Legislature(1995 - 1996)

01/23/1996 01:40 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
  SENATE BILL 84                                                               
       "An Act making a special appropriation to the principal                 
       of the permanent  fund; and providing for  an effective                 
  Representative  Martin  MOVED  that work  draft  #9-LS0639\Z                 
  dated  1/23/96, be the version  before the Committee.  There                 
  being NO OBJECTION, it was so ordered.                                       
  SENATOR RICK HALFORD  spoke in  support of the  legislation.                 
  He noted that the bill had been sponsored last year and that                 
  it had failed  to pass through the  entire Legislative Body.                 
  Since that time, the Long Range Planning Commission's Report                 
  advised an appropriation  be made of the  amount recommended                 
  in the bill.                                                                 
  Senator Halford repeated that  the legislation would provide                 
  no  access to the  Constitutional Budget Reserve  (CBR).  He                 
  continued,  the  legislation  was  first sponsored  by  Oral                 
  Freeman -  Ketchikan, a major defender of the Permanent Fund                 
  for  years.   Senator  Halford stressed  that  the money  in                 
  discussion belongs to future generations;  the ones who will                 
  deal  with  problems  that exist  with  less  resources than                 
  currently  available.     He   encouraged  the   Committee's                 
  bipartisan support.                                                          
  Representative Navarre  advised  that  long  range  planning                 
  would include consideration of the Permanent Fund.  He noted                 
  that he was a  member of the Long Range  Planning Commission                 
  and that the  recommendation made by  that group was not  to                 
  make  the  deposit  "piece  meal".   Representative  Navarre                 
  stressed that the proposed legislation,  absent a long range                 
  plan for the State would be  premature.  The Governor's plan                 
  would call for the transfer  after November, 1996, in  order                 
  that the voters would  have a voice in determining  a change                 
  of usage within the Permanent Fund.                                          
  Senator  Halford  pointed out  that  every action  which the                 
  Legislature makes would be incremental.  The Legislature can                 
  not adopt a plan.  Representative Navarre suggested that all                 
  plans  will  have some  "overlap"  and that  the Legislature                 
  should reach  consensus on  the "overlap"  aspects of  those                 
  Representative  Grussendorf  voiced  concern  with  removing                 
  funds from the Earnings Reserve Account to offset inflation.                 
  He  noted  that he  does  not  oppose the  intention  of the                 
  legislation, although would not support the timing proposed.                 
  Senator  Halford explained that  if the money  was placed in                 
  the principle, it could not be  appropriated as easily as it                 
  could be in  the Reserve Account.   He suggested "taking  it                 
  off  the  table" to  avoid  consideration of  spending those                 
  funds in order to preserve it for the future.                                
  Representative Martin interjected that it was never too late                 
  for the  State to  save money  for future  generations.   He                 
  advised  that  the  action  would  be  a  way  to  renew  an                 
  unrenewable resource.                                                        
  Representative Navarre  asked Senator Halford if  the Senate                 
  Finance Committee intended to spend money from the Permanent                 
  Fund  Earnings this  year.  Senator  Halford stated  that he                 
  would  oppose that action.  Representative Navarre clarified                 
  that the Permanent  Fund Earnings Reserve had  been invested                 
  as part of the  Permanent Fund and emphasized that  fund was                 
  currently  well protected.  He continued,  half the money in                 
  the Permanent Fund resulted  from Legislative action placing                 
  the   excess   of    constitutionally   mandated    amounts.                 
  Representative Navarre stressed that there is no threat that                 
  money will be spent.  He added, discussion to date addresses                 
  a comprehensive  plan which  could be  developed to  include                 
  that money as a tool.                                                        
  Senator Halford interjected that twice  the House had passed                 
  legislation with  the intent  to draw  on earnings from  the                 
  Permanent Fund Reserve.  The first time was to "back up" the                 
  budget, and the next was to create an education endowment.                   
  Representative   Kohring   voiced   his   support   of   the                 
  legislation, noting that  it would  remove the incentive  by                 
  taking the money "off the table".  He  stated his support to                 
  create a fiscally conservative government, spending  minimal                 
  for  essential programs.   Representative  Kohring indicated                 
  that he would like to co-sponsor the legislation.                            
  Co-Chair Hanley asked for  further information regarding the                 
  Legislative appropriations to the dividend and how inflation                 
  proofing would occur to protect it.                                          
  CORPORATION, DEPARTMENT OF REVENUE,  explained on June 30th,                 
  the Alaska  Permanent Fund Corporation  (APFC) would compute                 
  the amount due under the dividend and move that money out of                 
  the Earnings  Reserve Account  and into  a liability  in the                 
  revenue fund.   The appropriation  references AS  87:13:145.                 
  The  appropriation  has  always  stated  that an  amount  is                 
  appropriated in  accordance  with that  statute.   Following                 
  that  computation,  the  amount for  inflation  proofing  is                 
  computed, based upon  the balance  of the  principle of  the                 
  Permanent  Fund on  June  30th.   The  year-end report  then                 
  reflects the actions  of the  Legislature from the  previous                 
  Co-Chair Hanley pointed  out that  $100 million dollars  was                 
  left  in  the Earnings  Reserve  Account, inquiring  why the                 
  funds  over  that amount  were left  in  that account.   Mr.                 
  Bushre explained that  the dividend  was based upon  "income                 
  available  for  distribution",   computed  according  to   a                 
  statutory clause which  includes a  proviso that the  amount                 
  calculated  for the dividend  can not exceed  the balance in                 
  the  Earnings  Reserve  Account plus  the  earnings  for the                 
  current fiscal year.  The dividend  is based upon an average                 
  of five years  income of the Permanent Fund or  21% of total                 
  five year's income.                                                          
  Mr. Bushre advised that this particular fiscal year has been                 
  an  exceptionally profitable  year for  the  Permanent Fund.                 
  This year will raise the average of the five year projection                 
  considerably.  He noted  that it would be possible  that the                 
  amount available for distribution could exceed the amount of                 
  next year's  income if the  balance of the  Earnings Reserve                 
  Account was zero.                                                            
  Co-Chair  Hanley  understood  that  a  $100  million  dollar                 
  balance  should address  those concerns.   He  asked if  the                 
  Earnings Reserve  Account was invested differently  than the                 
  principle.  Mr.  Bushre stated that  both were invested  the                 
  same and that the funds were co-mingled together.                            
  Mr.  Bushre  explained  to  Representative  Therriault  that                 
  inflation proofing was  calculated on  the principle of  the                 
  bill,  noting  that  the  Earnings  Reserve Account  is  not                 
  inflation proofed.   Representative Therriault spoke to  his                 
  concern that there could be a time when there was not enough                 
  money in the account to inflation proof. He asked the impact                 
  of  that  action.   Mr. Bushre  explained  that it  would be                 
  possible someday to  not have sufficient funds  if inflation                 
  rates, earning rates and dividends were  high.  The law does                 
  not require any  carry forward under the  inflation proofing                 
  CORPORATION,  DEPARTMENT OF  REVENUE, added  that in  future                 
  projections of the Permanent Fund,  the Corporation uses the                 
  same inflation  rate that  the Department  of Revenue  uses.                 
  For future years, a realized "real"  rate of return would be                 
  used.  Under that scenario, the corporation  would be paying                 
  dividends, inflation  proofing and  have additional  revenue                 
  left over.                                                                   
  (Tape Change, HFC 96-17, Side 2).                                            
  Representative Therriault asked if the proposed action could                 
  be  detrimental  to  the future  action  of  the  fund.   He                 
  understood  that money  would  be  available  for  inflation                 
  proofing.    Representative  Navarre  stressed  that once  a                 
  deposit  was  made into  the fund,  it  becomes part  of the                 
  corpus and  without inflation proofing it, the corpus of the                 
  fund becomes eroded.   He asked if taking the  earnings from                 
  the fund  would change  the amounts  required for  inflation                 
  proofing.   He  thought  that could  someday "eat"  into the                 
  value of the corpus of the Permanent Fund.                                   
  Mr.  Kelly  advised that  the  appropriation would  add $1.2                 
  billion  dollars   to  the  principle   which  will  require                 
  additional  inflation  proofing.     Representative  Navarre                 
  suggested placing the amount of  earnings into the Permanent                 
  Fund, and then have the options remain open for the duration                 
  of this legislative  session in  order to plan  a long  term                 
  Representative Grussendorf asked if these funds were  placed                 
  into  the account  and  revenue was  short  in the  Earnings                 
  Reserve Account  following inflation proofing,  would affect                 
  the size of the  Permanent Fund Dividend check.   Mr. Bushre                 
  replied that the  statutes specifically limit the  amount of                 
  income that can  be used in calculation  for distribution to                 
  the balance of the Earnings Reserve Account plus the current                 
  year's income.   The formula  would not call  for an  amount                 
  greater than  the balance  of the  Earnings Reserve  Account                 
  plus the  current years income.   Representative Grussendorf                 
  concluded  that  a risk  would be  taken  by passage  of the                 
  Mr. Bushre noted that a deposit made on  June 30th would not                 
  be  inflation proofed.  In past  years, when the Legislature                 
  appropriated money,  APFC  would not  inflation  proof  that                 
  amount  at the  time of  deposit, but  rather  the following                 
  fiscal year.                                                                 
  Co-Chair   Hanley  clarified   that  once  the   amount  was                 
  deposited,  it  would  then  be   calculated  for  inflation                 
  proofing when it became  part of the principle.   Mr. Bushre                 
  projected the amount  needed for dividends next  year, FY97,                 
  was $600 million dollars.  Income of over $1 billion dollars                 
  is projected  by the  Department for each  of the  following                 
  Representative Navarre asked if lack of a  long range fiscal                 
  plan  would  be the  greatest  threat to  dividends  and the                 
  Permanent Fund.   Mr. Kelly  advised Committee members  that                 
  the Board of  Trustees does not  take a position on  matters                 
  which relate to the earnings of the fund.                                    
  LEGAL SERVICES, responded to  Representative Navarre's query                 
  regarding usage of other  funds for appropriation  purposes.                 
  She  explained  that  to  get   an  appropriation  from  the                 
  Constitutional Budget Reserve Fund  would require a majority                 
  vote.   The formula requires  that all funding  available be                 
  calculated with respect to what was spent.                                   
  commented  that  the  calculation before  the  Committee was                 
  based  on  the  November, 1995,  financial  report  from the                 
  Permanent Fund.  The calculations change with the additional                 
  information on  December, 1995.   Co-Chair Hanley  clarified                 
  that the amount available for  appropriation next year would                 
  be $1.5  billion dollars more  than that available  in FY96.                 
  Mr. Greany stated that the bill version before the Committee                 
  would place the FY96 balance of  $1.13 billion less the $100                 
  million  cushion,  and  then  transfer  that  amount.    The                 
  transfer would affect the  calculation, leaving $385 million                 
  dollars as the difference between  the FY96 calculations and                 
  the amount available.                                                        
  DIVISION, pointed out that there is no effective date on the                 
  legislative version before  the Committee.  After  July 1st,                 
  1996, the calculation would not be affected.                                 
  BUDGET,   OFFICE    OF   THE    GOVERNOR,   clarified    the                 
  Administration's  position  on  the   proposed  legislation.                 
  Governor Knowles supports a $1.2 billion dollar deposit into                 
  the  Permanent Fund if it is part  of the State's long range                 
  plan to close the budget gap.  The Governor feels that it is                 
  important to protect  and enlarge the  Permanent Fund.   Ms.                 
  McConnell added that the deposit is part of the FY97 budget,                 
  although,  the timing is to come after the deliberations for                 
  a  long   range  plan   and  would   take  effect  after   a                 
  constitutional amendment vote of the  people at the upcoming                 
  election in November, 1996.                                                  
  A plan  must be  developed  to deal  with considerations  of                 
  ongoing spending and  the possibility  of another oil  price                 
  Representative Martin asked if the  Governor would veto this                 
  legislation if it were presented to  him for signature.  Ms.                 
  McConnell stressed that a long range plan is needed in order                 
  that there be a transfer.   She reiterated that a resolution                 
  defining how to close the budget gap is needed.                              
  Representative Mulder asked  the amount that the  Long Range                 
  Planning Commission's recommended for budget reductions this                 
  year.  Ms. McConnell replied a  recommendation in the amount                 
  of $40  million  dollars  was  suggested.   She  added,  the                 
  Governor's  budget   recommended  $35  million   dollars  in                 
  expenditure reductions from the general  fund and $5 million                 
  dollars in shift  from general fund support  to fee support.                 
  Representative  Mulder  argued  the  figures  presented  and                 
  stated  that  the  Governor  had   adopted  a  "piece  meal"                 
  approach.   He stressed  that the  Governor  was focused  on                 
  "spending" on the tax side of the equation.                                  
  Ms.  McConnell  responded that  the  impact of  $1.2 billion                 
  dollar deposit would  be different than a $5  million dollar                 
  reduction.  She  advised that expenditure reductions  of $35                 
  million  dollars  had  been shifted  from  general  fund oil                 
  support to user support and were  not hidden.  Ms. McConnell                 
  acknowledged  that  some  legislators  state  that  shifting                 
  dollars is not an  appropriate budget cut, yet she  stressed                 
  that government should not  be so bound by numbers  that the                 
  impact of the  reductions is  forgotten.   She advised  that                 
  this was an important part of  the legislative process.  Ms.                 
  McConnell  reminded members that there has not been a public                 
  hearing  on  the   long  range  financial  plan   since  the                 
  Representative  Mulder  referenced  a   press  release  from                 
  Governor Knowles in  December, 1995,  stating that he  would                 
  seek  a $1.2  billion dollar  Permanent Fund  deposit.   Ms.                 
  McConnell explained that  the press  releases did not  place                 
  that information  in context.   She  stated that the  speech                 
  referenced by Representative Mulder, outlined the need for a                 
  plan and then  outlined the  deposit he was  proposing as  a                 
  part of the plan.   On the following day,  Governor Knowles,                 
  in a speech to  Commonwealth North, spoke of protecting  and                 
  enlarging the Permanent Fund as part  of a plan to close the                 
  budget gap.  Ms. McConnell noted  that the Governor has been                 
  consistent on his position for a long range plan.                            
  Representative  Navarre  remarked  that   the  Governor  was                 
  willing to work  with both Houses to  establish a bipartisan                 
  plan for the State.   He observed that the  Legislative body                 
  does not  spend enough time focusing on  policy; he stressed                 
  that creating a comprehensive plan  would be the responsible                 
  (Tape Change, HFC 96-18, Side 1).                                            
  Co-Chair Hanley commented that  he supported the legislation                 
  and felt  that it  would force  the Legislature  into better                 
  long range fiscal  planning.  The  deposit would gain $80  -                 
  $100 million dollars in spin-off earnings in the future.                     
  Representative  Navarre reiterated  that  the  money in  the                 
  Earnings Reserve was part of the  Permanent Fund and whether                 
  it was  in the corpus or the Earnings Reserve, it will still                 
  earn money  every year  at approximately the  same rate  and                 
  that those earnings  would continue to  be available to  the                 
  Legislature for appropriation.   He stressed that  there was                 
  no threat to the fund.                                                       
  Representative Grussendorf accentuated that there has  never                 
  been a  draw on those funds  to date.  He  supported keeping                 
  the funds as they currently are until  a long range plan has                 
  been agreed upon.                                                            
  Co-Chair Hanley commented that if the  money was left in the                 
  current spot, would make that  money available for spending.                 
  Representative   Therriault  pointed   out  that   a  future                 
  Legislature can not be bound by  decisions made at this time                 
  unless the principle under consideration is deposited.                       
  Representative  Navarre  summarized that  a  bipartisan plan                 
  should be  implemented  which includes  both  economics  and                 
  intellect,  not just  politics.   Representative Grussendorf                 
  felt that the proposed legislation could "hamstring"  future                 
  legislators.    Representative  Martin   and  Representative                 
  Kohring summarized their support of the bill.                                
  Representative Mulder MOVED to report HCS CS SB 84 (FIN) out                 
  of  Committee with individual  recommendations and  with the                 
  accompanying fiscal note.  There being NO OBJECTIONS, it was                 
  so ordered.                                                                  
  HCS CS SB 84 (FIN) was MOVED from Committee with a "do pass"                 
  recommendation and  with a  zero  fiscal note  by the  House                 
  Finance Committee dated 1/23/96.                                             

Document Name Date/Time Subjects