Legislature(2001 - 2002)

03/22/2002 09:20 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 304                                                                                                            
     "An Act relating to disposition of income of the                                                                           
     permanent fund; and providing for an effective date."                                                                      
Co-Chair   Williams  observed   that  a  proposed   committee                                                                   
substitute,  work  draft  22-LS1207\L,  3/21/02  changed  the                                                                   
split ratio to 40/40/20.                                                                                                        
PETER ECKLUND,  STAFF, CO-CHAIR  WILLIAMS explained  that the                                                                   
proposed committee  substitute  uses the endowment  principle                                                                   
and percent of market value payment  method for the Permanent                                                                   
Fund.  He  explained that  7  percent  of  the value  of  the                                                                   
Permanent Fund  would be  taken in FY03,  6 percent  in FY04,                                                                   
and 5  percent thereafter.  An education  fund of 40  percent                                                                   
would  be created  in  the  General Fund.  An  infrastructure                                                                   
account  would  be created  and  receive  20 percent  of  the                                                                   
funds.  Dividends  would  be   paid  from  the  remaining  40                                                                   
percent.  He emphasized  that deferred  maintenance needs  of                                                                   
the state of Alaska are over one billion dollars.                                                                               
Representative Hudson acknowledged  the work of the chairman.                                                                   
He  agreed  with  most  aspects  of  the  proposed  committee                                                                   
substitute,  with  one exception.  The  5 percent  of  market                                                                   
value  principal originated  with the  Alaska Permanent  Fund                                                                   
Corporation.  The  five percent  payout  would  automatically                                                                   
inflation proof  the fund. He observed that  Governor Hammond                                                                   
referred   to   a  30/30/30   payout:   inflation   proofing/                                                                   
dividend/general  government.  If you  take  5 percent  after                                                                   
inflation  proofing  and divide  it  on  a 50/50  basis,  the                                                                   
result  would be  35  percent to  general  government and  35                                                                   
percent  to the  dividend. He  explained  that the  five-year                                                                   
average shows a  reducing dividend. He spoke in  support of a                                                                   
50/50  dividend/state split,  which would  keep dividends  at                                                                   
approximately the same level.  The FY04 dividend amount would                                                                   
only  be $35  dollars  less  than  the current  amount  under                                                                   
Representative Hudson's  proposal. He asked the  Committee to                                                                   
consider changing  the dividend amount to 50  percent on page                                                                   
2, line 17.  The infrastructure percentage on page  3, line 3                                                                   
could be 10 to 15 percent and  the education account could be                                                                   
40 - 35 percent. He pointed out  that the 50/50 provision has                                                                   
been  well addressed.  A  40  percent division  would  reduce                                                                   
dividends by $300 per person.                                                                                                   
Representative Whitaker observed  that the proposed committee                                                                   
substitute no longer resembles  the original legislation, but                                                                   
indicated  that  he  would  support  the  proposed  committee                                                                   
substitute.  He  noted  that the  legislation  has  become  a                                                                   
reformulation  of  the  Permanent  Fund.  He  recognized  the                                                                   
challenges before  the legislation, but stressed  that action                                                                   
must be taken.                                                                                                                  
Representative   John  Davies   spoke  in   support  of   the                                                                   
legislation. He pointed  out that the provisions  of the bill                                                                   
have been well discussed. There  was discussion by the Alaska                                                                   
Permanent Fund  Corporation and  the fiscal policy  group. He                                                                   
felt that  the changes  recommended by Representative  Hudson                                                                   
would assist passage of the bill.                                                                                               
Representative Croft  spoke in support  of a 50/50  split. He                                                                   
noted  that  Alaska is  the  only  state  that has  a  common                                                                   
ownership  of  its resources.  The  public might  not  accept                                                                   
anything less  than 50/50. He  maintained that a  50/50 split                                                                   
would be fair.                                                                                                                  
Representative  Lancaster   stressed  that  the   plan  would                                                                   
protect the  dividend into the  future and expressed  support                                                                   
for the 50/50 provision.                                                                                                        
Vice-Chair Bunde  summarized that "100 percent  of nothing is                                                                   
still  nothing"  and pointed  out  that  the dividend  is  in                                                                   
danger if no action is taken.                                                                                                   
Co-Chair   Mulder   MOVED   to   ADOPT   proposed   committee                                                                   
substitute, work draft, 22-LS1207\L, Cook 3/21/02.                                                                              
The Committee recessed at 10:05 a.m.                                                                                            
The Committee reconvened at 2:40 p.m.                                                                                           
Representative  Hudson  provided  members  with  Amendment  1                                                                   
(copy on file). He explained that  the amendment would pay 45                                                                   
percent to dividends, 35 percent  to education and 20 percent                                                                   
to the  infrastructure or  economic development account.  The                                                                   
FY03 dividend would  not change. He observed  that, under the                                                                   
amendment,  dividends would  be  $100 dollars  less in  FY04.                                                                   
Dividends would  still grow, at approximately  $100 less than                                                                   
under the status quo. In FY03,  $965 million dollars would be                                                                   
available  for  to  the  General   Fund.  Approximately  $839                                                                   
million dollars  would be  available in  FY04. By FY10  there                                                                   
would be  approximately  $948 million  dollars to offset  the                                                                   
deficit. Inflation  proofing would  continue at 7  percent in                                                                   
FY03,6 percent in FY04, and 5 percent in FY05 and out.                                                                          
Representative Hudson MOVED to  ADOPT Amendment 1: 45 percent                                                                   
to dividends, 35 percent to an  education fund and 20 percent                                                                   
to the infrastructure/economic development account.                                                                             
Representative  John  Davies  questioned  why 5  percent  was                                                                   
taken   out   of   education   instead   of   infrastructure.                                                                   
Representative Hudson  responded that the amendment  would be                                                                   
a statutory allocation  and pointed out that  the legislature                                                                   
could  chose to  change  the ratio.  He  stated  that he  was                                                                   
responding to the need for deferred  maintenance. He observed                                                                   
that there is  a one billion dollar need and  reiterated that                                                                   
it could be changed in the future.  He explained that by FY10                                                                   
the education fund  would be more than $600  million dollars.                                                                   
The intent  is to find a  middle ground while  protecting the                                                                   
Permanent Fund and dividends.                                                                                                   
Representative   Croft   observed  that   the   spreadsheet's                                                                   
projected  rate of return  is 8.25  percent. He thought  that                                                                   
the  Alaska Permanent  Fund Corporation's  projected rate  of                                                                   
return  was  7.95 percent.  He  expressed  support  for a  50                                                                   
percent  payout to  dividends. He  stated that  he would  not                                                                   
object  to the  amendment because  it  moved the  legislation                                                                   
closer to the 50 percent target.                                                                                                
There being NO OBJECTION, Amendment 1 was adopted.                                                                              
Representative Croft  MOVED to ADOPT Amendment  2: 35 percent                                                                   
to  education, 50  percent to  dividends, and  15 percent  to                                                                   
infrastructure. Co-Chair Williams OBJECTED.                                                                                     
TAPE HFC 02 - 62, Side B                                                                                                      
Representative Whitaker  referred to the Constitution  of the                                                                   
state of  Alaska, Article 9,  section 16. He  maintained that                                                                   
the amendment  has been  ignored since it  was put  in place.                                                                   
The constitutional amendment would  dedicate one-third of the                                                                   
expenditures of  the state of  Alaska to be spent  on capital                                                                   
projects. He noted that the issues  are whether an additional                                                                   
$100 dollars  would go to dividends  or be used to  build the                                                                   
Representative John Davies interpreted  Article 9, section 16                                                                   
to mean not  more than one-third of the state's  budget would                                                                   
go  to  infrastructure.  He observed  that  the  1999  ballot                                                                   
initiative  indicated  that  the   public  wants  to  protect                                                                   
dividends. He  emphasized that it  is easy for the  public to                                                                   
understand a 50/50 split.                                                                                                       
Representative Whitaker spoke against the amendment.                                                                            
A roll call vote was taken on the motion.                                                                                       
IN FAVOR: Croft, Davies, Foster, Moses                                                                                          
OPPOSED:  Bunde,   Harris,   Hudson,   Lancaster,   Whitaker,                                                                   
          Williams, Mulder                                                                                                      
The MOTION FAILED (4-7).                                                                                                        
Representative Foster  MOVED to report CSHB 304  (FIN) out of                                                                   
Committee with  the accompanying fiscal note.  Representative                                                                   
John Davies OBJECTED for the purpose  of discussion. He noted                                                                   
that he still supports a 50/50 split.                                                                                           
Representative  Foster WITHDREW his  motion to move  CSHB 304                                                                   
Co-Chair Mulder MOVED to ADOPT  Amendment 3: "The legislation                                                                   
may appropriate  to the dividend  fund the additional  amount                                                                   
needed  so that  the total  amount  of the  2002 dividend  is                                                                   
$1,540. He explained  that the intention is to  keep the FY02                                                                   
dividend at it's current level.  There being NO OBJECTION, it                                                                   
was so ordered.                                                                                                                 
Co-Chair  Mulder  MOVED  to  report CSHB  304  (FIN)  out  of                                                                   
Committee with  the accompanying fiscal note.  Representative                                                                   
John Davies and Representative Croft OBJECTED.                                                                                  
Representative  Croft  stressed  that  there  are  structural                                                                   
problems with the  manner that the dividend  and earnings are                                                                   
calculated. He  maintained that  dividend creep has  to stop.                                                                   
He  did not  think  that  the  proposal would  be  successful                                                                   
without  substantial  sideboards,  new  revenues and  a  more                                                                   
clear and fair distribution.                                                                                                    
Representative  Hudson  spoke   in  support  of  the  amended                                                                   
legislation.  He  maintained  that  the  Permanent  Fund  was                                                                   
intended  to  meet the  demand  for  state support  when  oil                                                                   
revenues declined. He stressed that the plan was balanced.                                                                      
Representative Whitaker spoke  in support of the legislation,                                                                   
but emphasized  that it  cannot stand-alone.  He pointed  out                                                                   
that [the  1999 ballot  initiative  to use  a portion of  the                                                                   
Permanent Fund] was not supported.                                                                                              
Representative  John  Davies  pointed  out  that  the  amount                                                                   
available for  the education fund  would be diminished  in FY                                                                   
05, but  would start  to grow again.  He stressed  that there                                                                   
would need  to be an $80  million dollar increase  in general                                                                   
funds to  maintain full funding  for education when  the fund                                                                   
Co-Chair  Williams stressed  that the  legislation is  a tool                                                                   
and that the intent is to fully fund education.                                                                                 
Vice-Chair  Bunde maintained  that education  has never  been                                                                   
reduced,  although  he  acknowledged  that it  had  not  been                                                                   
A roll  call vote was  taken on the  motion to move  the bill                                                                   
from Committee.                                                                                                                 
IN FAVOR: Bunde,    Foster,   Harris,   Hudson,    Lancaster,                                                                   
          Whitaker, Williams, Mulder                                                                                            
OPPOSED: Croft, Davies, Moses                                                                                                   
The MOTION PASSED (8-3).                                                                                                        
CSHB  304 (FIN)  was REPORTED  out  of Committee  with a  "do                                                                   
pass"  recommendation and  with  previously published  fiscal                                                                   
note: REV #1.                                                                                                                   

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