Legislature(1999 - 2000)
04/12/2000 06:40 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 BILL NO. 411
"An Act relating to the market value of the permanent
fund and to distribution of income of the permanent
fund; and providing for an effective date."
REPRESENTATIVE BILL HUDSON, Sponsor spoke in support of HB
411. He observed that House Bill 411 would be a step toward
a long-term fiscal plan. House Bill 411 was introduced to
give the Permanent Fund strength, security and stability far
into the future. The legislation allows income from the
Permanent Fund to be distributed as a percentage of market
value. Permanent fund dividends are currently distributed
under a realized return formula. He stressed that Dave Rose
and other knowledgeable people recommended the market value
concept. Distributing the fund income as a percent of market
value has been discussed since the late 1980's. The
Commission on the Future of the Permanent Fund, various fund
trustees, the Long-Range Financial Planning Commission, the
Fiscal Policy Council, and Commonwealth North have
recommended this blueprint for strengthening the Fund. This
legislation fits in with the Permanent Fund's long-term
investment horizon. While not necessarily endorsing HB 411,
the Permanent Fund Board supports a percent of market value
approach and recognizes that continuing the present realized
return formula could lead to distortions in distributions
due to gain taking and asset allocation decisions made as
part of good investment policy. Passage of HB 411 would
allow the Permanent Fund Corporation to hold investments
that historically need more time to mature. Another unique
feature of the market value approach is that it produces a
distribution program that is inherently more level. First
and foremost, House Bill 411 protects the realized and
unrealized assets of the Earnings Reserve Account. The
Principal of the Permanent Fund is protected by the
Constitution.
Vice Chair Bunde pointed out that some of the earnings of
the Permanent Fund are being used to hold harmless those
that would lose their welfare benefits due to their
permanent fund dividend.
Representative Hudson reiterated that the proposal is but
one possible element of a long-range fiscal plan. It is
however, an essential element if the state is to close the
fiscal gap. According to the most recent Department of
Revenue prediction, approximately $413 million dollars will
be needed to balance the 2001 budget and $736 million
dollars will be needed to close the gap in 2002. He stressed
that the state of Alaska has a serious fiscal problem.
Representative Hudson maintained that HB 411 preserves and
grows the permanent fund. Preserving and growing the Fund is
an issue that he and others that support the plan felt they
needed to respond to after the September 14, 1999 special
election vote regarding use of the Permanent Fund. He
emphasized that opponents of the advisory vote did not infer
that some assets of the Permanent Fund could not be used and
that the entire fiscal gap would not be made up with the
Permanent Fund. The plan would maintain permanent fund
dividends at the status quo or greater over the next 10
years of projected growth.
Representative Hudson explained that the Earnings Reserve
Account would also be protected and would maintain growth.
The Earnings Reserve Account would grow from $3 billion to
more than $8 million dollars under the plan. The
Constitutional Budget Reserve would also be preserved.
Vice Chair Bunde questioned if the pay back to the
Constitutional Budget Reserve had been discussed.
Representative Hudson noted that the state of Alaska is
approximately $5 billion dollars in arrears to the
Constitutional Budget Reserve. The Constitutional Budget
Reserve now has close to $3 million dollars. He estimated
that the Constitutional Budget Reserve would be depleted by
the year 2005. He acknowledged that the pay back is a
serious concern. He did not have an answer.
Representative Hudson stressed that the cash flow of the
Permanent Fund would be protected. Permanent fund dividends
would continue at the same rate or greater. He maintained
that the approach maximizes the predictability and stability
of distributions. He maintained that it is an essential
element of the plan. Statutory inflation proofing would be
required. The Fund would earn approximately 8 percent over
the long term. The first 3 percent of earnings would remain
in the Fund for inflation proofing. After inflation proofing
5.3% of the earnings would remain for distribution to
dividends and the General Fund. House Bill 411 allocates 75%
of the distributions to the dividend and 25% to the General
Fund.
Representative Hudson noted that the plan includes 2 percent
inflation for education and transportation spending. He
maintained that timely action would come close to balancing
the budget.
Representative Hudson presented the Committee with charts to
demonstrate the need for a long-range fiscal plan. He
maintained that HB 411 would be the salvation of the
permanent fund dividend and that it fits into the original
intent of the Permanent Fund. He stressed that for every
billion dollars of the reserve that is lost there is a
corresponding loss of $80 - $100 million dollars in
potential earnings.
Vice Chair Bunde observed that individuals reduce their
outflow to met their income. Representative Hudson pointed
out that government has constitutional mandates such as
education. Approximately $1 billion dollars goes into
education and the university. The state of Alaska also has
welfare and public safety responsibilities. He observed that
the public wants more money for education, $17.5 million
dollars more for the university and full funding for Power
Cost Equalization. He stressed that the public would throw
legislators out if they reduced state support.
Vice Chair Bunde pointed out that there is a state budget of
over $6 billion dollars for only 600,000 people.
Representative Hudson observed that $1.6 billion dollars of
the $6 billion total is allocated to the public in the form
of the permanent fund dividend. The $1.5 billion dollar
federal portion must be allocated as the federal government
directs. The unrestricted general fund revenues are $2.1 to
$2.2 billion dollars. Oil production is going down. The
level of oil production has been reduced from 200 million
barrels to 1 million barrels a day. Oil production is
projected to drop to 800,000 barrels a day over the next 7 -
10 years.
Vice Chair Bunde concluded that the state's budget could be
divided into three equal parts: federal dollars, permanent
fund dividends, and state expenditures.
Representative Hudson stressed that there is a $417 million
dollar deficient and a statutory responsibility to produce
an available dollar for every dollar spent. Need exceeds the
money available. The Constitutional Budget Reserve account
is $4.5 to $5 billion dollars in the arrears.
Representative Austerman observed that the plan would
deposit 25 percent of the undistributed interest earnings in
to the General Fund. Undistributed interest earnings are the
amount left after inflation proofing. Dividends would be
paid with the remaining 75 percent. He observed that HB 411
allows higher payment of dividends than under the status
quo. The cost of government is projected to be short $700 -
$800 million dollars. The flow of 25 percent of the
undistributed interest to the General Fund would result in
approximately $350 - $370 million dollars. The
Constitutional Budget Reserve savings account would not need
to be used.
Representative Austerman pointed out that a tax base would
be needed to supplement undistributed interest to the
General Fund. Additional money from the oil industry, taxes
and permanent fund earnings would be used to balance the
budget. He observed that the figures are fluid.
Representative Phillips clarified that there would be $350
million dollars in new revenues. New revenues would come
from residents, industry, out-of-state workers and
nonresidents.
Representative Austerman provided members with four possible
tax structures (copies on file). A retable sales tax,
seasonal sales tax, a head tax similar to the school tax,
and a flat income tax were addressed. He emphasized that the
House Finance Committee is the appropriate place to discuss
which method or methods should be used.
Representative J. Davies spoke in support of a balanced
revenue plan. The third piece of the plan would be revenue
from industry. He provided members with two amendments
addressing the corporate income rate (copies on file). The
corporate income rate is a graduated tax structure. He
observed that almost all corporations are at the top of the
taxable rate. An increase in the corporate tax would raise
an additional $100 million dollars. This would be a tax cut
for some of the small and medium corporations. Addressing
the ELF rate could raise additional funds.
REPRESENTATIVE LISA MURKOWSKI stressed that options are
being presented. She observed that no one is suggesting that
all of the tax options be "rolled out on to the floor". The
plan is an attempt to encourage discussions on a wide range
of options. The longer there is delay, the fewer options
that will be available. The result would be a higher level
of taxes. She stressed the need to let people know what is
available and emphasized that it is important to bring
industry into the discussion.
REPRESENTATIVE ANDREW HALCRO echoed remarks by
Representative Murkowski. He observed that the public
criticized the amount of public input. He noted that there
were a number of reasons that people voted against the long-
range fiscal plan in FY00. He pointed out that the market is
volatile. "It is a dollar today, or $10 dollars tomorrow."
GOVERNOR JAY HAMMOND testified via teleconference in support
of HB 411. He observed that HB 411 obtains the first
obligation to the public to take dividends off the table. He
questioned if the interest rate is too high and asked why
there was a three-year instead of five-year average.
(TAPE CHANGE, HFC 00 - 115, SIDE 2)
Governor Hammond spoke in support of a public vote. He
maintained that the public was unaware that there is money
in the Permanent Fund that could be used without affecting
permanent fund dividends. He stressed the importance of
inflation proofing. He felt that the public would support a
plan to use up to but no more than the amount of Permanent
Fund earnings that are not needed for dividends or inflation
proofing. He stressed that the public needs to be assured
that the legislature would be prevented from using permanent
fund dividend dollars without a constitutional amendment or
a public vote. He observed that Governor Knowles promised
that there would be a public vote and that the public may
demand a vote before anything is approved. He stated that he
supports a public vote but would not oppose passage of a
ballot proposition to clarify the issue. He stated that he
would support use of a reasonable percentage that would not
impact the dividend.
BOB STORER, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION provided information on the legislation. He
observed that an interest rate of 5.3 percent would be on
the high end of reasonable. He explained that the longer the
time period the less volatile the payoff formula. A three-
year average would reduce the volatility.
Vice Chair Bunde asked if the dividend could get so high
that there would be a negative impact to the state of Alaska
in the form of the attraction to new residents.
Governor Hammond pointed out that inflation grows as
dividends grow. He did not think that the dividend would
grow so large that it would be unreasonable when inflation
is factored in.
Vice Chair Bunde clarified that more than 2.5 percent of the
earnings reserve is being spent for inflation proofing.
Representative Austerman reiterated that the percentages can
be changed and encouraged discussions to find the right
amount.
Co-Chair Therriault noted that an opponent of the September
14, 1999 advisory vote regarding use of the Permanent Fund
to support state government used a quote by Governor Hammond
to support his position. In response to a radio interview on
May 18, 1998 Governor Hammond responded to the question:
"When the Permanent Fund was originally established -- was
the intent to use that money to fund government or was the
intent solely to provide for a dividend program for the
citizens?" Governor Hammond responded to the question: "I
can't say what the intent of all those who played a role in
establishment of the [Permanent] Fund might be, all I can
tell you is what my intent was, and that was, in light of
the circumstances prevailing at the moment, it [was] to
confine the expenditures of the fund to dividends or
reinvestment in the fund period." Co-Chair Therriault
interpreted the quote to emphasize the circumstances
prevailing at the moment.
Governor Hammond pointed out that the circumstances have
changed since the dividend was proposed and acknowledged
that the legislature has made substantial additions to the
Permanent Fund. He observed that the income tax was in place
at the time the dividend program was proposed. He stressed
that his intent was to place at least 50 percent of bonuses,
royalties and severance taxes into the Fund. He observed
that severance taxes were eliminated, royalties were reduced
and the income tax eliminated. The original suggestion was
that half of the earnings would go to dividends and the
other half would go to state government. Inflation proofing
was added, further reducing the amount available for
government. He stated that when the tax was eliminated and
the contribution rate reduced substantially, then in his
view the dividends became the highest priority. He continued
that as long as dividends are held harmless, that the
circumstances of the moment would indicate that the surplus
could be used for government purposes. He stated that a
community dividend program would be in keeping with the idea
of dividends and could be a repository for surplus funds not
needed to pay dividends. A community dividend would go
primarily to Alaskans, which is his biggest concern. A
massive public education program is necessary to make the
public aware that there are dollars available that are not
required to keep dividends flowing.
Representative Hudson asked Governor Hammond to consider
language to institute a percentage on the limit of funds
available for state government use. He observed that under
HB 411 3 percent would go to inflation proofing and 75
percent of the remainder would be used to pay dividends and
25 percent would be go into the General Fund. He emphasized
that the plan would place a statutory limit on what the
legislature could spend. He suggested that a super majority
vote could be further required for legislative access or
change. He added that the Legislature is moving toward the
establishment of an interim committee to discuss the issue
with the public. He encouraged the former Governor to
participate in interim hearings.
Governor Hammond stressed that a requirement for a super
majority vote would be the right step and added that a vote
of the public could be required. He spoke in support of a
super majority vote of the public to change the
distribution. He stressed that the public hearing and
education process is imperative, but was not sure how the
public could be convinced. He observed that HB 411 doesn't
touch permanent fund dividend dollars.
Co-Chair Therriault stressed that a super majority vote
could not be established by statute. They only super
majority votes were established in the Constitution.
Vice Chair Bunde pointed out that the dividend has been
around for 20 years without legislative use. He felt that
there was enough public pressure to prevent the legislature
from spending dividend money.
JOHN BROWN, PRESIDENT, FAIRBANKS LABOR COUNCIL, FAIRBANKS
testified via teleconference in support of HB 411. He
stressed that the original intent of the Permanent Fund was
to take over as a revenue source after oil revenues
declined. He stated that he wanted to see talk about
reinstitution of an income tax. He stressed that an income
tax would capture funds from those that work in Alaska but
do not contribute to state services. It would also send the
message that business would not carry it on their backs.
Vice Chair Bunde added that the non-resident worker
contribution might not be as large as many believe. He
observed that 10 percent of Alaskan wager earners are non-
resident workers and that the average salary of a non-
resident worker is $13 thousand dollars. Mr. Brown
acknowledged that it is only one part of the solution.
Representative Moses estimated that there are 70,000 non-
residents in Alaska earning a total of one billion dollars.
Representative Phillips observed that discussions have
occurred regarding the use of an income tax, sales tax, and
head tax. She suggested that one option is to enact a small
percentage of each tax. She noted that the income tax would
capture funds from out-of-state workers, while a sales tax
would capture funds from summer visitors. There are
advantages to each and all are being considered.
In response to a question by Vice Chair Bunde, Mr. Storer
explained how the plan would change the calculation of
dividends. The current formula takes 21 percent of the
realized income over a five-year period. Realized income
includes dividends, interest and capital gains on profits
from the sale of securities. It does not include
appreciation of the asset. A percentage of the market value
takes systematic earnings of the average value of the fund,
which is smoothed out over a period of time. This approach
would smooth out the payout stream. A realized average is
more volatile.
Vice Chair Bunde noted that there is a risk that dividends
could not be paid during prolonged depressed stock markets.
He questioned the purpose of the constitutional mandate for
the purpose of the excess earnings. Mr. Storer clarified
that the purpose is to be used by the legislature, as they
deem appropriate.
JIM KELLY, LEGISLATIVE LIAISON, ALASKA PERMANENT FUND
CORPORATION clarified that the 1976 ballot proposition
stated that all income from the Permanent Fund "shall" be
deposited into the General Fund unless otherwise provided by
law.
In response to a question by Representative Austerman, Mr.
Storer explained that the Board did not take a position on
the change from status quo. Individual board members
recognize the advantage of a payout based on market value.
IAN OLSON, FAIRBANKS testified via teleconference in support
of HB 411. He stressed that oil is declining. He noted that:
"Those that fail to plan, plan to fail." The plan protects
and increases the permanent fund dividend and allows
consideration of a broad base revenue increase. He cautioned
the Committee not to take the plan to a vote of the people
without a massive educational effort. He expressed support
for income tax and a seasonal sales tax.
DAVE JONES, KODIAK testified via teleconference in support
of HB 411. He maintained that it is essential to address the
long-term budget plan. He expressed support for a
diversified revenue stream. He maintained that the original
intent was to use earnings of the Permanent Fund when oil
revenues declined. He maintained that HB 411 fulfills the
original intent of the program while maintaining the
permanent fund dividend. He noted that the revenue stream
would be broad based. Alaskans must pay their share. He
pointed out that he is not paying taxes. His permanent fund
dividend exceeds his property tax. He spoke in support of
income and sales taxes. He observed that the Constitutional
Budget Reserve needs to be captured now and that it could be
lost as a source of revenue, which would increase the
likelihood that dividends would be affected.
MARY GRISWOLD, HOMER testified via teleconference in support
of the market value payout. She read from written testimony:
I strongly support changing the distribution of
Permanent Fund earnings to a percentage of market value
payout This method protects the Permanent Fund
principal and promotes a long-term investment strategy
allowing our equity investments to reach their full
potential. Although there are no performance guarantees
with the market value approach, it does remove the
dependence on volatile realized earnings and offers a
more stable dividend distribution based on the real
return of the Permanent Fund investments. HB 411 and a
combination of reasonable taxes will provide funding
for essential government services and set the framework
for a successful long-term financial plan.
I think a long range fiscal plan including better
control of government spending and a combination of
reasonable taxes should be developed before the
Permanent Fund's earnings are tapped to meet government
expenses. Assuming these conditions are met, I prefer
starting with an 80/20 split of the payout because this
preserves the present dividend value. Howeveradjusting
1
the dividend should remain a legislative option for
balancing personal benefit and the common good for all
Alaskans as other General Fund revenue sources are
depleted. Shortchanging funding for essential public
services or raising exorbitant taxes in order to
sustain a large personal dividend does not serve our
best interests or the purposes for which the Permanent
Fund was established.
I strongly urge you to keep the payout at 5%. This is
commonly accepted as reasonable by most of the
country's large endowments and is supported by the
APFC's own predictions for a real return. It is better
to err on the side of protecting the Permanent Fund's
principal than on the side of increasing the amount of
money available to spend.
I would like to see language included in the bill to
provide for the periodic transfer of money from the
Earnings Reserve Account to the Permanent Fund
principal to make sure the inflation-proofing earnings
arc fully protected, such as was provided in HB1001.
Several underperforming years could erode the value of
the principal without such protection because the
payout would exceed the real return as long as there
were sufficient accumulated earnings in the reserve
account to permit it. It is imperative to compensate
for this by fully protecting the principal when the
fund is performing well.
I also urge the Legislature to start research on tax
options at the earliest moment, to come up with a
reasonable combination of sales and income taxes that
most fairly shares the burden for funding public
services among all those who benefit, including out of
state workers and tourists.
Representative Phillips observed that the Legislative Budget
and Audit Committee would be working on ideas during the
interim.
EDDIE BURKE, ANCHORAGE testified via teleconference in
opposition of HB 411. He quoted Ronald Regan: "Here we go
again." He maintained that it is an effort to take money
from the people. He stressed that the funds cannot be
designated and that future legislatures cannot be bound. He
referred to Rule 21. He stressed that there needs to be
constitutional protections. He noted that reductions have
been anticipated for a number of years. He stressed that
Alaskans are not greedy, but that they do not want the
legislature to spend their money. He observed that there is
no cap on government growth. He maintained that it is a
blank check written on different ink. He observed the
absence of key legislators from the discussions.
(TAPE CHANGE, HFC 00 - 116, SIDE 1)
Representative Phillips disagreed with remarks by Mr. Burke.
She stressed that the Legislature is making no attempt to go
into the corpus of the Permanent Fund. She added that under
HB 411 that there is a greater return to the individual
Alaskan in dividends than would exist under the status quo.
The Legislature did not spend $600 thousand dollars to
educate the public prior to the September 14, 1999 advisory
vote. The funds were raised by the public sector.
MARY RAYMOND, HOMER testified via teleconference in support
of HB 411. She expressed relief that discussions have taken
place regarding a long-range plan. She stressed that her
dividend has never been more important than the services
provided by state government. She noted that it takes more
than money to live in Alaska.
KEVIN RITCHIE, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL LEAGUE
testified in support of a balanced approach to state
revenues. He observed that development of a state long-range
fiscal plan is the top priority of the Alaska Municipal
League. Municipal governments are state governments. The
state and municipalities jointly provide education, public
safety and road services.
The Alaska Municipal League supports a balanced approach to
revenues such as HB 411. Mr. Ritchie stressed the need to
look at taxes and revenues. He pointed out that over the
last 10 years there has been a $200 million dollar increase
in property taxes collected in the state of Alaska. The
total amount of revenue collected from property tax is $450
million dollars. Money collected from property taxes has
almost doubled in the last 10 years. At the same time,
revenue sharing has been reduced by $100 million dollars
over the past 10 years. He spoke in support of a municipal
dividend. He pointed out that the tax cap initiative is the
result of increased property taxes. A municipal divided
would extend benefits of the Permanent Fund to the people
and stabilize local taxes.
Vice Chair Bunde maintained that there would not be a tax
cap initiative if local municipalities had reduced their
spending instead of increasing taxes.
Mr. Ritchie observed that two-thirds of the revenue
collected through property tax goes to education.
Municipalities also provide road service, fire and police
services. He observed that the public is asking for better
road maintenance, more police officers and better schools.
Representative J. Davies noted that there is a call for less
state spending but more state services.
Mr. Ritchie did not feel that state expenditures could be
reduced sufficiently to cover the fiscal gap. An income tax
that would balance the budget would be too high. A sales tax
that could cover the gap would have to be 20 percent. There
has to be a balanced approach. He personally supports HB 411
as a balanced approach.
PAM LABOLLE, PRESIDENT, ALASKA STATE CHAMBER OF COMMERCE
testified in support of a long-range fiscal plan. She
applauded efforts to continue discussions. The Alaska State
Chamber of Commerce laid out their support for three
elements: reduction in the size and spending of state
government, some use of the Permanent Fund earnings and, if
necessary, a broad-based tax. The organization had not met
to discuss support for the specific plan outlined in HB 411.
However, the bill holds the three elements proposed by the
Alaska State Chamber of Commerce.
Vice Chair Bunde pointed out that the plan is a prototype
not a finished product.
In response to comments by Representative Phillips, Ms.
LaBolle stated that the Alaska Chamber of Commerce would be
happy to be involved in continued work on the issue.
BILL CORBUS, JUNEAU testified in support of a long-range
fiscal plan and HB 411. The state must strive to get its
financial house in order. The legislation is a good start
and adopts the endowment concept, satisfies the dividend
test, and recognizes the need for other sources of revenue.
Representative Foster asked how to sell the plan to the
public. Mr. Corbus responded that a media campaign was a
mistake. He stressed the need to involve service
organizations.
Representative Phillips commented that she received phone
calls that were organized by folks that lead the "no" vote
campaign in September. The calls disagreed with one of the
cuts made to the operating budget. She noted that her new
slogan is: What part of "cut the budget" do you want me to
ignore? People fail to understand that the vote represented
only 84 percent of less than 25 percent of the voters of the
state of Alaska. She stressed the need to let everyone in
the state understand the issue.
Representative J. Davies felt that the [September 14, 1999
advisory] vote was worthwhile but noted that he expected a
"no" vote. He stressed that anyone would answer "no" to
paying taxes or receiving less in their dividends. He
emphasized that elected officials are elected to balance the
desire to not pay any more taxes than necessary against the
desire to have real services supported by state government.
He maintained that such votes by the people always result in
a "no" vote. He stressed that "the buck stops here" and that
legislators were elected to make decisions. Legislators are
in the best position to understand the balance between
revenues and expenditures. He added that there were a large
number of reasons why people voted "no". There was no one
reason for the "no" vote. He concluded that legislators have
the most information at hand and are best situated to make
decisions.
Representative Moses spoke in support of the legislation. He
expressed disappointment that the issue was not resolved in
the current session. He stated in his 1992 campaign that an
income tax was needed. He maintained that there are large
numbers of people in the state that want to create a nest
egg and do not care what happens to the state in the future.
He observed that he introduced legislation creating a
municipal dividend and an income tax. He stressed that his
oath of office was taken to do the best thing for the state
of Alaska as well as for his district.
HB 411 was heard and HELD in Committee for further
consideration.
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