Legislature(2003 - 2004)

03/22/2004 01:42 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
 HOUSE JOINT RESOLUTION NO. 26                                                                                                
         Proposing       amendments       to   the    Constitution         of   the   State                                     
         of   Alaska     relating      to   and   limiting      appropriations          from                                    
         and    inflation       proofing       the    Alaska      permanent       fund     by                                   
         establishing a percent of market value spending limit.                                                                 
 Co-Chair      Harris     MOVED     to   ADOPT     Work    Draft    Version      U  of   HJR                                    
 26    dated     3/19/04.       There      being      NO   OBJECTION,         it   was     so                                   
 PETE     ECKLUND,      STAFF     TO    REPRESENTATIVE          WILLIAMS,       explained                                       
 the    incorporation         of   Representative          Stoltze's       Amendment       #1                                   
 in   Version     U.     He   said   that    it   simply     shortened       and   amended                                      
 the title of the resolution.                                                                                                   
 In   response      to   a  question      by   Co-Chair      Williams,       Mr.   Ecklund                                      
 commented that Amendment #2 is not in Version U.                                                                               
 Co-Chair      Williams      announced      that    he   would    move    HJR   26   to  the                                    
 bottom     of  the    agenda     until    Representative         Stoltze     arrived      to                                   
 address it.                                                                                                                    
 HOUSE JOINT RESOLUTION NO. 26                                                                                                
                Proposing        amendments        to   the    Constitution         of   the                                    
                State       of      Alaska       relating         to     and      limiting                                      
                appropriations           from     and    inflation        proofing       the                                    
                Alaska     permanent       fund    by  establishing        a  percent      of                                   
                market value spending limit.                                                                                    
 Co-Chair      Williams      again     brought     HJR    26   before     the   committee                                       
 to   discuss     Work    Draft     Version     U   that   was    adopted     earlier      in                                   
 the    meeting.        He   noted    that    Amendment       #1   by   Representative                                          
 Stoltze was adopted and incorporated into Version U.                                                                           
 Representative            Stoltze       MOVED       to     ADOPT       Amendment        #2.                                    
 Representative Hawker OBJECTED.                                                                                                
 Representative         Stoltze      explained       the   amendment       reflects      his                                    
 concern      about    protecting       the    principal      from    invasion       in  the                                    
 event    a  POMV    is   implemented       in   the   Constitution.          He   had   the                                    
 amendment        drafted      after      listening       to    testimony       from     the                                    
 Mental Health Trust and Permanent Fund Corporation staff.                                                                      
 Amendment #2 reads:                                                                                                            
         Page 2, line 3:                                                                                                        
                Delete "five"                                                                                                   
                Insert "four"                                                                                                   
 In      response         to      a      question         by      Co-Chair         Harris,                                      
 Representative         Stoltze      explained       that    the   amendment       changes                                      
 the    percentage,        on   line    2,    page    3   of   the    new   version.       It                                   
 proposes to make it 4% of the value.                                                                                           
 Representative           Hawker       agreed       with      the     intent       of    the                                    
 amendment      to   ensure     protection       of   the   value    of   the   Permanent                                       
 Fund    over    time.       The   issue     has    been    given     a  great     deal    of                                   
 technical       analysis      and   consideration,          but   he   was    personally                                       
 convinced      that    5%   would    protect      Fund   over    time.    He   discussed                                       
 the    ten-year      rolling      real    rate    of   return     for   the    Permanent                                       
 Fund    and    why   5%   is   appropriate.          He   reminded       the   committee                                       
 of   statutory      enabling       language      in   HB  298    that    provides      that                                    
 if    the    10-year      real     rate    of    return      drops     below     5%,    the                                    
 Legislature        would    be   limited     to   that   lower     number    for    draws.                                     
 He   concluded      that    there     is   a  compelling       argument      to   keep    it                                   
 at   5%.      He   noted     that    the    constitutional          amendment       states                                     
 "up to 5%."  He could not support Amendment #2.                                                                                
 Vice-Chair       Meyer    commented       that    in  the   community       meetings      on                                   
 POMV,      people       constantly          returned        to    the      5%.     He     is                                   
 comfortable        with    5%    and   up    to   the    5%.      He   expressed       that                                    
 adequate safeguards are already in place.                                                                                      
 Representative          Croft     commented       that     4%   is    a   more    prudent                                      
 number.      He    supported        erring      on   the    side     of    caution      and                                    
 conserving       more    for   Alaska's      children      and   grandchildren.           He                                   
 said    5%   is   defensible,        but   "on    the   outer     edge    of   what    most                                    
 endowments take."                                                                                                              
 Co-Chair Harris expressed support for Amendment #2.                                                                            
 Co-Chair       Williams      stated      that    he   objected       to   Amendment       #2                                   
 for    the    reasons      that     Vice-Chair        Meyer     and    Representative                                          
 Croft     expressed.        After      working      on    the    Percent      of    Market                                     
 Value    for    the   past    six   years,     he   believes      that    5%   is   a  good                                    
 and proven payout.  He would vote against the amendment.                                                                       
 A roll call vote was taken on the motion.                                                                                      
 IN FAVOR: Joule, Stoltze, Chenault, Croft, Harris                                                                              
 OPPOSED: Fate, Foster, Hawker, Meyer, Williams                                                                                 
 Representative Moses was absent.                                                                                               
 The MOTION FAILED (5-5) and Amendment #2 was not adopted.                                                                      
 Co-Chair       Harris       MOVED      to    ADOPT      Amendment        #3.     Co-Chair                                      
 Williams OBJECTED for purposes of discussion.                                                                                  
 TOM    WRIGHT,     STAFF     TO   REPRESENTATIVE          HARRIS,      explained       that                                    
 Amendment       #3   would    establish       an   earnings      reserve     account      to                                   
 ensure     that    the   corpus     of   the   Fund    would     not   be   touched     and                                    
 would     be   a  separate      entity.        Language      was    inserted      on   page                                    
 2,   beginning       on   line    4,   to   provide     a   mechanism       within     this                                    
 amendment       to    appropriate         funds     for    the    operation        of   the                                    
 Permanent      Fund    Corporation.        There     is  also    language      providing                                       
 to    distribute        a   program       of    dividend       payments       for    state                                     
 residents       and    public      education       after     paying      the    costs     of                                   
 operation.        Conforming       language       on   page     2,   subsection        (b),                                    
 line    19,    provides      that    after     the   effective       date,     the   costs                                     
 up   to   June    30,   2004    prior     to   the   passage      of   this    amendment                                       
 will be appropriated.                                                                                                          
 Co-Chair        Harris      asked       if    this      constitutional           language                                      
 protecting        the    corpus      of    the    Fund     provides       that     if   the                                    
 earnings      are   less    than    5%,    the   payout     would    be   less    than    5%                                   
 for     the    first      five     of    six     fiscal      years.         Mr.     Wright                                     
 Amendment #3 reads:                                                                                                            
 CS FOR HOUSE JOINT RESOLUTION NO. 26(   )                                                                                    
 IN THE LEGISLATURE OF THE STATE OF ALASKA                                                                                      
 TWENTY-THIRD LEGISLATURE - SECOND SESSION                                                                                      
 Sponsor(s):     HOUSE   RULES  COMMITTEE   BY  REQUEST   OF  THE  LEGISLATIVE    BUDGET  AND                                 
 AUDIT COMMITTEE                                                                                                              
 A RESOLUTION                                                                                                                 
 Proposing       amendments        to    the   Constitution         of    the    State     of                                 
 Alaska     relating       to   the   Alaska      permanent       fund,    establishing                                       
 the    earnings       reserve      account,       and    permitting       distribution                                       
 from    the   account     only    for   permanent       fund    dividends,       costs    of                                 
 administering the permanent fund, and public education.                                                                      
 BE IT RESOLVED BY THE LEGISLATURE OF THE STATE OF ALASKA:                                                                    
      *  Section      1.      Article IX, sec.  15, Constitution  of the  State of Alaska,  is                                
 amended to read:                                                                                                               
                Section 15.  Alaska Permanent Fund.  (a)  At least twenty-five per cent                                   
         of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral                                        
         revenue sharing payments and bonuses received by the State shall be placed in a                                        
         permanent fund, the principal of which shall be used only for those income-                                            
         producing  investments   specifically designated  by law  as eligible for permanent                                    
         fund investments.   The  earnings   reserve  account  is established  as a  separate                               
         account  in the fund.   All income  from  the permanent   fund shall be deposited  in                              
         the earnings  reserve  account   as soon  as it is received.  Appropriations    may                                
         only be  made   from   the earnings   reserve  account  as  provided  in  (b) of this                              
         section [GENERAL FUND UNLESS OTHERWISE PROVIDED BY LAW].                                                           
    * Sec. 2.  Article IX, sec. 15, Constitution of the State of Alaska, is amended by adding                                 
 a new subsection to read:                                                                                                      
                (b)  Appropriations from the earnings reserve account for a fiscal year may                                     
         not exceed  five percent of the average of the market values  of the fund on June 30                                   
         for the first five of the six fiscal years immediately   preceding  that fiscal year.                                  
         Appropriations   from  the earnings  reserve  account  may   be  made   only  for the                                  
         following purposes:                                                                                                    
                        (1)  costs of administering the permanent fund;                                                         
                        (2)  a program of dividend payments for State residents established                                     
         by law together with costs of administering that program; and                                                          
                        (3)  public education.                                                                                  
      * Sec. 3.  Article XV,  Constitution  of the State of Alaska,  is amended  by  adding  a                                
 new section to read:                                                                                                           
                Section 30.  Transition.  (a)  On the effective date of the 2004                                              
         amendments    relating  to the  Alaska   permanent   fund   (art. IX,  sec. 15),  the                                  
         unencumbered,     unappropriated    balance   of   the  earnings   reserve   account                                   
         established  under  AS  37.13.145(a)   is added   to the  earnings  reserve  account                                   
         established in the Alaska permanent fund.                                                                              
                (b)  Section 15(b) of Article IX first applies to appropriations for fiscal                                     
         year 2006.    Appropriations  from   the permanent   fund  for fiscal year 2005   are                                  
         subject to Section 15 of Article IX as that section read on June 30, 2004.                                             
      * Sec. 4.  The  amendments    proposed   by this resolution shall be  placed before  the                                
 voters  of the state at the  next  general  election in conformity   with  art. XIII, sec. 1,                                  
 Constitution of the State of Alaska, and the election laws of the state.                                                       
 Representative         Croft     asked    if   the    language      on   page   2,   lines                                     
 9-10     protects      the    current      dividend       structure       in    law.    Mr.                                    
 Wright      clarified        that     it    states      a    program       of    dividend                                      
 payments       for    state     residents,        and    it   doesn't      prescribe       a                                   
 percentage        or    an    amount.       In   response        to   a    question       by                                   
 Representative         Croft,     Mr.    Wright     said    it   would    apply     to  the                                    
 current statute.                                                                                                               
 Representative          Croft    asked     if   the    Legislature        could     change                                     
 the    current       statute      on    the     dividend       program      under      this                                    
 language.          Mr.     Wright      pointed      out     that     the    Legislature                                        
 always has the authority to change the dividend program.                                                                       
 Co-Chair      Harris     explained       that    Amendment       #3   would    establish                                       
 in   the   Constitution        three    things     that    the   Legislature        can   do                                   
 with    the    earnings      of   the   Permanent       Fund:      pay    the   costs     of                                   
 administering         the    Fund,     pay    the    dividend,       and    appropriate                                        
 for public education.  It doesn't give percentages.                                                                            
 Representative          Croft     commented       that    the    amendment       language                                      
 looks     like    a   dividend      protection        but   it    could    be    anything                                      
 established by law.                                                                                                            
 Co-Chair       Harris     observed       that    the    Legislature        could     spend                                     
 all   the    earnings      of   the    Permanent      Fund    if   it   so   chose,     but                                    
 this      amendment        provides        some     small      protection         to    the                                    
 Co-Chair      Williams       asked    if    Amendment       #3   changes      everything                                       
 and   gives    a   new   direction      to   HJR   26.   Co-Chair      Harris     replied                                      
 that     it's    not     a   complete       change,      but    it    is   a    lot    more                                    
 Co-Chair      Williams       requested       that    the   committee       not    vote    on                                   
 Amendment      #3   at   this    time   in   order    to   have    time   to   review     it                                   
 before the next hearing.                                                                                                       
 Representative           Hawker      asked     Co-Chair       Harris       to    consider                                      
 dividing      Amendment       #3   into    the   two   distinct       issues     embodied                                      
 in Section 1 and Section 2 of the amendment.                                                                                   
 Representative          Joule     commented       that    there     is    currently       an                                   
 earnings       reserve      account      and    he    asked     how    this     would     be                                   
 different.        Mr.    Wright     pointed       out    the    only    difference        is                                   
 that     this    amendment        states      there     is    a   separate       earnings                                      
 reserve account and places it in the Constitution.                                                                             
 Representative          Fate    MOVED    to   ADOPT     Amendment       #4.      Co-Chair                                      
 Williams OBJECTED for purposes of discussion.                                                                                  
 Representative          Fate    expressed       concern       over    the    ability      of                                   
 the      Legislature           to     fulfill        its      prime        purpose        of                                   
 appropriating         money.        He   expressed       that     any   percentage        is                                   
 subject      to    a   warranted        change,      and    the    ten-year       rolling                                      
 average      has   been    well    researched.         He   said    he  is   one    of  the                                    
 few   members      who   can    recall     the   Great     Depression       that    lasted                                     
 12   years,     with    double-digit         inflation.         He   reiterated        that                                    
 the      prime      responsibility            of     the      Legislature          is     to                                   
 appropriate, and if it can't, its function has been eroded.                                                                    
 Representative         Fate    explained       that    Amendment       #4   changes     six                                    
 words.       On  line    2,   instead      of  saying     a   percentage       of   5%,   it                                   
 codifies      in   the   Constitution        that    there    will    be  a  percentage                                        
 determined by law.                                                                                                             
 Amendment #4 reads:                                                                                                            
 *Sec.2.      Article      IX,    sec.    15,    Constitution        of   the    State     of                                   
 Alaska, is amended by adding a 01 new subsection to read:                                                                      
           02(b)Appropriations from the permanent fund for a fiscal year shall be                                           
 03  a percentage     of[on  may   not  exceed   five  percent    of]  the  average   of  the                               
 04  market   values    of  the  fund   on  June   30  for  the   first   five   of  the  six                                   
 fiscal years                                                                                                                   
 05 immediately preceding that fiscal year as determine[d] by law.                                                          
 MR.     BOB      BARTHOLOMEW,          CHIEF      OPERATING         OFFICER,        ALASKA                                     
 PERMANENT       FUND    CORPORATION,        DEPARTMENT       OF   REVENUE,       compared                                      
 Amendment      #4   to   Work    Draft    U.  The    proposed      work   draft     puts   a                                   
 spending      limit     on   the   Permanent       Fund    equal     to   the   Board     of                                   
 Trustees'       recommendation         of   no   more    than     5%.     The    proposed                                      
 amendment       maintains      the    concept     of   basing     appropriations          on                                   
 market     value,      but   states      that    the    spending      limit     would     be                                   
 put    into    statute     instead      of   the    Constitution,         on   an   annual                                     
 Representative         Croft     noted    previous      discussions       of   the   limit                                     
 of    5%,     which     would      allow      lower     appropriations           but    not                                    
 higher.        This    amendment       would     allow    higher      appropriations.                                          
 The    trade-off      for    POMV    is   the    spending      limit    discipline        of                                   
 5%    in   good     years     in    order     to   reserve       for    the    bad.       He                                   
 expressed       concern      that    in    a  year     when    oil    prices      and   the                                    
 market     are    up,    the   inclination        to   ignore      an   income     tax    or                                   
 oil    tax   and    the   pressure       to   spend    up   to   6%   or   7%   might     be                                   
 irresistible.           This     amendment         gets      rid     of    the      needed                                     
 Representative          Hawker     agreed     with     Representative          Croft    and                                    
 expressed         concern        that      Amendment         #4      clearly        allows                                     
 overspending         in    the    good     years.      He   pointed       out    that     it                                   
 violates       three      of    the     five     reasons      the     Permanent        Fund                                    
 Corporation        argues     for   Percent      of   Market     Value:     maintaining                                        
 the   purchasing       power     of  the   Fund,     preventing       overspending        in                                   
 good    years,     and   making     payout     amounts      more    stable     from    year                                    
 to    year.     He    observed       that     the    purpose      of    the    POMV     set                                    
 percentage       is   to   stabilize       the   amount     of   appropriation         from                                    
 the   Fund    and    give    absolute      guarantee      of   the    long-term      value                                     
 of    the     Fund.     He    respectfully          did    not     concur      with     the                                    
 Representative            Fate      informed        the     committee         that      his                                    
 amendment      was    drafted     in   concurrence       with    the   spending      limit                                     
 bill    [HJR     9]   before     the    Committee.          For    him,    it   does    not                                    
 come    down    to   a  short,      or   even    a  25-year      term    consideration                                         
 of   the   growth     of   corpus     of   the   Fund.      In   his   view,     although                                      
 he   agreed    with    the   concept      of  the    measure,      passage     of   HJR   26                                   
 would       erode       the      prerogative           and      responsibility            to                                   
 appropriate         by    the     Legislature.         It    is    not     his    concern                                      
 whether      the   Fund    even    grows,     but   putting     from    zero    to   5%   in                                   
 the   Constitution        establishes        an   appropriation.         He  introduced                                        
 the   amendment       because     of   the   basic    question      of   the   functions                                       
 and    responsibilities           of    the   Legislature,         not    in    order     to                                   
 allow 7% or 8% in the future.                                                                                                  
 Co-Chair      Harris     asked     if   the    fiscal     note    for   $700     thousand                                      
 dated      3-16-04       is    still      in    effect      with      the    bill.      Mr.                                    
 Bartholomew         affirmed,        and    explained        that     there      are    two                                    
 additions      to   the   FY   05   budget    that    the   Board     of  Trustees      and                                    
 Permanent       Fund     staff     is    requesting.        Once     the    Legislature                                        
 adopts     the    constitutional          amendment,       the    Corporation        would                                     
 fall     under     the    restrictions        of    the    Alaska      Public     Offices                                      
 Commission       (APOC)     on   the   authority      to   advocate.      The    requests                                      
 in    the    operating       budget      are    for    additional        authority        to                                   
 educate     and    advocate      for   Percent     of   Market     Value;    and    if  the                                    
 Legislature        supported       that     request,      to   be    able    use    radio,                                     
 television and print media to carry out those functions.                                                                       
 A  roll    call    vote    was   taken     on  the    motion     to   adopt    Amendment                                       
 IN FAVOR: Foster, Fate                                                                                                         
 OPPOSED: Hawker, Joule, Meyer, Stoltze, Chenault, Croft,                                                                       
           Williams, Harris                                                                                                     
 Representative Moses was absent.                                                                                               
 The MOTION to adopt Amendment #4 FAILED (2-8).                                                                                 
 Representative         Croft     questioned       if  the   Fund    would    educate      in                                   
 a  non-partisan        manner     or   advocate      for   POMV.      He  asked     how   it                                   
 would    be   found    in   a  fiscal     note.    Mr.   Bartholomew        stated     that                                    
 in   talking      with    the   APOC,     the    definitions       of   education       and                                    
 advocacy      are    unclear.       He   said    that    if   there     were     specific                                      
 lines    to   draw,     the   PFC   would     work    with    legal    counsel      on  the                                    
 authority       to  comply,      as   well    as   the   authority       language.        He                                   
 noted     that    if   the   language      in   the    operating       budget     did   not                                    
 pass, the PFC couldn't spend the $700 thousand.                                                                                
 Co-Chair       Harris     thought       that    it   would      be   a   "slap     in   the                                    
 face"     to    the    public      for    the    Permanent        Fund    Corporation,                                         
 which     is   entrusted      with     the   dividend      to   advocate       for   POMV.                                     
 He   questioned       using     $700    thousand       dollars     of   the    Permanent                                       
 Fund    on  advocacy      when    another     entity     could     assume    that    role.                                     
 Mr.    Bartholomew       agreed      that    it   would    be   the    preferred       way.                                    
 He   explained        that    the    "feed-back"        from     the   public      on   the                                    
 Percent      of    Market      Value     approach       indicates       that     a   broad                                     
 segment     of   the   public     does    not   understand       it.     The   public     is                                   
 educated       through      mass    media.     The    Permanent       Fund    needs     the                                    
 authority       to   speak    publicly.       To   reach     the   public,      you    must                                    
 go after them, he said.                                                                                                        
 Co-Chair      Harris     voiced     concern     that    the   Just    Say   No   campaign                                      
 gets     the    message       out    to    many     Alaskans        who    may    not     be                                   
 educated      on   the   issue    but   are   hearing      the   message.        He  asked                                     
 if   people     would    be   "turned      off"   by   the    use   of   $700    thousand                                      
 of   Permanent       Fund    money    to   tell    Alaskans       what    they    need    to                                   
 do.  He asked if that had been considered.                                                                                     
 Mr.   Bartholomew        replied     that    even    as  the    request     was   written                                      
 up, the Board discussed a negative public reaction.                                                                            
 TAPE HFC 04 - 63, Side B                                                                                                     
 Mr.   Bartholomew        continued       discussing       the    use   of   state    money                                     
 for    advocating       for    the    POMV,     expressing       that    the    Board     of                                   
 Trustees       believes      there      is   the    obligation        to   educate      and                                    
 that the benefits outweigh the risks.                                                                                          
 Vice-Chair        Meyer    pointed      out    that    $300     thousand      is   in   the                                    
 Supplemental          Budget      and    asked      if    the     $700     thousand       is                                   
 additional.         Mr.     Bartholomew         addressed        the     $1.4     million                                      
 advocacy,       pointing      out    that    the    amount     could    be   determined                                        
 by   campaign      parameters.        Costs    would     be  split     between      FY  04-                                    
 FY   05,   with    $900   thousand      in   FY   05  and   $700    thousand      derived                                      
 from    the   fiscal     note.     He   said   that    $200    thousand      would     come                                    
 from    other    parts     of   the   budget.      He  expressed       that    the   Board                                     
 was   very    sensitive      to   the   potential       negative      reaction      and   it                                   
 urged     the    Corporation         not    to   proceed       without      legislative                                        
 Vice-Chair       Meyer     asked     if   there    would     be   other     than    public                                     
 sources     of   funding     available       if   there    were    only   General      Fund                                    
 money.     Mr.   Bartholomew        answered      that   the    Corporation       had   not                                    
 pursued      other    sources,      and    private     groups     had    not   contacted                                       
 it.    The    Board     would      not    seek     private      funding,       and    as   a                                   
 public entity, it wouldn't want to have "strings attached."                                                                    
 Vice-Chair         Meyer     noted      that      there     are     opposing        groups                                     
 raising      private      money.     He   suggested       a  grassroots        effort     to                                   
 be   a  "Just    Say   Yes"    group,     but   he   acknowledged        that    it  would                                     
 be a challenge.                                                                                                                
 Representative           Hawker      referred        to    the     fiscal      note.      He                                   
 thought      that   the    opposition       groups     would    not    be   held    to  the                                    
 same     standard        of    truthfulness          and    impartiality          of    the                                    
 Permanent      Fund    Corporation,        and    he  commented       that   it   is   easy                                    
 to   tell     people     what    they     want    to   hear.     He    voiced     concern                                      
 over    the    Legislature's         leadership        role    and    responsibility,                                          
 and    said    that     if   the    Legislature         lacks     faith     in   its    own                                    
 convictions        on    the    POMV    being     the    right     thing     to    do,    an                                   
 inappropriate          message       could     be    sent      to    the    public.       He                                   
 expressed       that     the    dialogue       before      the    public      should      be                                   
 objective, factual and truthful.                                                                                               
 Representative          Stoltze       felt     that     there     is    no    legitimate                                       
 reason      to   use    government       money     and    it    would     erode     public                                     
 confidence.          He   recommended        looking      at    it   from    a   strategy                                      
 point     of   view,    and    he   lauded     all    the    effort     that    has    been                                    
 Co-Chair       Williams      noted     that    he    agreed     with    the    Permanent                                       
 Fund    Corporation's         approach.          He   stressed      that    this     is   an                                   
 important issue for the State of Alaska, and the public                                                                        
 needs to make an informed decision.                                                                                            
 Co-Chair Williams stated that HJR 26 would be HELD in                                                                          
 Committee for further consideration.                                                                                           

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