Legislature(2003 - 2004)
03/22/2004 01:42 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE BILL NO. 298 An Act relating to the distribution of appropriations from the Alaska permanent fund under art. IX, sec. 15(b), Constitution of the State of Alaska, and making conforming amendments; and providing for an effective date. Co-Chair Harris MOVED to ADOPT Work Draft Version V for HB 298 dated 3/19/04. There being NO OBJECTION, it was so ordered. MR. PETER ECKLUND, STAFF TO REPRESENTATIVE WILLIAMS, explained the changes by comparing Version V with the previous version, House Special Committee on Ways & Means Version U. In Version U, on page 3, lines 5 and 8, the word "average" was changed to "annualized," at the request of the Permanent Fund Corporation. On page 3, line 6, "10 calendar years" was changed to "10 fiscal years" to match the other calculations based on fiscal years. On page 3, line 21, after the word "inflation" the remainder of that subsection (1) and (2) is deleted after the words "for a specific fiscal year by," The new language was inserted in Version V, page 3, lines 20- 26 was a change requested by the Permanent Fund Corporation. MR BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA PERMANENT FUND CORPORATION (PFC), DEPARTMENT OF REVENUE explained the change in Version V starts on line 24 of page 3. The PFC has recommended a simpler way to calculate the annual inflation rate, using the Consumer Price Index (CPI). The Corporation has always used the CPI, and would now look at the change in one 12-month period instead of from month to month. It is a technical simplification. Mr. Ecklund addressed Representative Croft's questions from the last hearing on the bill, referring to page 3, lines 17- 18 of the Ways & Means Version U. The language states, "50 percent may be appropriated to the general fund" and "50 percent may be appropriated to the dividend fund". The new Version V states: "not more than 50% may be appropriated to the general fund" and "not more than 50% may be appropriated to the dividend fund." He explained it was in response to questions of whether "may be appropriated," meant that 60% or 40% could be appropriated. The new language sets more of an upper cap. The way it is written allows future legislatures to decide a cap of zero to 50% on either the general fund or the dividend. Mr. Ecklund referred to page 3, line 14, Work Draft V subsection (b), "The legislature may appropriate from the fund for each fiscal year the amount for costs of the corporation associated with operating and investing the fund." The current costs of operating the Fund are between $45 and $50 million annually. Those operating costs would be taken off the top, and then 50% would be distributed to dividends, and 50% to the General Fund. Mr. Ecklund referred to page 3, line 22, subsection (d) noting that the previous version was silent on when the transfer of money would occur from the Permanent Fund to the dividend fund and the General Fund. The new language states that the transfer would occur "within 14 days after the effective date of the appropriation." Mr. Ecklund referred to a change in Version V on page 4, Sec. 5, which now states, "The operating budget of the corporation shall be included in the state's operating budget under AS 37.07 (Executive Budget Act)." He said the Corporation is agreeable to the language change. Representative Chenault asked if the Corporation has any problem with the change to 14 days. Mr. Bartholomew commented on the timing of the distributions. The dividend distribution historically ranges from a $500 million to $1 billion lump sum distribution that is needed within the first week of October. It is a policy call if the money resides in the General Fund or the Permanent Fund for that period. It has been transferred in July, so this change is in line with how the Corporation handled the dividend this year. The new language providing an allocation for state services would require discussion on whether to pay a lump sum at the beginning of the fiscal year, or on a quarterly or monthly basis. He said that when there is a steady cash flow, it is easier for the Fund to plan to do a recurring payment rather than a lump sum. A lump sum requires determining how many securities to sell or how to raise the cash. However, Mr. Bartholomew said that the Fund could make it work as written for a $1.2 billion transfer on that date. He asked the committee to consider approaching the state services portion from a cash flow standpoint with either a quarterly or monthly distribution. He said it would work as written. In response to a question by Co-Chair Harris, Mr. Ecklund explained that language was removed from Section 10 of the previous Version U, and confirmed it now provides one effective date of January 1, 2005 if voters approve the constitutional amendment. Co-Chair Harris MOVED to amend Amendment #1 by adding the words "not more than" before (1) and (2) to incorporate the change in Version V. Co-Chair Williams OBJECTED. Co-Chair Harris explained that his Amendment #1 would change the 50-50 allocations to the General Fund to not more than a 40% appropriation to public education, and not more than a 60% appropriation to the dividend. He said that his reasoning is to ensure that the public would accept the measure, and would understand that the Legislature wouldn't take any more of the dividend money than is necessary for the operation of the public education portion of general government. He remarked that education is the most highly supported service by the public. He submitted the amendment hoping that it would help to pass the bill and the constitutional amendment. The amendment to Amendment #1 reads: Page 3, lines 19-20: Delete all material and insert: "(1) not more than 40 percent may be appropriated for public education; (2) not more than 60 percent may be appropriated to the dividend fund" Vice-Chair Meyer commented that the 60-40 split is closer to what the "Conference of 55" had recommended. He agreed that 40% is appropriate for public education, but expressed concern that 50% could also be appropriated for education in the 50-50 split. He thought that 50% would get the Legislature closer to the amount needed for education. He thought the discussion would center on the 40-60 split or 50-50 split. He indicated that he's inclined to leave it at 50-50 but would agree to change public education to 50% in (1) of Amendment #1. Representative Hawker agreed with Vice-Chair Meyer's thinking. He drew attention to the new fiscal note from the Department of Revenue, dated 3/22/04 at 12:30 pm. The analysis gives current projections of appropriations available to the Legislature's discretion under the adoption of the 5% POMV in a constitutional amendment. He noted that in FY 2006, the 50-50 split breaks out Public Services and Per Capita Dividend at $641 million each. It climbs to about $800 million each in FY 2011. Combining the two figures totals about $1.2 billion in FY 06 and $1.6 billion in FY 11. Looking at immediate need, the proposed amendment would increase the amount appropriated by 10% from 50% to 60% for an approximate additional $120 million into dividends and away from public services, and perhaps education. Representative Hawker discussed the attempt to increase education funding by about $90 million a year for all future years, asking where it will come from. He doubted that the current $30 per barrel oil price would be sustained. As that price declines, he said the state would have to "scratch" to meet the recurring budget requirements. He voiced reluctance to designate that extra 10% or $120 million to dividends when it is needed for schools. He noted that the schools need an additional $30 million to $40 million above the $90 million each year. He calculated that $120 million in a per capita dividend for 600,000 residents has a net effect of $200 each. He noted that public testimony this year predominantly asked the Legislature to pay for schools first and expressed support for using some of the state wealth for state programs. He was not inclined to support the amendment. Representative Croft spoke against Amendment #1 for different reasons. He said that it would amend a statute, and it doesn't matter what those two sections are because they give a false perception to the public as long as the words "may be appropriated" are used. It's a statement that these percentages could be used for public education or dividends or for anything, and different numbers could also be used. The language doesn't put any substantive restrictions on what the Legislature can and cannot do. Different percentages wouldn't guarantee the result, or restrict the power of appropriation. He doubted that the amendment makes the difference the sponsor intended, and said that it gives a false impression. Co-Chair Williams asked how the change from 50% to 40% for state services, amounting to about a $200 million reduction, would affect the cash flow for payout. CHERYL FRASCA, DIRECTOR, DIVISION OF MANAGEMENT & BUDGET, OFFICE OF THE GOVERNOR replied that she perceived the issue to be the amount of shortfall over the next 5 to 6 years. She said if the assumption is flat spending, it averages between $700 and $800 million in each of the next 5 or 6 fiscal years based on the fall forecast. The pending increase in K-12 funding raises it by another $85 million. She said that 50% helps a lot in filling the gap, and 40% helps "not quite as much." Co-Chair Harris agreed with Ms. Frasca if the intention is to fill the gap only with Permanent Fund earnings. He argued that 40% plus other revenues from the gas line or an income tax would achieve the goal. The budget could easily be balanced on 100% of the earnings of the Fund. Ms. Frasca responded that is correct but she said that she "based it on what has been passed so far." Co-Chair Williams agreed with Representative Croft that the split can be "dressed," but he observed that spending on education is a selling point for the public. He expressed that the state can't afford a "wish list" of a gas line, an income tax or high oil prices with a fiscal gap of $600-700 million a year. He said, the Permanent Fund is a rainy day fund, and "It's raining out there, and I don't want to get wet." He spoke for taking care of state services, and said that he strongly opposed the amendment. Co-Chair Harris questioned adding "shall" rather than "may" and asked if it would cause a legal problem. MS. TAMARA COOK, DIRECTOR, LEGISLATIVE LEGAL AND RESEARCH SERVICES, explained that fundamentally it wouldn't matter in the context of the two provisions. The lead-in language is mandatory, which states "appropriations for a specific fiscal year are limited as follows." With the insertion of the language, "not more than," some discretion is built in, whether "shall" or "may" is used. The language says the Legislature can go up to a certain percentage for a certain purpose. In any case, statutorily the Legislature cannot dedicate revenue. Ms. Cook said, from that point of view, it may be that this provision would not be enforceable, depending on the form of the constitutional amendment when it's adopted. She hastened to remind the committee that the current allocation in AS 37.13.145 repealed in this bill is also not enforceable as a dedication. She expressed that it has been very potent in explaining the behavior of the Legislature with respect to the use of Permanent Fund income. To that extent, she concluded, there is no reason to suspect that the new provision 143 [Sec. 37.13.143] would have less political force. Co-Chair Williams asked for clarification that currently the Legislature may use the Permanent Fund in any way it wishes. Ms. Cook affirmed, saying that the Legislature is restricted to the use of the Fund income, but there is currently no restriction in the Constitution regarding how that income can be used. The Legislature statutorily has elected to distribute it under a formula providing for dividends and inflation proofing. She said it has mathematically resulted over the years in an accumulation of additional money in the earnings reserve account. She noted that that statute also could not be enforced as a dedication, and it has been adhered to by the Legislature because of the public policy decision it makes every year. Co-Chair Williams asked if the Legislature has ever used any part of the Permanent Fund earnings for state services. Ms. Cook thought that once or twice small amounts from the earnings reserve or income account were used to reimburse litigation expenditures of the Department of Law when it was at fault in litigation. She said there might have been other isolated instances involving very small amounts. Representative Hawker noted that over the last 8 years since 1996, the Legislature has appropriated over $238 million from Permanent Fund earnings for other purposes. Appropriations to the Department of Corrections through provisions in statute allow taking dividends from felons to use for the department's operations. Supplemental social service benefits are paid to recipients who also receive dividends. The Legislature has also funded administrative costs of the Departments of Revenue, Public Safety, and Law. In response to a question by Representative Stoltze, Representative Hawker affirmed that it is money already appropriated for dividends that has been redirected. Ms. Cook agreed that Representative Hawker is correct. She cited AS 37.13.145, the distribution system that puts a set formula amount into the dividend fund. She clarified that in the dividend fund statutes, the Legislature also identified some appropriations that are taken out of the dividend fund, not for the distribution, but for the purposes Representative Hawker has itemized. It is part of the dividend program. Co-Chair Harris commented that constitutionally, 25% of oil royalties go into the Permanent Fund automatically, so it was felt that 25% or more can toward the operations of oil and gas to help perpetuate and build up the Fund. Co-Chair Williams noted that the Legislature hasn't used the Permanent Fund earnings since enactment. Ms. Cook agreed that it is fundamentally true. As the earnings have accumulated, the Legislature has swept the additional earnings back into the principal of the Permanent Fund through a special act of appropriation. Co-Chair Williams commented that if this measure passed right now, it would be difficult to change the numbers up or down. He recommended that the Legislature can always pay more to the dividend distribution, but it can't lower the dividend amount. A roll call vote was taken on the motion to adopt the amendment to Amendment #1. IN FAVOR: Chenault, Foster, Harris OPPOSED: Stoltze, Croft, Fate, Hawker, Joule, Meyer, Moses, Williams The MOTION FAILED (3-8). Amendment #1 was not adopted. Vice-Chair Meyer agreed with Co-Chair Harris in dedicating money to education in statute. He proposed a conceptual Amendment #2 using the 50-50 split that would state, "50% may be appropriated for public education." Amendment #2 reads: Page 3, line 19: (1) not more than 50 percent may be appropriated for public education; Amendment #2 was adopted without objection. HB 298 was heard and HELD in Committee for further consideration.