Legislature(1999 - 2000)
02/22/2000 08:06 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 411-DISTRIBUTION OF PERMANENT FUND INCOME Number 1485 CHAIR JAMES announced the next order of business is HOUSE BILL NO. 411, "An Act relating to the market value of the permanent fund and to distribution of income of the permanent fund; and providing for an effective date." Number 1450 REPRESENTATIVE HUDSON read the sponsor statement as follows: House Bill 411 was introduced to give the permanent fund strength, security and stability far into the future. This legislation allows for distributing income from the permanent fund as a percent of market value, rather than the current realized return formula. Arguments in support of distributing fund income as a percent of market value were first suggested by then permanent fund trustee Hugh Malone in the late 1980s. The Commission on the Future of the Permanent Fund advised further study of this concept in 1990. In 1995, the Long-Range Financial Planning Commission recommended the market value approach for a long-term investment strategy. This year, Commonwealth North also recommended this blueprint for strengthening the fund. This legislation fits in with the permanent fund's long-term investment horizon. While not necessarily endorsing HB 411, the Permanent Fund Board supports a percent of market value approach, recognizing that continuing the present realized return formula could lead to distortions in distributions due to gain taking and asset allocation decisions made as part of good investment policy. Passage of HB 411 would allow the permanent fund to hold investments that historically need more time to mature. Another unique feature of the market value approach is that it produces a distribution program that is inherently more level. This is consistent with accepted methods of measuring permanent fund performance and with the market value accounting requirement now mandated by the Governmental Accounting Standards Board. First and foremost, HB 411 protects the principal of the permanent fund. Additionally, this approach maximizes the predictability and stability of annual distributions. This proposal is but one possible element of a long-range fiscal plan. It is, however, an essential element if we are to close the troublesome fiscal gap, by most accounts, approximately $800 million short annually. House Bill 411 preserves and grows the permanent fund through statutorily required inflation proofing and actually maintains the permanent fund dividend at the status quo over the next 10 years of projected growth. After inflation proofing the fund, the total amount of money available for distribution would be calculated. Out of this amount, HB 411 allocates 80 percent to the dividend and 20 percent to the general fund. It produces stability in the fund management and clearly affords a first ever contribution for payment of essential services provided to the people of Alaska, while at the same time holding the dividend harmless. It may be politically convenient to simply eat the public's savings as we have done since 1992, but that practice could easily lead to a full collapse of Alaska's economy. REPRESENTATIVE HUDSON referred to the [permanent fund advisory] vote that occurred September 14, 1999. He said HB 411 is appreciably different than the September vote because HB 411 does not attempt to solve all of our fiscal gap problems solely from the assets of the earnings of the permanent fund. He recognized from the September vote that the legislature had to hold the permanent fund dividend harmless, which he feels that HB 411 seeks to do. He further stated that Alaska does not have a steady revenue source to address the fiscal need, which is now at $2.1 billion. He acknowledged that he does not recommend HB 411 as a stand-alone solution to the fiscal gap and is glad that other people are looking at alternative revenue sources. Number 0509 REPRESENTATIVE HUDSON reminded members that the legislature has a constitutional responsibility to deliver not only a spending plan but also a revenue plan that shows source of the money. He emphasized that the legislature cannot constitutionally present an unbalanced budget plan. He acknowledged that since 1992 the budget has been balanced annually almost exclusively by draw- downs on the constitutional budget reserve fund. He emphasized that if the legislature does not develop additional revenues, the constitutional budget reserve fund money is gone by 2004. He predicted that after 2004 the legislature will face a $990 million deficit. He envisions that the 2004 deficit could be paid for by the earnings reserve account of the permanent fund, which the legislature has never touched. REPRESENTATIVE HUDSON recognized that until now the legislature has always added permanent fund earnings back into the corpus of the fund to the extent of $5 billion in order to inflation proof the fund. He noted that HB 411 will continue to inflation proof the fund. He reiterated that it is the legislature's mandate to produce a series of fiscal plans in an effort to close the fiscal gap in a responsible manner. If HB 411 passes, $272 million of permanent fund earnings would be available in 2001. As it is, the constitutional budget reserve fund earns $100 million a year in interest, which could be added to the $272 million permanent fund earnings. Therefore, even though those two pots of money cannot close the fiscal gap, the use of that money could allay the need for onerous tax measures. Number 0114 CHAIR JAMES said she is distressed about how the permanent fund and its earnings are counted together in one lump sum. She suggested that the public has been led astray because they believe there is $27 billion in the permanent fund, which is not true. In the future, the legislature should make a separation between the permanent fund itself and the earnings. She noted that the original constitutional amendment regarding the permanent fund made that separation clear. In fact, she added, if the legislature presented any plan that ate into the permanent fund itself, it would have to pass a constitutional amendment to so. TAPE 00-9, SIDE A CHAIR JAMES reminded the committee that all money taken out of the constitutional budget reserve must be repaid. Furthermore, the practice of drawing down on the budget reserve does not allow the reserve fund to earn interest for future use. She remarked that she believes that constitutional budget reserve fund monies should be added in either to the permanent fund or its earnings so that money is all in one place. Number 0237 REPRESENTATIVE OGAN referred to Representative Hudson's handout regarding the constitutional budget reserve fund. He had heard Representative Hudson say that since 1992 the budget has been funded almost entirely from the constitutional budget reserve, Representative Ogan said, but the handout showed that in 1996 the legislature drew upon the constitutional budget reserve fund in the amount of $173 million; in 1997 it was $83 million; in 1998 it was $325 million; and there is a projection for 1999 of $1,104 million. He suggested it is an overstatement that the legislature has funded a $2.2 million budget almost entirely from budget reserves. REPRESENTATIVE HUDSON clarified that he was talking about the fiscal gap and unrestricted funds. Number 0340 REPRESENTATIVE OGAN added that he had heard Representative Hudson say that the legislature always puts the earnings back into the corpus, but he himself recalls that the legislature has not deposited earnings back into the corpus in the last two years, nor has it done so this year. So there is almost $3 million that has not been deposited. REPRESENTATIVE HUDSON answered that in his many years in the legislature, the legislature has always deposited residual money, outside of dividends, back into the corpus of the permanent fund. However, Representative Ogan is right in that the legislature has not always deposited money into the corpus of the permanent fund. Number 0410 REPRESENTATIVE OGAN asked what is "broken" in regard to the existing formula for distributing dividends from the permanent fund. Number 0436 REPRESENTATIVE HUDSON answered that he does not think the permanent fund formula is broken but does believe that it can be managed in a more long-term, level-based methodology. He said HB 411 essentially advocates the same process that the permanent fund has now but HB 411 defines the process a little differently. He added that HB 411 still uses a five-year-average basis, but it is used on percent-of-market value as opposed to annual-earnings value. REPRESENTATIVE OGAN reiterated that HB 411 allegedly seeks stabilization, but the bill attempts to move the permanent fund to a market-based evaluation; therefore, HB 411 seems to make the permanent fund even more susceptible to the market. REPRESENTATIVE HUDSON replied that the permanent fund investment people had assured him that a market-based evaluation is a better process. Number 0557 CHAIR JAMES said when determining payout based on earnings of the fund, the possibility exists of making investment decisions based on maintaining a sufficient amount of money to cover a calculated income. The $3 billion constitutional budget reserve fund still includes some unrealized gains - the calculation of money to be spent. She emphasized that unrealized gains would eat into the earnings and investments would have to be sold to obtain cash to pay the dividends. REPRESENTATIVE OGAN interpreted the September 14, 1999 [permanent fund advisory] vote as sending a clear message that voters did not want the permanent fund dividend touched. He said it seems to him that people mistrust the motivations of anyone who tries to change the permanent fund structure. He said the legislature does not seem to be able to adjust its lifestyle to accommodate less revenue. He asked whether Representative Hudson thought the "no" [advisory] vote meant "take another shot at it." Number 0754 REPRESENTATIVE HUDSON acknowledged that he had heard the public's voice but had presented HB 411 because of the continued erosion of constitutional budget reserve earnings, which he believes will lead to the ultimate destruction of the permanent fund program. He emphasized that the legislature needs to curtail its appetite for spending or find other sources of revenue to eliminate erosion of budget reserves. He reminded the committee that Governor Knowles has recommended that the legislature take some unrealized gains (paper assets) of the permanent fund and deposit them into the constitutional budget reserve. Thus, interest earned from an increased constitutional budget reserve could be deposited into the general fund to help decrease the budget deficit. REPRESENTATIVE HUDSON explained that in drafting the questions for the September [advisory] vote, the drafters had thought that the public's fear of income taxes would be greater than their fear of putting a minor restriction on the permanent fund dividend. However, he recognized that the public disagreed and had voted resoundingly against the plan. REPRESENTATIVE HUDSON mentioned that he had met with former Governor Hammond a few weeks ago, who had said the legislature needs to pass a measure that guarantees 50 percent of the permanent fund earnings will be distributed as dividends and any surplus earnings after inflation proofing can be spent on state government. Representative Hudson indicated HB 411 follows that direction by depositing 80 percent of the earnings to permanent fund dividends after inflation proofing, with 20 percent deposited to pay for state government. Number 1200 REPRESENTATIVE OGAN said the only way he believes the public will have confidence in the legislature and accept some use of permanent fund earnings is to take the dividend program issue off the table. REPRESENTATIVE HUDSON acknowledged that HB 411 has a long way to go. He reminded the committee that HB 411 is not an individual effort, however, but is a result of cooperation between himself and Representatives Austerman, Phillips and Murkowski. The public needs to understand that there is a fiscal gap of $900 million, but he acknowledged that the public is sick of taxes because they are taxed heavily at the local level, at least in regard to property taxes. Number 1383 CHAIR JAMES said as soon as the legislature starts using permanent fund earnings in accordance with the calculation of 20 percent of a five-year average or one-half of the earnings reserve, whichever is smaller, at some point one-half of the earnings reserve will become the determining number on which the dividend payment is based. She reminded the committee that there is no guarantee over the next few years of what the inflation rate will be, which has to be considered in calculating permanent fund earnings. She emphasized that the current calculation of the dividend does not work to figure payouts in the future. CHAIR JAMES added that she, too, had heard the loud "no" of the people on September 14. Since then, she has conversed with thousands of people and found that the one main factor which led to the "no" vote was that there was no fence around how much money the legislature could spend; there was no limit and no plan. She emphasized that the legislature needs an overall plan that establishes by statute a healthy dividend that can be protected over the long term. She added that she is not sure if she will support HB 411 and recognizes that more work needs to be done on this issue. She reminded the committee that the legislature has three more years to come to grips with the budget deficit, and then time is up. [HB 411 was held over.]
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