to obtaining
the information that included in the State's voter pamphlet at the
time the Establishment of the Permanent Fund was voted on in the
early 1970s. That information "clearly" stated that the money would
be available "for appropriation and use to support State services
when oil revenues have diminished".
Co-Chair Wilken assured that that would be done.
Senator Hoffman, referencing the graph on page 13, asked whether
the total CBR/ERA Draw amount that would be required until new
resource development comes on line is known.
Co-Chair Wilken stated that that information was included in a
Division of Legislative Finance spreadsheet titled "50/50 model",
dated Feb 18, 2005 [copy on file] that had been previously
distributed.
Senator Hoffman asked whether this proposal would deplete the CBR.
Co-Chair Wilken replied in the affirmative.
Co-Chair Green asked whether CBR growth was included in the
projections.
Co-Chair Wilken deferred to the Division of Legislative Finance.
Senator Hoffman restated his question regarding the total amount of
the CBR and ERA draws that would be expected.
ROB CARPENTER, Fiscal Analyst, Division of Legislative Finance,
Legislative Affairs Agency, clarified that the proposal would split
the draws equally between the CBR and the ERA. The total amount
required from the ERA and the CBR would exceed $2.1 billion.
Earnings of the funds would also be utilized.
Senator Hoffman estimated that the total could exceed $4.2 billion.
Mr. Carpenter responded that the amount would be approximately $2.4
billion.
Mr. Carpenter re-distributed the aforementioned spreadsheet to
Members.
Senator Stedman suggested that a "sensitivity table" be included in
the presentation in order to recognize the changing price of oil as
it increases and decreases. This would reflect the expansion and
retraction and the price of oil that would be required.
Co-Chair Wilken stated that such a presentation could be developed.
Continuing, he noted that the thrust of the issue is whether or not
the Legislature, after considering all these components, should
adopt a policy that would allow joint use of the CBR and the ERA.
Co-Chair Wilken stated that the Alaska Permanent Fund, Fund
Financial History & Projections as of December 31, 2004 spreadsheet
is provided on page 15. It was included as verification that the
numbers provided in the presentation have a legitimate basis. This
sheet is the source for the forthcoming conclusions reached in this
proposal.
10:56:55 AM
Co-Chair Wilken voiced the importance of the realization that, as
reflected on page 16, there are two pots of money in the Permanent
Fund: the principal consisting of 25-percent of oil revenues with
the exception of the National Petroleum Reserve-Alaska (NPR-A);
"special deposits" authorized by the Legislature; and inflation
proofing drawn from the ERA. The Permanent Fund principal is
protected in the State's Constitution. While it is highly unlikely,
it "would be a dark day" for the State were the time to come that
it would be required to ask voters to approve accessing the PF
principal to provide for State services.
Co-Chair Wilken continued that the second pot of money comprising
the Permanent Fund is the ERA, currently valued at $3.3 billion.
Money from the ERA is used to provide for annual Permanent Fund
Dividends, inflation proofing of the Principal, and, by a simple
majority vote of the Legislature, the balance of the fund could be
accessed in order to fund a State fiscal gap. He voiced surprise
that a large portion of the population are unaware that the ERA
could be accessed in this manner.
Co-Chair Green commented that the "Other" ERA expenditure,
reflected on page 16 as $2.1 billion, could be referred to as
"excess earnings".
Co-Chair Wilken asserted that Co-Chair Green's term or the word
"remaining" would be descriptively appropriate.
10:59:09 AM
Senator Bunde shared the suggestion that the excess earnings be put
toward Permanent Fund Dividends. It should be pointed out however,
that the previous year, Alaskans sent $180 million to the Internal
Revenue Service (IRS) as the federal tax on that year's dividend.
"A great deal" more money would be sent to the IRS were the
Dividend increased substantially. That money, being sent out of
State, would not thereby support the building of new roads or
schools or some other "State service that people would value".
Co-Chair Wilken stressed the importance of clarifying the
distinction between the principal of the Fund and the ERA when
discussing the Permanent Fund with people.
Senator Bunde concurred.
Co-Chair Wilken characterized the CBR and the ERA as "Alaska's
Crown Jewels" as referenced on page 17. We are the only Legislature
in the nation "deciding how to manage $31 billion for 650,000
people". Only a few countries have that sort of wealth. While the
State is not at the financial level of major oil producing
countries like Qatar or Saudi Arabia, "it is in the next level
down". The power of the PF earnings could be a big consideration,
and each day, through a variety of avenues such as the financial
market, "the world helps build Alaska". Stock market and real
estate investments assist in building the State's Permanent Fund
holdings. It is a form of economic development for the State.
11:01:47 AM
Co-Chair Wilken reminded that the average CBR draw has been $318
million. Under this proposal, a hypothetic $500 million annual
fiscal gap for the next ten years would be equally split with $250
million being drawn each year from both the CBR and the ERA. The
chart depicted on page eighteen was developed to address the
concern about how withdrawing money from the ERA would affect the
Permanent Fund Dividend (PFD) check. The $250 million ERA draw
specified in this example, would result in a total PFD reduction of
$446 for the ten-year period. "This is a very important" chart, "as
it brings home" the realization of how much money is in the ERA. In
order to communicate this information to the public, the page
eighteen chart is duplicated on the flip side of the aforementioned
wallet sized card.
Co-Chair Green agreed that this is "great" information.
Senator Hoffman suggested that, to further alleviate public
concern, a column that reflects the expected dividend amount for
each of the ten years should be included on the chart. This
information would be based upon the "Alaska Permanent Fund History
and Projections as of December 31, 2004" information on page 15,
and would assure people that their dividends would continue to
grow.
Senator Bunde stated that the information on page eighteen could
address the difficulty that some citizens have in recognizing the
fact that, unlike the federal government, the State cannot print
more money. State services are supported in a manner somewhat akin
to "robbing Peter to pay Paul", in that, through either citizen
taxation or other means, the State must raise money to pay for
services. While some people opine that a State income tax would be
the most fair, others say it would be regressive. Therefore, it
might be instructive to develop "a parallel chart" to the one on
page eighteen that would reflect what folks might pay were an State
income tax in place.
Co-Chair Wilken replied that a forthcoming presentation chart might
address Senator Bunde's suggestion.
Co-Chair Wilken stated that the chart on page nineteen provides, as
suggested Senator Hoffman, information regarding the estimated PFD
for the next ten years compared to the PFD amount were $250 million
withdrawn from the ERA as per this proposal. After his initial
review of the numbers, he had asked the Division of Legislation
Finance to recalculate them, as they appeared "too good to be
true". They are legitimate.
Co-Chair Wilken noted that the information on page twenty reflects
the potential impact of this proposal to one's PFD in common terms:
there would be almost no impact the first year; the amount lost the
second year could equate to the cost of a specialty cup of coffee;
the amount lost the third year might amount to the price of a movie
ticket; the amount the fourth year could equate to the price of a
large pizza; the amount lost the fifth year could equate to the
price of a woman's haircut, and the amount lost the tenth year
would equate to the price of a dinner for two at a fancy
restaurant.
Co-Chair Wilken stated that the information on page 21 might
address Senator Bunde's earlier suggestion as it compares the
affect of an ERA draw to that of implementing alternate revenue
generating sources such as a State income or sales tax. An income
tax would cost a married couple with two children earning an
adjusted gross income of $57,000 approximately $1,000 a year; a
State sales tax would cost that family approximately $950; and
tapping the ERA would cost that family approximately $12. This
information is based on the second year of implementation.
11:10:10 AM
Senator Bunde suggested that a comparison reflecting the costs to
someone earning $30,000 a year be developed, as that was the
minimum income baseline utilized during income tax proposal
discussions.
Co-Chair Wilken stated that the graph depicted on page 22 indicates
how adopting this policy would extend the life of the CBR to the
time when resource development revenues would come online.
Co-Chair Wilken stated that "unlike" the Percent of Market Value
(POMV) budgeting concept legislation that had been recently
considered, the policy proposed in SB 88 would only be implemented
when there were a fiscal gap. Years might pass without there being
the need to tap the CBR or the ERA or they could be tapped one year
and not the next. This legislation would establish a "unique
accountability" between the Legislature and the electorate because
the affect of the decision could be quantified. As presented on
page 23, this legislation "demands spending accountability because
? (1) the Earnings Reserve Account is the people's money and (2)
each legislator must answer to the public on how much was spent
from the Earnings Reserve to fund state services."
Co-Chair Wilken read the summary of the presentation, as presented
on pages 24 and 25.
The Bridge to Development Plan
• Bridges the State of Alaska revenue needs until development
can occur
• Recognizes Alaska's natural resource potential and
opportunity for jobs
• Recognizes the power of the Earnings Reserve - the crown
jewel of a fiscal plan
• Establishes accountability by forming a investment
partnership will all voters
? and
• When needed, minimizes the financial impact on Alaska
families
• Doubles the life of the CBR
• Strengthens the Alaska's bond rating and saves millions of
dollars
• Provides Alaska with a stable and dependable long term
fiscal plan
Senator Bunde pointed out that, were this legislation adopted, the
CBR and the ERA would not be utilized in FY 06 as oil price
projections indicate that sufficient revenue would be generated to
support that year's budget. In addition, were those who are more
optimistic than him about oil prices and production correct, this
might be the scenario for the next several years.
Co-Chair Wilken agreed, but cautioned that oil prices could
decrease as quickly as they had increased. He voiced the belief
that the State "has a structural deficit" in that over a ten-year
period, State revenues would be inadequate more often than they
were "flush". "We need to be ready."
Senator Stedman "liked the presentation and the concept" of "a
bridging mechanism" that could be utilized until the time that new
resource revenues came on line, but opined that further discussion
should occur on a couple of issues. To that point, he suggested
that "some sidebars" or a maximum limit on the amount that could be
drawn from the ERA be considered. This would address the concern
that there might be budget increases of five, ten, or twelve
percent were no limits placed on the revenue side. The objective
would be include "sidebars" in order to prevent the occurrence of
"ballooning budgets". "This year's a good example."
Senator Hoffman declared that, "this year is a really good
example". To that point, however, he opined that, "when it's all
said and done, we would find that we were the sideboards".
11:18:08 AM
Co-Chair Green applauded the presentation, and reminded the
Committee that regardless of the outcome of this legislation, the
ability for the Legislature to access the ERA, via a simple
majority vote, has always been an option. She agreed with Senator
Hoffman that the Legislature does play the roll of the sideboards.
She doubted that the Legislature "would limit, under any
circumstances", the amount that could be withdrawn as that could
jeopardize appropriate action in the case of an emergency.
11:18:53 AM
Senator Bunde stated that while the Legislature could have
exercised its ability to access the money in the ERA "many times"
that has not occurred. There is a "huge political dike between" the
Legislature and its ability to spend the ERA. Therefore, the
question is were a mechanism such as the one provided by this
legislation available, would future Legislators take "more
political courage" and utilize it.
Senator Bunde also noted that, in order to further the spending
limit goal as previously proposed in separate legislation by
Senator Dyson, provisions could be included in this legislation
that would allow this ERA/CBR mechanism to be utilized only were
the budget no more than perhaps a three percent increase over the
previous year's budget.
Co-Chair Green remarked that such a provision would prohibit this
CBR/ERA funding mechanism from being utilized in regards to the FY
06 budget.
Senator Bunde continued that, while such legislation could be
modified, it would put in place "pretty serious sideboards that a
future Legislature would be changing at its own political peril."
Senator Dyson suggested that the passage of this legislation could
be contingent on the passage of a Constitutional spending limit.
Co-Chair Wilken, in response to Senator Bunde's comment, stated
that his recent bid for re-election to his Senate seat had provided
him the opportunity to discuss this ERA/CBR concept with a variety
of people. Although he had been initially "afraid" to discuss this
plan, which his opponent painted as a raid on the PF, the public
response to it was gratifying. The opportunity proved successful in
enlightening people about the power of the earnings of the PF. He
encouraged people who might run for a public office to continue the
dialogue of positioning the earnings "as an asset".
Co-Chair Wilken commented that the idea of imposing a spending
limit of two or three percent above the previous year's budget
could be doable provided the Legislature "could define what goes
into the two or three percent increase".
Senator Bunde commented that, "the groundwork has been
established".
Senator Hoffman asked Co-Chair Wilken's position in regards to
placing this proposal on a Statewide ballot.
Co-Chair Green interjected that this proposal would not require
voter approval.
Co-Chair Wilken stated that this issue is not addressed in the
proposal.
Senator Hoffman agreed.
Co-Chair Wilken expressed that the Legislature should not request
voter permission to spend the ERA. "That's our job".
Senator Hoffman argued that, rather than the issue being whether
the Legislature could access the ERA, the issue is whether this
proposal, rather than a State sales tax, income tax, or user tax,
would be the mechanism through which to fill the State's fiscal
gap. Rather than his concern being that voter permission should be
required to spend money from the ERA, his concern is whether this
proposal should be the long-term solution. He surmised that upon
voter review of the various options, this option "would have a high
potential of passing."
11:24:43 AM
Co-Chair Wilken characterized this legislation as "soft policy"
which future Legislators could either use or ignore. Future
legislators would continue to have the opportunity to pursue other
options if needed to raise revenue. The ramifications of
implementing a sales tax or income tax would include placing
pressure upon corporations and families. He opined that were this
legislation in place and used, it would work. At that point, "it
would become the standard". He voiced discomfort at the thought of
asking the voters whether this should be "the" fiscal plan.
Senator Hoffman questioned the reason for Co-Chair Wilken's
unwillingness to allow the people to vote on the issue since he had
previously mentioned that after discussing the proposal with people
during his re-election campaign, they had recognized its worth.
Therefore, they would support it.
Co-Chair Wilken stated that it would be a challenge to discuss this
issue with 640,000 citizens.
In response to a comment from Co-Chair Green, Senator Hoffman re-
stated Co-Chair Wilken's remarks about how, during his bid for re-
election, he had broached the subject of this bill and that, as a
result, people had warmed up to the idea. The other options had
drawbacks; this proposal "is markedly different".
Senator Bunde questioned the reason for there being such a thing as
the Senate Finance Committee, were the Legislature "to accept what
State law says" regarding the availability of the ERA for
appropriation, but nonetheless putting that action to a vote of the
people. Were that to occur, perhaps all spending of State funds
should be put before a vote of the people. There is no difference
between the ERA, "corporate income tax, and any other source of
funds that the State has access to".
Senator Olson recognized there to be "a lot of difference" between
a State income tax and corporate income tax, and the spending of
the ERA. He echoed Senator Stedman's concern that, were a "bigger
and bigger and more swollen budget" to evolve, few individuals
would possess the ability to hold a budget in line. He praised the
work conducted by the chair of the Senate Finance Committee
Department of Natural Resources subcommittee, who, in an earlier
presentation, had held that Department's budget down.
Co-Chair Wilken clarified, in response to Senator Stedman's and
Senator Olson's concerns, that the only time this policy would be
necessary would be when State revenue were insufficient to support
the State's budget. "That automatically dampens the desire to
spend, spend, spend". It is not something that would occur every
year.
Senator Olson respectively disagreed by commenting that, "when
somebody spends someone else's money, there is always a shortage of
money".
The bill was HELD in Committee.
ADJOURNMENT
Co-Chair Green adjourned the meeting at 11:29 AM.
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