Legislature(1995 - 1996)
01/23/1996 01:40 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 date." 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 3 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 plans. 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 4 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. PETER BUSHRE, CHIEF FINANCIAL OFFICER, ALASKA PERMANENT FUND 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 session. 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 5 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 statute. JIM KELLY, RESEARCH & LIAISON OFFICER, ALASKA PERMANENT FUND 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 scenario. 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 6 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 legislation. 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 years. 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. TAMARA COOK, DIRECTOR, OFFICE OF THE DIRECTOR, LEGISLATIVE 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. MIKE GREANY, DIRECTOR, LEGISLATIVE FINANCE DIVISION, 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. RANDY WELKER, LEGISLATIVE AUDITOR, LEGISLATIVE AUDIT 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. 7 ANNALEE MCCONNELL, DIRECTOR, OFFICE OF MANAGEMENT AND 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 crash. 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 inception. 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 8 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 action. (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 9 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.