Legislature(2003 - 2004)

05/07/2003 01:40 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HJR 26 - CONST. AM: PF APPROPS/INFLATION-PROOFING                                                                             
                                                                                                                                
[Contains brief mention of SJR 19 and HJR 3.]                                                                                   
                                                                                                                                
Number 0048                                                                                                                     
                                                                                                                                
CHAIR McGUIRE  announced that the  first order of  business would                                                               
be 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.                                                               
[Before the committee was CSHJR 26(W&M).]                                                                                       
                                                                                                                                
Number 0075                                                                                                                     
                                                                                                                                
ROBERT  D.  STORER,  Executive Director,  Alaska  Permanent  Fund                                                               
Corporation (APFC),  Department of Revenue (DOR),  explained that                                                               
after  years of  study, the  proposed constitutional  amendment -                                                               
HJR  26  -  has  been  requested by  the  Alaska  Permanent  Fund                                                               
Corporation  Board  of  Trustees  ("the Board")  to  ensure  that                                                               
inflation-proofing is  in the Alaska  State Constitution  so that                                                               
all  generations   are  treated  equally.     He  indicated  that                                                               
inflation-proofing  the Alaska  permanent fund  ("the fund")  has                                                               
been a key issue for the  Board since its inception over 20 years                                                               
ago.  He went on to say:                                                                                                        
                                                                                                                                
     The way we propose  to address inflation-proofing is by                                                                    
     limiting  the amount  that can  be appropriated  in any                                                                    
     given  year to  no more  than 5  percent of  the moving                                                                    
     average  of  the fund.    We  call that  "[percent]  of                                                                    
     market value" or "POMV."   And what we are proposing is                                                                    
     [that]  that limit  be based  on  the five-year  moving                                                                    
     average of the fund.                                                                                                       
                                                                                                                                
MR. STORER  indicated that he  next wished  to speak to  five key                                                               
differences between  [POMV] and  the status  quo, and  that these                                                               
differences have been outlined in a document provided in                                                                        
members' packets.  He said:                                                                                                     
                                                                                                                                
     The  [percent] of  market value,  as  I noted  earlier,                                                                    
     offers  constitutional   inflation-proofing  protection                                                                    
     for  the entire  fund.   The status  quo on  inflation-                                                                    
     proofing is  by statute; it comes  after the [permanent                                                                    
     fund  dividend  (PFD)]   and  it  inflation-proofs  the                                                                    
     principal only.   To date,  the legislature  has always                                                                    
     had the  ability and has chosen  to inflation-proof the                                                                    
     fund,  but  that's  not necessarily  the  case  in  the                                                                    
     future.    We're  not  predicting  it;  we  just  think                                                                    
     memorializing it in the  [Alaska State] Constitution is                                                                    
     a very important issue.                                                                                                    
                                                                                                                                
     The  second item  is ...,  as I  noted earlier,  it's a                                                                    
     spending limit:   no more  than 5 percent of  the five-                                                                    
     year moving average  of the fund.  By  ... limiting the                                                                    
     availability of  only taking the  real income -  or the                                                                    
     income  in excess  of inflation  -  the residual  stays                                                                    
     with  the fund,  and  that's  how you  inflation-proof:                                                                    
     you're  not taking  all of  the income,  only the  real                                                                    
     income - or  the income in excess of inflation.   As it                                                                    
     stands  today,  the  status quo,  the  entire  earnings                                                                    
     reserve may be appropriated.                                                                                               
                                                                                                                                
Number 0321                                                                                                                     
                                                                                                                                
     And I can  give you examples where, over  the last four                                                                    
     years, up to 25 percent  of the fund was represented by                                                                    
     the earnings  reserve, so one could  take - appropriate                                                                    
     - 25 percent of the fund  in the heavy days of the bull                                                                    
     market.  Or there's been  a couple [of] times this year                                                                    
     in the,  hopefully, ...  late stages  of a  bear market                                                                    
     where  nothing  was available.    So  think about  that                                                                    
     volatility:   you can appropriate  25 percent  or zero,                                                                    
     depending on what happens.  That's how it now stands.                                                                      
                                                                                                                                
     Markets  are always  volatile.   You talk  about during                                                                    
     volatile markets - and I've  been doing this for a long                                                                    
     time and  I haven't  seen it yet  where there  wasn't a                                                                    
     volatile  market -  it's a  magnitude issue,  and we've                                                                    
     been in ... very volatile  markets.  The POMV approach,                                                                    
     or  what  we're  suggesting, actually  creates  greater                                                                    
     stability than  the current methodology.   We  have had                                                                    
     times where the dividend alone  has been in excess of 5                                                                    
     percent  or,  over  the  next few  years,  it'll  be  3                                                                    
     percent  or potentially  zero.   As I  noted yesterday,                                                                    
     there's still  a 10-percent chance that  there could be                                                                    
     no dividend  [from] the permanent  fund this year.   So                                                                    
     you  get greater  stability and  greater predictability                                                                    
     by doing this methodology.                                                                                                 
                                                                                                                                
MR. STORER continued:                                                                                                           
                                                                                                                                
     Item four. ... When the  permanent fund was created 26-                                                                    
     27 years ago,  it was a world of bonds  only, and bonds                                                                    
     are  very stable;  you buy  them for  income producing,                                                                    
     you  get  the interest  payment  every  year.   And  so                                                                    
     basing  your methodology,  as we  do  now, on  realized                                                                    
     income or the  realized cash flow of  the fund probably                                                                    
     made a lot  of sense.  But that was  a different world.                                                                    
     The fund  currently is [composed]  of about  50 percent                                                                    
     in the equity  markets; ... you buy  more volatility on                                                                    
     a year-to-year [basis],  but you earn a  higher rate of                                                                    
     return by  accepting that volatility.   And so  ... the                                                                    
     current methodology  did make  sense 26 years  ago, but                                                                    
     we think less so right now.                                                                                                
                                                                                                                                
Number 0510                                                                                                                     
                                                                                                                                
     We've spoken  a lot about  why 5 percent;  we've stated                                                                    
     that we  believe the limit,  if you will, of  5 percent                                                                    
     is on  the high end  of doable.   It doesn't  mean that                                                                    
     one has to  appropriate all the 5 percent  in any given                                                                    
     year, but we  want to limit [it] up to  5 percent.  But                                                                    
     we've  looked at  76 years  of data;  we know  that our                                                                    
     asset  allocation and  our statutes  will  allow us  to                                                                    
     achieve, we  believe, a 5  percent real rate  of return                                                                    
     over  time.   We're  very  comfortable  in making  that                                                                    
     statement.     So,  it's  consistent  with   our  asset                                                                    
     allocation and the long-term  philosophy of a permanent                                                                    
     fund.                                                                                                                      
                                                                                                                                
     That  stability really  goes  to  predictability.   And                                                                    
     there is  greater stability  in the  payout methodology                                                                    
     of  using  the moving  average  of  a fund  versus  the                                                                    
     current one.   Year to year  you don't know -  we don't                                                                    
     know -  how much would  be available until ...  the end                                                                    
     of  the day  [on] June  30th.   But if  you accept  our                                                                    
     methodology   as  appropriate,   you  will   have  less                                                                    
     volatility  in  the  payout  and  you  will  know  with                                                                    
     precision what is  available in any given  year.  That,                                                                    
     Madame Chair,  is very briefly  why we think  moving to                                                                    
     the   constitutional   amendment,   memorializing   the                                                                    
     spending limit, is appropriate.                                                                                            
                                                                                                                                
Number 0616                                                                                                                     
                                                                                                                                
BOB BARTHOLOMEW,  Chief Operating Officer, Alaska  Permanent Fund                                                               
Corporation   (APFC),  Department   of   Revenue  (DOR),   turned                                                               
attention  to CSHJR  26(W&M), and  noted that  the House  Special                                                               
Committee on  Ways and  Means, along  with Legislative  Legal and                                                               
Research  Services,   outside  counsel   to  the  APFC,   and  [a                                                               
representative  from] the  attorney general's  office, spent  4-5                                                               
hours working  on the technical  aspects of the  bill's language.                                                               
Therefore, the resulting  language in CSHJR 26(W&M)  was what all                                                               
parties  involved felt  was the  best way  to move  forward.   He                                                               
offered:                                                                                                                        
                                                                                                                                
     In  the  title,  it's  really just  trying  to  make  a                                                                    
     statement of ... why we're  amending the [Alaska State]                                                                    
     Constitution and that [we] basically  want to limit the                                                                    
     appropriations, on  a fiscal-year basis, that  can come                                                                    
     out  of  the permanent  fund.    And the  reason  we're                                                                    
     limiting  the  appropriations  is to  assure  the  real                                                                    
     value of  the fund grows  over time and that  all we're                                                                    
     spending  is the  value  in excess  of  inflation on  a                                                                    
     year-to-year basis so you protect it.                                                                                      
                                                                                                                                
     On  page 1,  line 10,  is  the first  amendment to  the                                                                    
     [Alaska State] constitution.  And  what that's doing is                                                                    
     just  referring to  a new  [subsection] (b)  that we're                                                                    
     going to  add to the  constitution ....  [On]  Line 11,                                                                    
     we're   deleting   the   word  "principal"   from   the                                                                    
     constitution.  And that's been  something that's been a                                                                    
     longstanding --  that people  have understood  that the                                                                    
     permanent fund,  the principal, could not  be spent and                                                                    
     the income could.  The  reason the trustees ... propose                                                                    
     removing  that, and  that  came after  quite  a lot  of                                                                    
     debate  at  the  board  meetings,   is  that  the  word                                                                    
     "principal" -- we believe you  can protect the fund, as                                                                    
     explained on page 2, by the spending limit.                                                                                
                                                                                                                                
     And  the benefit  of removing  the word  "principal" is                                                                    
     basically a  policy decision  of balancing  the benefit                                                                    
     of  assuring that  each  year, there's  going  to be  a                                                                    
     distribution, versus  the risk  that in the  short term                                                                    
     you might  dip into the fund  a little bit if  you have                                                                    
     ... down  years of  income.  So  it's a  balancing, and                                                                    
     they  believed  it's  in  the   best  interest  of  the                                                                    
     permanent  fund, and  the  investment  strategy, if  we                                                                    
     know, on  a year-to-year  basis, how  much is  going to                                                                    
     come  out  of  the  fund  and  that  it's  limited  and                                                                    
     predictable.   Then that helps their  investments; they                                                                    
     know  what to  have  invested, they  know when  they're                                                                    
     going to  have to raise  money ... for the  dividend or                                                                    
     for general government.  So  that's a significant issue                                                                    
     that's had a lot of debate.                                                                                                
                                                                                                                                
Number 0803                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW continued:                                                                                                      
                                                                                                                                
     And  then  on  lines  13 and  14,  we're  deleting  the                                                                    
     language  from  the  [Alaska State]  Constitution  that                                                                    
     says all income from the  permanent fund will go to the                                                                    
     general  fund except  [as] provided  by law.   And  the                                                                    
     legislature,  since 1982,  has taken  advantage of  the                                                                    
     "provided  by  law",  and  they've  directed  that  all                                                                    
     earnings  would  go  to the  earnings  reserve  in  the                                                                    
     permanent fund.   By deleting  the two  sentences, what                                                                    
     in  effect   happens  is,  all  income   stays  in  the                                                                    
     permanent    fund,   subject    to   the    5   percent                                                                    
     appropriation.   So  ... it's  no  longer necessary  to                                                                    
     direct the income.                                                                                                         
                                                                                                                                
     On page 2  of the resolution, starting on line  2, is a                                                                    
     fairly long sentence  that does two things.   It states                                                                    
     how we intend  to protect the permanent fund  - ... the                                                                    
     goal is to protect the real  value over time - and that                                                                    
     it's  going to  be limited  to a  ... 5-percent  annual                                                                    
     appropriation of  the five-year  average.  But  lines 5                                                                    
     and 6 are a little hard  to read at first go because it                                                                    
     talks  about  [that]  we're going  to  use  the  market                                                                    
     values  on June  30th for  the  first five  of the  six                                                                    
     fiscal years preceding the year  that you want to spend                                                                    
     the money.                                                                                                                 
                                                                                                                                
     And ... that language is in  there ... so that when the                                                                    
     legislature [comes]  into session  in January --  so an                                                                    
     example  this  year:   you've  come  into town,  you're                                                                    
     working  on  the  [fiscal  year  (FY)]  04  budget;  by                                                                    
     looking back an extra year,  it allows you to know [in]                                                                    
     January  exactly what's  available  from the  permanent                                                                    
     fund based on  the spending limit.  So  you'll know, as                                                                    
     soon as [you] start working  on the budget, how much is                                                                    
     available for either  dividends or government purposes,                                                                    
     and  you don't  have to  ask for  estimates, you  don't                                                                    
     have  to ask  for projections.   So,  ... what  we'd be                                                                    
     doing is:   the  FY 04 spending  limit would  have been                                                                    
     based on  [the] year ended  June 30, 2002.   And that's                                                                    
     the main  intent; [it] was  so you knew  exactly what's                                                                    
     available.   It  doesn't have  to be  appropriated, but                                                                    
     there's certainty to the amount.                                                                                           
                                                                                                                                
MR. BARTHOLOMEW concluded:                                                                                                      
                                                                                                                                
     And then  the last  addition is  a temporary  item, and                                                                    
     that's  Section  3.   And  that's  a transitional  item                                                                    
     which  won't become  a permanent  part  of the  [Alaska                                                                    
     State]  Constitution.   It just  [ensures] that  at the                                                                    
     date the voters pass this,  ... all the earnings of the                                                                    
     permanent fund stay in the  permanent fund - there's no                                                                    
     debate about  whether it's general fund  money or other                                                                    
     funds  -  it's  part  of  the  permanent  fund,  to  be                                                                    
     protected.  And  then Section 4 states  that this would                                                                    
     have  to go  to  a  general election  so  that all  the                                                                    
     voters in  Alaska could weigh  in on this change.   And                                                                    
     that would  happen in  November 2004,  and if  that was                                                                    
     successful,  then it'd  be approximately  early January                                                                    
     2005 that the change would take effect.                                                                                    
                                                                                                                                
Number 1018                                                                                                                     
                                                                                                                                
LAURIE CHURCHILL stated that she is opposed to HJR 26.  She went                                                                
on to say:                                                                                                                      
                                                                                                                                
     The  PFD's appropriations  should  not be  limited.   I                                                                    
     believe  the current  funding  formula  should be  left                                                                    
     alone.    Alaska is  experiencing  a  decline in  North                                                                    
     Slope oil production; we're currently  at 50 percent of                                                                    
     what  the North  Slope used  to produce  in the  1980s.                                                                    
     This  decline in  oil production  means  less money  is                                                                    
     being  placed into  the permanent  fund dividend.   I'm                                                                    
     very  concerned  that  the Twenty-Third  [Alaska  State                                                                    
     Legislature] has introduced  596 bills and resolutions,                                                                    
     and  out of  these 596  resolutions and  bills, ...  17                                                                    
     pieces of  PFD legislation  have been introduced.   And                                                                    
     in my personal opinion, only  two of these bills are in                                                                    
     favor of  the citizens  of Alaska,  and I  believe that                                                                    
     SJR  19 and  HJR 3  are the  only ones  that favor  the                                                                    
     citizens  of Alaska.    And I'm  just  asking that  you                                                                    
     please vote no on this ... HJR 26.                                                                                         
                                                                                                                                
CHAIR McGUIRE, after determining that no one else wished to                                                                     
testify, closed public testimony on HJR 26.                                                                                     
                                                                                                                                
REPRESENTATIVE GARA said he had a question about the mechanics                                                                  
of "this proposal."  He elaborated:                                                                                             
                                                                                                                                
     Under POMV, we'll end up  taking 5 percent of the value                                                                    
     of the permanent fund every year  - I hope that a large                                                                    
     part of that  will go to a dividend ....   But how does                                                                    
     this work?   The  concept is that  we're going  to keep                                                                    
     the value of  the permanent fund up  with inflation; in                                                                    
     addition, we're going to stick  a certain percentage of                                                                    
     our oil  royalties into  the permanent  fund so  it can                                                                    
     grow and  stay ahead of  inflation.  I  understand that                                                                    
     part.                                                                                                                      
                                                                                                                                
     But tell  me how the 5  percent payout will keep  us up                                                                    
     with inflation  in, for example, a  very high-inflation                                                                    
     year and  a high-earnings  year ....   And then  how it                                                                    
     will do the same thing  in a very low-earnings year ...                                                                    
     and  low inflation.   So  there are  four factors  that                                                                    
     you'll face in  the real world.  Some  years there will                                                                    
     be  high  inflation;  some  years  there  will  be  low                                                                    
     inflation; some years there will  be great stock market                                                                    
     and real  estate asset returns;  some years  there will                                                                    
     be terrible stock market and  real estate asset returns                                                                    
     - maybe  negative ones.   Can you tell me  what happens                                                                    
     ... in  relation to  keeping the value  of the  fund up                                                                    
     with    inflation    under   those    four    different                                                                    
     circumstances?                                                                                                             
                                                                                                                                
Number 1199                                                                                                                     
                                                                                                                                
MR. STORER remarked that in any given year, as well as in "short                                                                
periods," that's a very real issue.  He elaborated:                                                                             
                                                                                                                                
     If  we looked  over the  last three  years, we  did not                                                                    
     keep up  with inflation  in terms of  the value  of the                                                                    
     fund.  However, we  did continue to inflation-proof the                                                                    
     principal of the fund because  of the discipline that's                                                                    
     been invoked during  the good years.   In short periods                                                                    
     of time  - and I going  to define short as  three, even                                                                    
     five years  - you  may not  achieve the  5-percent real                                                                    
     rate of  return.  Or you  will, if you were  to look at                                                                    
     1998,  ... challenge  why 5  percent; I  don't remember                                                                    
     exactly, but my guess is  we probably earned 10- to 12-                                                                    
     percent  real rate  of return  over the  three to  five                                                                    
     years prior to that.                                                                                                       
                                                                                                                                
     It's the  discipline in  the longer-term  time horizon,                                                                    
     through  the good  and the  bad times,  [that] is  what                                                                    
     really matters.   A  lot of people  focus on  the bear-                                                                    
     market side  of the  equation and  what happens  in the                                                                    
     down years.  I think  one of the [important aspects] of                                                                    
     this is not  getting caught up in what I  will call the                                                                    
     mania of  a bull  market and  think you  can overspend.                                                                    
     It  really is  important to  create that  discipline in                                                                    
     the  good and  bad times.    And that  will ensure  the                                                                    
     maintaining [of]  the purchasing  power ...  over time,                                                                    
     for all generations.                                                                                                       
                                                                                                                                
     I give an example of least  one friend of mine who runs                                                                    
     an endowment fund  in a major university,  and they got                                                                    
     caught  up  in  the  bull market,  and  the  university                                                                    
     started a large capital project  well in excess of what                                                                    
     I'll call,  sort of theoretically,  the 5  percent; now                                                                    
     they're  not able  to sustain  those kinds  of returns,                                                                    
     but  they have  commitments,  based on  the heavy  bull                                                                    
     market, that  they must continue  to make  and overpay.                                                                    
     This creates the  discipline in the good  and bad years                                                                    
     that  allows you  to achieve  the goal.   But  in short                                                                    
     periods  of time,  anything  you  suggested can  happen                                                                    
     where  we could  earn well  in excess  of 5  percent or                                                                    
     well below that 5-percent real  rate of return.  If you                                                                    
     think  about it,  ... [in]  any given  year there's  so                                                                    
     much  volatility that  one could  not predict  that ...                                                                    
     kind of precision  in even [a] one-  to three-year time                                                                    
     horizon.                                                                                                                   
                                                                                                                                
Number 1325                                                                                                                     
                                                                                                                                
REPRESENTATIVE GARA  said that that  explanation deals  with what                                                               
happens when the stock market does  well and what happens when it                                                               
does  poorly,   but  added  that   he'd  like  a   more  detailed                                                               
explanation  regarding  what  would  happen in  years  with  high                                                               
inflation and in years with low inflation.  He elaborated:                                                                      
                                                                                                                                
     Let's assume we  have an 8-percent return  in the stock                                                                    
     market and on our real  estate holdings in a particular                                                                    
     year.  What  happens ... to the value  of the permanent                                                                    
     fund if, let's say, inflation  is 13 percent that year,                                                                    
     and then  what happens if  inflation is 2  percent that                                                                    
     year?   (Indisc.  - coughing)  assume an  average stock                                                                    
     market  and  real  estate   asset  return,  but  wildly                                                                    
     varying inflation amounts for the year.                                                                                    
                                                                                                                                
MR. STORER replied:                                                                                                             
                                                                                                                                
     You're going  to run into  problems in the  short term.                                                                    
     Could I  use a real-life example,  if I may?   Let's go                                                                    
     back to the  late '70s, where inflation  was quite high                                                                    
     and  continued higher.  ... So,  you wrap  that emotion                                                                    
     into  it and,  in fact,  during probably  the five-year                                                                    
     period  prior to  that, you  did  have barely  positive                                                                    
     returns on  bonds and I  think some - absent  '73-'74 -                                                                    
     ...  positive returns  on equities,  but  you were  not                                                                    
     keeping up with  inflation.  So we would  not have kept                                                                    
     up for probably about a  four- or five-year period, and                                                                    
     you'd say this isn't working.                                                                                              
                                                                                                                                
     What happened  around '82  is, ... we  were still  in a                                                                    
     high-interest-rate environment,  and you  keep fighting                                                                    
     a war  that you've  won.  In  that case,  inflation was                                                                    
     descending and  stayed low  for what  is now  15 years.                                                                    
     We were just  looking ... at our early  returns, and in                                                                    
     the early '80s, there was  one year where the permanent                                                                    
     fund only  ... basically  owned [a] bond  portfolio and                                                                    
     we returned 25  percent.  And I don't  remember, but my                                                                    
     guess is  inflation was  below 6 percent.   And  so, if                                                                    
     you looked  even in that  five-year period, if  ... our                                                                    
     asset  allocation  existed  in that  rising,  horrible,                                                                    
     high-inflationary  environment,  [we   would  have  not                                                                    
     achieved] the goal.                                                                                                        
                                                                                                                                
     If  [we'd] maintained  that discipline,  though, as  we                                                                    
     came  out of  that  environment, and  at  least for  15                                                                    
     years and probably longer [when  the] inflation war was                                                                    
     won,  then I  think we've  achieved an  excess of  a 6-                                                                    
     percent real  rate of return  ever since then.   So, in                                                                    
     short periods,  the answer -  and I'm defining  a short                                                                    
     period in that  case of five years - we  would not have                                                                    
     achieved inflation-proofing.  If  you stayed the course                                                                    
     and   had  that   discipline,  you   would  have   been                                                                    
     successful.                                                                                                                
                                                                                                                                
Number 1463                                                                                                                     
                                                                                                                                
MR. STORER, in response to  a question, replied that according to                                                               
two studies, about  70 percent of endowments  and foundations use                                                               
some sort of  payout methodology that is formula  driven based on                                                               
a  percentage  of market  value.    Most  use a  three-year  time                                                               
horizon, but  many use a  five-year time horizon; the  longer the                                                               
moving average,  the greater  the stability from  year to  year -                                                               
ultimately the payout is the same.   He offered that the proposal                                                               
before the  committee, the 5-percent  limit, is  not inconsistent                                                               
with  the aforementioned  studies.   More important,  however, is                                                               
that it would be consistent  with the fund's asset allocation and                                                               
objectives.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  SAMUELS,  on  the   issue  of  5  percent,  said,                                                               
"Actually it will  be less, as the average goes;  that's what I'm                                                               
reading from the numbers."                                                                                                      
                                                                                                                                
MR. STORER replied:                                                                                                             
                                                                                                                                
     That  is correct.   What  happens is,  you look  at the                                                                    
     payout two ways.  It's  5 percent of a five-year moving                                                                    
     average, and  in a  perfect world  the fund  is growing                                                                    
     every  year, so  that 5  percent  is a  series of  five                                                                    
     smaller and larger.   Usually they take  the snap shot,                                                                    
     then, based  on the  year-end value  of the  end point.                                                                    
     And if  you looked at  that 5-percent payout,  and just                                                                    
     assumed you earned  "8 nominal, 5 real,"  it equates to                                                                    
     more of  a 4.6-4.7  payout versus  the ending  value of                                                                    
     that time period.                                                                                                          
                                                                                                                                
MR.  BARTHOLOMEW noted  that included  in member's  packets is  a                                                               
schedule  that  shows,  "going forward,  if  the  permanent  fund                                                               
achieved its  median 8-percent return, what's  the true effective                                                               
rate of  taking 5  percent of a  five-year average,"  adding that                                                               
it's really 4.6 percent or 4.7 percent.                                                                                         
                                                                                                                                
REPRESENTATIVE SAMUELS asked whether any  other of the 30 percent                                                               
of the funds  referred to in the  aforementioned studies "operate                                                               
the way that  we do," wherein it is not  known what "you're going                                                               
to have in the earnings."                                                                                                       
                                                                                                                                
MR. STORER said  he could not say whether any  of those funds are                                                               
based on realized income, but  surmised that some do shorter time                                                               
horizons and are,  he opined, suffering from  the bigger problems                                                               
brought about by living day to day.                                                                                             
                                                                                                                                
Number 1632                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GRUENBERG   remarked  that  HJR  26   is  a  very                                                               
thoughtful  piece of  legislation and  contains many  dimensions.                                                               
He relayed  that many  have said  to him  that HJR  26 is  a good                                                               
piece of  legislation because it  adopts an  endowment principal.                                                               
However, he  added, all of the  endowments of which he  is aware,                                                               
for example,  university-type endowments, are different  from the                                                               
permanent  fund  in one  key  respect:   those  other  endowments                                                               
generally  only endow  operating expenditures,  rather than  both                                                               
operating expenditures and capital expenditures.                                                                                
                                                                                                                                
REPRESENTATIVE   GRUENBERG  referred   to   the  four   different                                                               
variables  mentioned earlier:    high  inflation, low  inflation,                                                               
good stock market, and bad stock market.  He said:                                                                              
                                                                                                                                
     I would like to focus  on the high-inflation model, and                                                                    
     the fact  that "this" is endowing  capital expenditures                                                                    
     as well as  operating expenditures.  I  could foresee a                                                                    
     circumstance  [of] high  inflation where  a legislature                                                                    
     might  say,  "We foresee  a  period  of high  inflation                                                                    
     coming up;  therefore, what  we want to  do is  buy our                                                                    
     capital   expenditures  now,   while  we   can  do   so                                                                    
     relatively  cheaply, because  a  road will  cost a  lot                                                                    
     more next year and more  even than that the year after,                                                                    
     so what we're going to do  is put our money into assets                                                                    
     that  will  float with  the  inflationary  rate."   And                                                                    
     because you  have a "governor"  or a cap on  the amount                                                                    
     that  can  be  appropriated  in this  bill,  it  has  a                                                                    
     weakness  because it  won't  let  the legislature  deal                                                                    
     with high inflationary rates by  investing in a capital                                                                    
     budget now.  How do you answer that problem?                                                                               
                                                                                                                                
MR. STORER replied:                                                                                                             
                                                                                                                                
     The  one   thing  that  we've   always  said   is,  our                                                                    
     perspective  is  inflation-proofing and  ensuring  that                                                                    
     all generations  are treated equally; ...  the trustees                                                                    
     believe it is not within  their providence [to say] ...                                                                    
     how the  money is spent  or appropriated, and  so we've                                                                    
     stayed away  from that issue.  ... There is a  board of                                                                    
     trustees;   we   have   a  charge   of   --   fiduciary                                                                    
     responsibility is an important [term] ....                                                                                 
                                                                                                                                
REPRESENTATIVE GRUENBERG pointed out,  however, that the issue of                                                               
how the legislature is to  work with the proposed changes, should                                                               
they  be adopted,  is something  that does  need to  be discussed                                                               
now.    "We  have  to   recognize  and  deal  with  that  factual                                                               
possibility," he added.                                                                                                         
                                                                                                                                
Number 1865                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW surmised  that Representative Gruenberg's example                                                               
is  that of  a future  legislature believing  that it  is in  the                                                               
state's  best interest  to  spend  more, in  the  short term,  on                                                               
capital   expenditures,  because   of   high   inflation.     Mr.                                                               
Bartholomew offered:                                                                                                            
                                                                                                                                
     The   legislature  does   have  numerous   tools;  [for                                                                    
     example]  issuing   debt.     So  you  would   cap  the                                                                    
     distribution from the permanent  fund, but ... it could                                                                    
     fund  debt.   If  you  wanted  to  issue debt  to  take                                                                    
     advantage  of  needing a  large  amount  of money,  you                                                                    
     would have  a stream of  money from the  permanent fund                                                                    
     that you  could commit to  debt retirement.   So that's                                                                    
     just an  angle of  where you could  ... issue  debt and                                                                    
     say,  for the  next  five  years, "I  want  to use  'X'                                                                    
     amount  of the  5 percent  to  retire that  debt."   So                                                                    
     that's just an  example of where, at  least knowing you                                                                    
     have a steady  stream, ... we're not going  to have any                                                                    
     problems  issuing  debt.    And   I'm  not  saying  you                                                                    
     directly link them, but that's just an option.                                                                             
                                                                                                                                
REPRESENTATIVE OGG, after remarking  that language in the [Alaska                                                               
State] Constitution should be clear  and not ambiguous, indicated                                                               
that  he  has  concerns  about  the  language  used  in  proposed                                                               
subsection  (b), which,  he surmised,  defines how  "things" come                                                               
out of the  permanent fund.  He posited that  the first clause of                                                               
subsection (b) is  really just intent language  and therefore not                                                               
mandatory.  He asked that someone  explain to him why this intent                                                               
language ought to be included in the constitution.                                                                              
                                                                                                                                
MR.  BARTHOLOMEW  remarked  that  the  discussion  in  the  House                                                               
Special Committee on Ways and  Means centered on that very issue.                                                               
He relayed  that some people  favored simplifying  subsection (b)                                                               
to say  that appropriations will be  limited to 5 percent  of the                                                               
five-year  average  "with  the  look-back  provision."    Others,                                                               
however,  felt that  because HJR  26 is  proposing to  remove the                                                               
word  "principal",  it  would  be  helpful  if  the  language  in                                                               
subsection  (b) contained  an  explanatory preface,  particularly                                                               
since the proposed  changes would be going before  the voters [if                                                               
the bill passes].                                                                                                               
                                                                                                                                
Number 2057                                                                                                                     
                                                                                                                                
REPRESENTATIVE  OGG  argued,  however, that  although  the  first                                                               
clause in subsection  (b) refers to protecting the  fund from the                                                               
effects of  inflation, it  does not  mention protecting  the fund                                                               
from the  effects of deflation.   In addition, he noted,  it uses                                                               
the terms  "real value"  and "over the  long term",  and although                                                               
these  may be  terms  of  art in  the  accounting and  investment                                                               
fields,  he is  not  aware  that they  currently  have any  legal                                                               
meaning; therefore, he  would like to know how  these terms would                                                               
be defined,  for example, during  an argument before  the supreme                                                               
court.                                                                                                                          
                                                                                                                                
MR. BARTHOLOMEW indicated that there  was discussion in the House                                                               
Special Committee on Ways and  Means regarding the aforementioned                                                               
language's  potential   to  create   an  open  field   for  legal                                                               
challenges.     He  mentioned,  though,   that  there   is  other                                                               
legislation  going   through  the   process  that   outlines  the                                                               
implementation  of this  resolution's  provisions,  and that  the                                                               
Senate  has  discussed  using that  implementing  language  as  a                                                               
vehicle  for statutorily  defining the  aforementioned terms  and                                                               
statutorily  outlining   further  the   criteria  by   which  the                                                               
legislature determines  whether to take  the full 5 percent.   He                                                               
mentioned, additionally,  regarding a definition of  "long term",                                                               
that  the  U.S. Department  of  the  Treasury considers  ten-year                                                               
notes to be long-term securities.                                                                                               
                                                                                                                                
REPRESENTATIVE  OGG mentioned  that  this only  indicates to  him                                                               
that the terms he has concern  with do not already have their own                                                               
legal definition that scholars  or constitutional attorneys could                                                               
point  to and  say that  they  know what  those terms  mean.   He                                                               
observed  that even  if this  legislature does  like the  idea of                                                               
going  along with  what the  Treasury currently  considers to  be                                                               
long term, that decision won't  be binding on future legislatures                                                               
that might  decide they  like some other  definition better.   He                                                               
remarked that  he is not  comfortable with  approaching [language                                                               
destined for] the constitution in this manner.                                                                                  
                                                                                                                                
MR.  BARTHOLOMEW   argued  that   the  "financial   and  economic                                                               
definitions" for  the aforementioned  terms would  be sufficient.                                                               
With  regard to  the term  "real value",  he explained  that this                                                               
means maintaining  purchasing power  even through the  effects of                                                               
inflation.   He relayed that  to the  APFC, "long term"  means 10                                                               
years.   He  pointed to  existing constitutional  language, which                                                               
says, "unless  otherwise provided  by law", as  proof that  it is                                                               
usual to not try to define everything in the constitution.                                                                      
                                                                                                                                
Number 2298                                                                                                                     
                                                                                                                                
REPRESENTATIVE OGG asked  what impact HJR 26 would  have today if                                                               
it had been in effect 3 years ago.                                                                                              
                                                                                                                                
MR.  STORER offered  his  belief  that "we'd  be  about the  same                                                               
place."  He elaborated:                                                                                                         
                                                                                                                                
     We went  through a  bull market  where we  were earning                                                                    
     extraordinarily  high  real  rates  of  return  through                                                                    
     about March of about 2000,  and then we started earning                                                                    
     negative  real rates  of return  because  of the  stock                                                                    
     market.   So, the  answer [to] what  is long  term, ...                                                                    
     that is a  term of art; I think it's  sort of ten years                                                                    
     or  longer  [as]  a  decent  benchmark  ....    I'd  be                                                                    
     surprised if  we didn't earn  a 5-percent real  rate of                                                                    
     return, looking back over the last 10 years.                                                                               
                                                                                                                                
MR. BARTHOLOMEW added  that the APFC can show that  over the last                                                               
10 years,  it has earned in  excess of a 5-percent  real [rate of                                                               
return].   And  because the  state, for  the last  three or  five                                                               
years, has  not spent more  than 5  percent of the  fund's market                                                               
value and because  the fund has earned more than  5 percent, both                                                               
the  state and  the fund  would be  in the  exact same  financial                                                               
position they  are in  today.   He noted  that under  the current                                                               
funding formulas,  the legislature could  have spent more  than 5                                                               
percent during those years, but didn't.                                                                                         
                                                                                                                                
REPRESENTATIVE OGG remarked, however:                                                                                           
                                                                                                                                
     My question was trying to focus,  not on so much the 5-                                                                    
     percent  part of  spending  it, but  was  on the  words                                                                    
     "real value" and  "long term" and how  they would apply                                                                    
     in  that particular  situation.   And  "real value"  --                                                                    
     because you're  running through  a period  of (indisc.)                                                                    
     great  growth, the  fund itself  increases in  value to                                                                    
     like $29  billion.   Is that a  "real value"  any more?                                                                    
     And  then it  drops [to  $23 billion].  ... Where  does                                                                    
     "real value" fit in there at that point in time?                                                                           
                                                                                                                                
TAPE 03-52, SIDE B                                                                                                            
Number 2386                                                                                                                     
                                                                                                                                
MR.  STORER said  that he  is  comfortable saying  that the  APFC                                                               
achieved "that  goal, that objective,  during that period."   The                                                               
value of  the fund was just  slightly less than $29  [billion] in                                                               
[the  first part  of]  2000,  and the  subsequent  drop in  value                                                               
occurred  in  three  ways:     payouts  of  over  $2  billion  in                                                               
dividends; subtractions from the earnings  reserve to be put into                                                               
the principal; and the market drop.   He added, "Over the last --                                                               
from  that period,  the first  fiscal year  (indisc.) a  negative                                                               
3.25; second  fiscal year,  negative 2.25;  and I'm  delighted to                                                               
say we're slightly  positive this fiscal year to date  as of last                                                               
night."   Therefore, he  remarked, the drop  in the  fund's value                                                               
was not all due  to the market; in fact, he  added, "we were able                                                               
to  inflation-proof and  meet  the  dividend distribution  during                                                               
that three-year period as well."                                                                                                
                                                                                                                                
MR. BARTHOLOMEW added:                                                                                                          
                                                                                                                                
     When it reached $29 billion,  and the NASDAQ marked had                                                                    
     just  finished a  year of  returning 80  percent, there                                                                    
     was a lot of [questions] of  was that real.  And people                                                                    
     that bought  it at  that time  have learned  it wasn't.                                                                    
     And  so,  the  principal, what  was  protected  against                                                                    
     inflation, back  then, was $21  billion.  So we  had $8                                                                    
     billion  above principal,  and I  think the  market has                                                                    
     told us it wasn't all  real.  The $21 billion, luckily,                                                                    
     is  still real.  ...  If the  market corrected  another                                                                    
     year, the  value of the  fund would go below  that, and                                                                    
     so  "real"  is trying to maintain that  principal ... -                                                                    
     the  purchasing power  of that  principal.   So, as  we                                                                    
     move  forward, that's  what's real  to us.   And  we're                                                                    
     going to have  up years again, and the  fund's going to                                                                    
     grow,  but  it may  grow  faster  than the  sustainable                                                                    
     markets, and we're going to  come back down or ... vice                                                                    
     versa - it could go down and then up.                                                                                      
                                                                                                                                
REPRESENTATIVE OGG  remarked that the foregoing  explanation just                                                               
begs more  questions.  That's  the problem with "real  value", he                                                               
said,   because  according   to   his   interpretation  of   that                                                               
explanation, "real  value" appears to  be tied to the  NASDAQ and                                                               
whatever its  value is.  Or  is it the "real  value" with respect                                                               
to the  value of  Alaska's economy  or the  cost of  real estate?                                                               
The purchasing  power with  regard to real  estate in  Alaska has                                                               
not decreased from $29 billion  down to $23 billion, he observed.                                                               
He  reiterated that  he has  concerns  with how  the terms  "real                                                               
value" and "long  term" will be interpreted.   Why confuse people                                                               
with language like that?                                                                                                        
                                                                                                                                
MR. STORER  mentioned that  he tends to  define "real  value", in                                                               
terms of purchasing power, by  using a Consumer Price Index (CPI)                                                               
as the criteria regarding inflation.                                                                                            
                                                                                                                                
Number 2231                                                                                                                     
                                                                                                                                
CHAIR McGUIRE  indicated that she could  see Representative Ogg's                                                               
point  regarding  the  ambiguity  of  the  aforementioned  terms.                                                               
However,  although such  terms  might typically  be  seen in  the                                                               
intent section of "regular" bills, retaining the first clause of                                                                
the proposed subsection (b) will clarify for the voters the                                                                     
intent of the proposed changes to the constitution.                                                                             
                                                                                                                                
REPRESENTATIVE GARA said:                                                                                                       
                                                                                                                                
     My  big fear  is that  we're going  to do  something to                                                                    
     jeopardize the permanent fund, and  I know that POMV is                                                                    
     a  careful  attempt to  not  do  that.   But  it  still                                                                    
     worries me.   If there's one great  decision we've ever                                                                    
     made in this state, I  believe it's the creation of the                                                                    
     permanent fund.   But I  worry about some of  these 10-                                                                    
     year horizons  where, to  an economist,  10 years  is a                                                                    
     short amount  of time, [but] to  legislators, to school                                                                    
     children, 10 years is an  incredibly meaningful part of                                                                    
     their life.                                                                                                                
                                                                                                                                
     And so  I'm worried that  if we  take 5 percent  of the                                                                    
     value  of the  permanent fund  out every  year, and  we                                                                    
     have  one of  these 15-year  difficult periods  for the                                                                    
     stock market, though that's looked  at as a blip on the                                                                    
     screen  by economists,  that's  a  whole generation  of                                                                    
     school children here.  And  I'm wondering whether it is                                                                    
     wise to spend upwards of 5  percent of the value of the                                                                    
     permanent fund when  we might have a  15-year period of                                                                    
     economic downturns.                                                                                                        
                                                                                                                                
REPRESENTATIVE GARA concluded:                                                                                                  
                                                                                                                                
     So, I guess the first question  is, can you tell me ...                                                                    
     how  long have  economic  downturns -  and I'm  talking                                                                    
     about  economic  downturns   which  mean  stock  market                                                                    
     downturns  or level  periods -  how long  have some  of                                                                    
     these  periods  lasted  in  the past?    What  kind  of                                                                    
     periods are  we facing where  we might see  declines in                                                                    
     the  value  of  the   permanent  fund  plus  5  percent                                                                    
     withdrawals from the  value of the permanent  fund?  In                                                                    
     order for me know to  how much we might possibly damage                                                                    
     the  permanent  fund, under  a  proposal  like this,  I                                                                    
     guess I'd like to know  what those timeframes have been                                                                    
     historically.                                                                                                              
                                                                                                                                
Number 2105                                                                                                                     
                                                                                                                                
MR. STORER replied:                                                                                                             
                                                                                                                                
     There are  more up markets  than down markets,  ... and                                                                    
     I'm  talking  about the  stock  market  here, which  is                                                                    
     really the  driver of higher  rates of return.  ... And                                                                    
     so ... in my mind, that  5 percent is a limit; one does                                                                    
     not  have to  take  5  percent, ...  but  it creates  a                                                                    
     discipline  on the  upside. ...  Depending  on how  you                                                                    
     want  to define  the  Depression, ...  there were  four                                                                    
     significant downturns.                                                                                                     
                                                                                                                                
     The Depression  had a several-year downturn.   And then                                                                    
     the stock market went up 50  percent, and then it had a                                                                    
     few more years  of downturn, and then  the stock market                                                                    
     went up  with few down  years after that.   After that,                                                                    
     prior to  what we're experiencing right  now, the worst                                                                    
     years were in  1973 and 1974, and nobody  wanted to own                                                                    
     stock in  1975.   And ...  one could  say that  was the                                                                    
     beginning   of   this   long  run   that   we've   just                                                                    
     experienced.  Now we have -  now, which has gone on for                                                                    
     ... almost exactly three years - this bear market. ...                                                                     
                                                                                                                                
     I found  there were 14  observations where there  was a                                                                    
     negative  year  followed  by  a  positive  year.    The                                                                    
     average rate  of return, when  it turned  positive, was                                                                    
     up 28 percent; that was with  a high of 50 percent, and                                                                    
     that was in  the middle of the Depression, to  a low of                                                                    
     up 4 percent - and I forget  when that was - I think it                                                                    
     might  have  been  in  the   mid-'70s.    And  so,  ...                                                                    
     typically, if you accept that  data, and I do, ... when                                                                    
     you come out of the  bear market, the stock market will                                                                    
     go  up rather  dramatically  because  of the  depressed                                                                    
     prices in the stock market.                                                                                                
                                                                                                                                
Number 2001                                                                                                                     
                                                                                                                                
MR. STORER continued:                                                                                                           
                                                                                                                                
     I'm not  prepared to suggest  that will happen  in this                                                                    
     time, because we  went to such a  high bubble preceding                                                                    
     this -  or high valuation  - that we're more  back into                                                                    
     normal  valuation; so  I'm not  about  to suggest  that                                                                    
     this market  will turn  around and  we'll achieve  a 28                                                                    
     percent or  anything like that.   So, ...  [there were]                                                                    
     four  real  periods of  prolonged  bear  markets.   Two                                                                    
     periods ...  - you could  break it  down - were  in the                                                                    
     Depression,  when we  were  in  a deflationary  period.                                                                    
     One  was  ... in  the  middle  of  the oil  crisis  and                                                                    
     commodity shortages  and inflation and sort  of in that                                                                    
     "guns and  butter" era  ... at the  end of  the Vietnam                                                                    
     war.  And  then the one we're going  through right now,                                                                    
     which  was preceded  by an  extraordinary bull  market.                                                                    
     But most of the time, the stock markets have gone up.                                                                      
                                                                                                                                
REPRESENTATIVE GARA sought to clarify his question:                                                                             
                                                                                                                                
     There have been periods of  time where the stock market                                                                    
     hits a  peak.  It goes  down and it doesn't  reach that                                                                    
     peak  again for  five years,  ten years,  I think  even                                                                    
     sometimes  longer  than  that.    Those  are  the  long                                                                    
     periods  of drought  that I'm  wondering  about.   What                                                                    
     have been the  longest periods of time  where ... [the]                                                                    
     stock  market has  hit its  peak and  then not  reached                                                                    
     that  peak again  - the  longest period  between those.                                                                    
     Because that's the period I'm  worried about, is we hit                                                                    
     a  high  moment  for  the  permanent  fund,  we're  the                                                                    
     legislators  for   the  next  15  years,   [but]  we're                                                                    
     spending 5 percent  of the value of  the permanent fund                                                                    
     in a  long period where we  never get back to  the peak                                                                    
     of the stock market.                                                                                                       
                                                                                                                                
MR. STORER replied:                                                                                                             
                                                                                                                                
     The two  periods that were prolonged,  I can't remember                                                                    
     the years, but  one was during the  Depression, where I                                                                    
     guess it was 1929 was a peak  and I ... think it was 10                                                                    
     or 15  years or maybe  longer that  we came back  up to                                                                    
     that era  in terms  of valuation  of the  stock market.                                                                    
     The other, if I remember  correctly, in the late '60s -                                                                    
     either '66 or  '68 - the "Dow" hit 1,000,  [and] it may                                                                    
     have taken  10 years  for the Dow  to hit  1,000 again.                                                                    
     I'm offering extremes, but those extremes did happen.                                                                      
                                                                                                                                
Number 1899                                                                                                                     
                                                                                                                                
     That  is  also, keep  in  mind,  why we  diversify  our                                                                    
     portfolios.   The  permanent fund  is  only about  half                                                                    
     invested  in equities.   Our  bond  portfolios and  our                                                                    
     real  estate  portfolios  have been  achieving  double-                                                                    
     digit returns  during this last  three years  since ...                                                                    
     That's  why you  don't want  to  get caught  up in  the                                                                    
     mania,  and the  permanent fund  did not,  in terms  of                                                                    
     thinking you're supposed  to put all your  money in the                                                                    
     stock  market, and  we've benefited  from  that in  the                                                                    
     bear market.                                                                                                               
                                                                                                                                
     While  our returns  have  been  negative, they've  been                                                                    
     considerably less than our peer  group out there; we've                                                                    
     been achieving  very high comparative returns.   So ...                                                                    
     you want  to diversify ...  in a manner that  helps you                                                                    
     achieve   you're   goals,   both  in   your   long-term                                                                    
     objectives and  your risk.   That's a risk; we  look at                                                                    
     that modeling every day.                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARA   brought  attention   to  Amendment   1,  a                                                               
handwritten amendment which, with original punctuation, read:                                                                   
                                                                                                                                
     At p.2 line 6 after "year."                                                                                                
          c) the Permanent fund Dividend shall equal at                                                                         
     least the greater  of: 1) the Dividend paid  in 2003 or                                                                    
     2004, adjusted for inflation, or;  2) 50% of the amount                                                                    
     stated in  section (b) of  this section, which  ever is                                                                    
     greater.  The Legislature  may issue a Dividend greater                                                                    
     than these amounts in any year.                                                                                            
          d) Concetual [sic] - Sevability [sic] of section                                                                      
     (c)  if  it  results  in  a  ruling,  that  causes  the                                                                    
     Permanent  funds earnings  to  be taxable  by the  U.S.                                                                    
     Internal Revenue Service.                                                                                                  
                                                                                                                                
REPRESENTATIVE  GARA, before  offering Amendment  1, pointed  out                                                               
that the line  that contains "or; 2) 50%"  should instead contain                                                               
"or; 2)  a per recipient share  of 50%", and that  subsection (d)                                                               
contains two  misspelled words that should  read "conceptual" and                                                               
"severability".                                                                                                                 
                                                                                                                                
Number 1784                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GARA made  a motion  to adopt  Amendment 1  [text                                                               
provided previously].                                                                                                           
                                                                                                                                
Number 1782                                                                                                                     
                                                                                                                                
CHAIR McGUIRE objected.                                                                                                         
                                                                                                                                
REPRESENTATIVE    GARA   offered    that   Amendment    1   would                                                               
constitutionalize the dividend.  He said:                                                                                       
                                                                                                                                
     My  worry  is  that  if we  adopt  this  constitutional                                                                    
     amendment, it  might be  seen by some  as a  first step                                                                    
     towards getting rid of the  dividend itself.  And so if                                                                    
     we're going  to authorize the legislature  to spend any                                                                    
     of  the permanent  fund, I  think this  is the  time to                                                                    
     make sure that we enshrine  the dividend in the [Alaska                                                                    
     State]  Constitution  as  well.    So,  this  amendment                                                                    
     enshrines  the  dividend  in the  constitution  so  the                                                                    
     legislature can't get rid of the dividend program.                                                                         
                                                                                                                                
     It  also sets  a  minimum  amount to  be  paid for  the                                                                    
     dividend.   So  this vote  will happen  in November  of                                                                    
     2004  if  this  resolution  passes; I  don't  want  the                                                                    
     dividend  to  go  down lower  [than]  the  most  recent                                                                    
     dividend before the vote comes  along.  So the proposal                                                                    
     is that the dividend shall  never be any lower than the                                                                    
     greater  of the  2003  or 2004  dividend; the  dividend                                                                    
     shall  never be  lower than  a per  recipient share  of                                                                    
     half of  the money  that we take  out of  the permanent                                                                    
     fund.                                                                                                                      
                                                                                                                                
     And just so  members of the committee know,  I spoke to                                                                    
     [Mr.]  Bartholomew; if  projections work  out well,  it                                                                    
     seems like  by 2004 the  dividend might be  about $900,                                                                    
     [and] it  seems this  year, if we  have a  dividend, it                                                                    
     might be about  $1100.  If we pass  this amendment, and                                                                    
     we split the use of  this 5 percent fifty-fifty between                                                                    
     state government  and the dividend, at  fifty-fifty, in                                                                    
     2004,  that   would  be  something  close   to  a  $900                                                                    
     dividend. ... So in that  year, for example, under this                                                                    
     proposal, the dividend would be  higher; it would be no                                                                    
     lower than the prior year's dividend.                                                                                      
                                                                                                                                
     But  the  concept  is  that   we  should  enshrine  the                                                                    
     dividend,  we should  make sure  that  it doesn't  keep                                                                    
     going  down, and  we should  also give  the legislature                                                                    
     the  flexibility  to  issue a  larger  dividend  beyond                                                                    
     that.   But I want to  set minimums.  I'm  just worried                                                                    
     that we're  going to  start losing  the dividend.   The                                                                    
     dividend, I think, does a  very good job of sharing the                                                                    
     wealth  among Alaskans;  there  are  very few  programs                                                                    
     anywhere where  people of  all walks  of life  share in                                                                    
     wealth.                                                                                                                    
                                                                                                                                
     And  I think  it's  become something  that our  economy                                                                    
     relies upon; I think I've  seen [numbers] that show the                                                                    
     drastic affects  upon this economy  if we were  to take                                                                    
     the  dividend  out  of  the economy.    That's  not  to                                                                    
     mention the obvious  uses that many people  use for the                                                                    
     dividend, which  is ... payment of  prescription drugs,                                                                    
     [and] payment for  food and shelter and  clothing.  So,                                                                    
     that's the idea.                                                                                                           
                                                                                                                                
Number 1653                                                                                                                     
                                                                                                                                
REPRESENTATIVE GARA continued:                                                                                                  
                                                                                                                                
     There's  a  subsection  (d), which  addresses  a  legal                                                                    
     issue; there  is some argument  back and forth  that if                                                                    
     we  constitutionalize the  dividend,  that somehow  the                                                                    
     IRS  [Internal  Revenue  Service]  might  start  taxing                                                                    
     permanent  fund earnings.   I  don't believe  that that                                                                    
     would happen, I've looked at  the arguments myself, I'm                                                                    
     not  a  scholar  on  the  issue  though,  and  so  what                                                                    
     subsection (d) would do, and  this is a conceptual part                                                                    
     of  this amendment,  ...  [is]  include a  severability                                                                    
     clause  that said  if constitutionalizing  the dividend                                                                    
     caused  the IRS  to  start taxing  the permanent  fund,                                                                    
     then we  would not  go that  route because  we wouldn't                                                                    
     want the permanent fund to be taxed.                                                                                       
                                                                                                                                
     So that  would make  this [subsection] severable.   And                                                                    
     there have  been previous versions of  a POMV amendment                                                                    
     that have  included a severability  clause.   So that's                                                                    
     just  conceptual  for  now,   but  when  the  amendment                                                                    
     passes, then  we'll draft the amendment's  language, as                                                                    
     we'll need to do.                                                                                                          
                                                                                                                                
REPRESENTATIVE SAMUELS  said that  he agrees  with Representative                                                               
Gara regarding  the importance  of the  dividend on  the economy,                                                               
but does  not agree that  HJR 26  gives the legislature  any more                                                               
authorization to appropriate money from  the earnings of the fund                                                               
than it already has.   "We can do that right now,"  he added.  He                                                               
indicated a reluctance to vary  from the framework that the Board                                                               
has proposed.  He opined that  Amendment 1 would muddy the water,                                                               
would  be  divisive,  and  would   do  the  people  of  Alaska  a                                                               
disservice.                                                                                                                     
                                                                                                                                
Number 1444                                                                                                                     
                                                                                                                                
A roll call  vote was taken.  Representative Gara  voted in favor                                                               
of  Amendment  1.     Representatives  Ogg,  Samuels,  Gruenberg,                                                               
Anderson, and McGuire  voted against it.   Therefore, Amendment 1                                                               
failed by a vote of 1-5.                                                                                                        
                                                                                                                                
Number 1431                                                                                                                     
                                                                                                                                
REPRESENTATIVE GRUENBERG made  a motion to adopt  Amendment 2, to                                                               
delete from  page 2,  lines 2-3, "To  protect the  permanent fund                                                               
from the  effects of inflation  and thereby assure that  the real                                                               
value  of the  permanent fund  will  be preserved  over the  long                                                               
term,";  and   on  page  2,   line  4,  capitalize  the   "a"  in                                                               
"appropriations".   Thus  subsection  (b) would  begin with  "(b)                                                               
Appropriations".   He noted that  the House Special  Committee on                                                               
Ways and Means had a lot of discussion regarding this language.                                                                 
                                                                                                                                
Number 1412                                                                                                                     
                                                                                                                                
REPRESENTATIVE SAMUELS objected for the purpose of discussion.                                                                  
                                                                                                                                
REPRESENTATIVE GRUENBERG said that although he originally liked                                                                 
the language he is proposing to delete, he has since changed his                                                                
mind and would now prefer to have it removed.  He elaborated:                                                                   
                                                                                                                                
     One  reason is  that  there may  be  other reasons  why                                                                    
     appropriations  should  not  exceed  5  percent.    The                                                                    
     protection  of  the ...  permanent  fund  ... from  the                                                                    
     effects  of inflation  may  only be  one  reason.   I'm                                                                    
     going to give you another  reason that's just as valid,                                                                    
     and that  is because  the limitation  on appropriations                                                                    
     is  a spending  limit, and  that in  itself is  another                                                                    
     very good  reason for having  this here.  So  that's my                                                                    
     first reason for wanting to delete it. ...                                                                                 
                                                                                                                                
     The second reason is because we  had a lot of debate in                                                                    
     [House Special Committee on Ways  and Means] on whether                                                                    
     this is  mandatory language or merely  descriptive, and                                                                    
     it caused  a lot of  legal discussion, and I  think the                                                                    
     less  legal  discussion we  have,  and  ambiguity in  a                                                                    
     constitutional provision, the better.                                                                                      
                                                                                                                                
     And the  third reason,  independent reason,  is because                                                                    
     there are very few  constitutional provisions that have                                                                    
     descriptive  language in  them.   And  they asked  this                                                                    
     question of  me ..., "Is  there any other place  in the                                                                    
     constitution with descriptive language?"   And the only                                                                    
     place I  could think  of was our  "right to  bear arms"                                                                    
     amendment, where originally it  said the well regulated                                                                    
     [Militia] being  necessary, et  cetera, et  cetera, and                                                                    
     that caused a lot of  problems with that amendment, and                                                                    
     we had  to amend it to  assure a private right.   So it                                                                    
     really  caused  ...  litigation in  another  state  and                                                                    
     caused us to have to  amend the constitution.  And it's                                                                    
     just much  cleaner not to  have that language in.   And                                                                    
     so  for those  three reasons,  I would  move to  delete                                                                    
     ....                                                                                                                       
                                                                                                                                
CHAIR  McGUIRE said  that  she  tended to  agree  for those  same                                                               
reasons,  as   well  as   for  the   reasons  brought   forth  by                                                               
Representative  Ogg.   She  mentioned that  the  only reason  for                                                               
keeping it in  would be to assist the voters  in interpreting the                                                               
remainder of subsection (b)                                                                                                     
                                                                                                                                
Number 1259                                                                                                                     
                                                                                                                                
REPRESENTATIVE GRUENBERG noted that  the language he is proposing                                                               
to  delete could  be inserted  in the  voter pamphlet,  which the                                                               
courts typically look to as part of legislative history.                                                                        
                                                                                                                                
MR.   BARTHOLOMEW,  after   noting  that   the  Board   would  be                                                               
comfortable with  either keeping  the aforementioned  language or                                                               
deleting it,  suggested that the  title of  HJR 26 should  not be                                                               
changed,  even  though  it,  too,   contains  some  of  the  same                                                               
language,  since the  proposed constitutional  amendment will  be                                                               
placed, word for word, in the voter pamphlet.                                                                                   
                                                                                                                                
REPRESENTATIVE GRUENBERG said he had  no objection to keeping the                                                               
title the same.                                                                                                                 
                                                                                                                                
CHAIR McGUIRE,  for the benefit  of Representative Holm,  who had                                                               
just joined the  meeting, detailed the changes  being proposed by                                                               
Amendment 2.                                                                                                                    
                                                                                                                                
REPRESENTATIVE SAMUELS [withdrew] his objection to Amendment 2.                                                                 
                                                                                                                                
Number 1123                                                                                                                     
                                                                                                                                
REPRESENTATIVE GARA stated that he objected to Amendment 2.                                                                     
                                                                                                                                
REPRESENTATIVE GARA,  regarding failed Amendment 1,  mentioned to                                                               
Representative Holm  that "nobody would let  me constitutionalize                                                               
the dividend."                                                                                                                  
                                                                                                                                
REPRESENTATIVE HOLM indicated that had  he been present, he, too,                                                               
would have voted against Amendment 1.                                                                                           
                                                                                                                                
REPRESENTATIVE GARA,  speaking to  his objection to  Amendment 2,                                                               
said:                                                                                                                           
                                                                                                                                
     I understand  the argument of  the folks who  want this                                                                    
     out  of the  constitutional language.   I  like it.   I                                                                    
     think  courts will  often  look  at legislative  intent                                                                    
     [and] they'll  look at constitutional intent.   I think                                                                    
     it's fine  to have intent  language in a statute  or in                                                                    
     the  constitution as  long as  it doesn't  mess up  the                                                                    
     wording of the statute  or constitution.  The mechanics                                                                    
     of this provision  will be that 5 percent  of the value                                                                    
     of the  permanent fund can  be spent.  It's  clear. ...                                                                    
     So I don't  see that the intent, the  statement that we                                                                    
     want  to protect  the  permanent  fund from  inflation,                                                                    
     harms this at all.                                                                                                         
                                                                                                                                
     ...  I can't  envision  a circumstance  where it  would                                                                    
     interfere  with the  operation  of this  constitutional                                                                    
     amendment, and  I think  it is nice  for the  public to                                                                    
     have an  explanatory statement in the  constitution.  I                                                                    
     think  we do  that  with our  "free  speech" clause;  I                                                                    
     think we do that with  a number of other constitutional                                                                    
     provisions  where  we  have  extra  language  that  the                                                                    
     courts  use for  intent  purposes.   But  at a  minimum                                                                    
     this, I  think, helps  the public also  understand that                                                                    
     they have  the right to  have the permanent  fund, over                                                                    
     the long  term, protected  from inflation.   So, that's                                                                    
     my objection.                                                                                                              
                                                                                                                                
CHAIR McGUIRE  said that this was  a tough issue for  her because                                                               
she agrees  with both sides of  the argument.  She  remarked that                                                               
she wants  HJR 26 to succeed,  both "in its intent"  and with the                                                               
electorate.                                                                                                                     
                                                                                                                                
REPRESENTATIVE HOLM  noted that  he could see  both sides  of the                                                               
argument, but indicated  that he agrees with the  point that over                                                               
time, the  constitution could become quite  cumbersome because of                                                               
the  addition  of  intent  language.     He  also  suggested  the                                                               
possibility that the current intent  language may no longer apply                                                               
in the future.                                                                                                                  
                                                                                                                                
The committee took an at-ease from 3:04 p.m. to 3:05 p.m.                                                                       
                                                                                                                                
Number 0891                                                                                                                     
                                                                                                                                
REPRESENTATIVE  OGG  asked  whether  the  language  currently  in                                                               
subsection (b)  would prohibit funds from  being appropriated for                                                               
reasons other than the protection  of the permanent fund from the                                                               
effects of inflation.                                                                                                           
                                                                                                                                
MR. BARTHOLOMEW replied:                                                                                                        
                                                                                                                                
     It's my  understanding that  there's no  prohibition to                                                                    
     taking money out of the  permanent fund up to the level                                                                    
     of 5  percent.  So, the  constitutional amendment would                                                                    
     say, up to  5 percent, it's the  power of appropriation                                                                    
     that removes it and there's  no stipulation [as] to why                                                                    
     you  would  take  it  out   or  whether  you  could  or                                                                    
     couldn't.  It's  up to 5 [percent].   It would prohibit                                                                    
     you, for  any reason, above  -- you could not  go above                                                                    
     that 5 [percent].  That's a hard and fast limit.                                                                           
                                                                                                                                
REPRESENTATIVE OGG  pointed out,  however, that the  first clause                                                               
of  subsection  (b)  seemingly  specifies  "To  protect"  as  the                                                               
particular  purpose for  which  funds may  be  appropriated.   He                                                               
asked  whether money  could be  taken out  of the  permanent fund                                                               
without [subsection] (b).                                                                                                       
                                                                                                                                
MR. BARTHOLOMEW explained that since  Section 1 of HJR 26 removes                                                               
the word  "principal" from  the constitution,  lacking subsection                                                               
(b), no  money could be  removed from the permanent  fund because                                                               
the constitution  would then  say that  the permanent  fund could                                                               
only  be  used  for  income-producing [investments].    Thus  the                                                               
permanent fund would grow forever.                                                                                              
                                                                                                                                
REPRESENTATIVE SAMUELS suggested, then,  that by not deleting the                                                               
first   clause  of   subsection   (b),   the  legislature   could                                                               
appropriate  money beyond  the  5-percent limit  if  the goal  of                                                               
protecting the  permanent fund from  the effects of  inflation is                                                               
reached.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  GRUENBERG added  that although  he was  not sure,                                                               
that  might  actually  be  the  case.    He  suggested  that  the                                                               
legislature  really doesn't  want to  cause litigation  over this                                                               
issue.                                                                                                                          
                                                                                                                                
CHAIR McGUIRE agreed.                                                                                                           
                                                                                                                                
Number 0635                                                                                                                     
                                                                                                                                
A  roll call  vote  was taken.    Representatives Holm,  Samuels,                                                               
Gruenberg,  Ogg,  and McGuire  voted  in  favor of  Amendment  2.                                                               
Representative  Gara voted  against it.   Therefore,  Amendment 2                                                               
was adopted by a vote of 5-1.                                                                                                   
                                                                                                                                
Number 0574                                                                                                                     
                                                                                                                                
REPRESENTATIVE  SAMUELS   moved  to  report  CSHJR   26(W&M),  as                                                               
amended,  out of  committee with  individual recommendations  and                                                               
the accompanying fiscal  notes.  There being  no objection, CSHJR                                                               
26(JUD)   was  reported   from  the   House  Judiciary   Standing                                                               
Committee.                                                                                                                      

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