Legislature(1999 - 2000)
04/06/2000 08:09 AM House STA
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HJR 49-CONST AM: PERM FUND INCOME DISTRIBUTION Number 2419 CHAIR JAMES announced the next order business is HOUSE JOINT RESOLUTION NO. 49, Proposing an amendment to the Constitution of the State of Alaska to guarantee the permanent fund dividend, to provide for inflation proofing, and to require a vote of the people before changing the statutory formula for distribution that existed on January 1, 2000. REPRESENTATIVE OGAN presented the sponsor statement for HJR 49. He had a sponsor substitute [1-LS1340\H, Cook, 4/3/00] that he would like to put on the table for discussion, but right now he would discuss HJR 49 itself. He explained that HJR 49 was introduced after the September 14, 1999, advisory vote regarding spending the permanent fund (PF) earnings and the plan that a bipartisan group of legislators had put forth last year, which he said was endorsed by Republicans, Democrats and the governor. He commented that in all his 25 years of living in the state, he does not recall any vote that was as overwhelmingly negative as the September 14 vote. He acknowledged that there has been a great deal of discussion about what "no" means since then, and a number of plans have been brought forward. REPRESENTATIVE OGAN remarked that he had come to the conclusion that the earnings of the PF were intended at some point to be a rainy-day account for the state. However, it is a policy call whether or not the rainy day has arrived or clouds are just gathering in the sky. He recognized that regardless of how the committee feels about that particular issue, he believes that the public will have neither confidence in the legislature nor trust that the permanent fund dividend (PFD) program is safe until the legislature constitutionally protects the PFD. Therefore, he stated that HJR 49 enshrines the existing formula for distributing and inflation proofing the PF into the Alaska State Constitution. REPRESENTATIVE OGAN said that the opponents of HJR 49 - and the concept of HJR 49 - believe that there is a stake driven into the heart of this issue by saying that implementation of HJR 49 will result in federal taxation of the PF itself. He suggested that if the PF is not taxable now, it would not be taxable then, so he had come up with a possible solution [to the federal PF taxation threat]. He said that is why he would like to possibly move a proposed CS to HJR 49 at this time and put that before the committee. He explained that his proposed sponsor substitute does exactly the same thing as the original HJR 49 except that Section 3 adds the "Effective Date of Permanent Fund Amendment." Number 2561 CHAIR JAMES suggested that the sponsor substitute could be offered instead as an amendment. REPRESENTATIVE OGAN replied that he would like to offer it as an amendment to HJR 49. CHAIR JAMES said the committee could do that, but first she would like to discuss the issue. She noted that she will take testimony on the original HJR 49. She explained that she thinks it is worthwhile to talk about all the different long-term plan changes, but believes the legislature ought not to pass anything this year. She commented that on the surface, she would agree with Representative Ogan's concern that the public at this point is demanding - or would demand if it were asked to vote again - some protection for the dividend over the long term before the legislature spends one cent out of the PF. However, she also believes that the legislature has a huge education process that needs to be done, and the legislature is saved by the bell in the form of high-priced oil this year which is going to extend the value of the constitutional budget reserve (CBR) for a few years. Therefore, she indicated that the legislature has time to discuss the PF issue with the public, and she has been doing that in her district. CHAIR JAMES informed the committee that the day after the September 14 vote she had done a little survey to find out what the "no" vote meant and published it in the Fairbanks paper. She emphasized that the results of the survey were very, very enlightening, and she had found that the top reason why people voted "no" was because they do not trust the legislature. She agrees with the people and does not trust the legislature either. Yet she does believe that every legislator is sincere and honest in their ability and desire to do the right thing, but when 40 different districts are being represented, 40 different ideas will be presented. She recognized that to get anything done, the legislators representing the 40 different districts have to come to an agreement. Number 2660 CHAIR JAMES said whatever [fiscal] plan she supports must include a healthy, long-term PFD for the public because she thinks a PFD is needed to protect the fund itself. She never has any intention of spending one cent of the fund. However, she is hearing people talk out of both sides of their mouths since they say they want more spending done on one hand, and on the other hand, they do not want the legislature to spend PF earnings. She has said consistently that to balance the budget over the long term (and she does not know what long term means, it may be five or six years from now) and provide services that the public demands without continuing to make efficiencies in government, there will have to be some combination of taxes and use of earnings (not any particular amount) of the PF. She said that the legislature should not foolishly jump to a quick conclusion this year in reaction to such a convoluted vote because the question was too vague and advertising on both sides was so misleading in many ways. Number 2808 CHAIR JAMES commented that she understood the purpose behind HJR 49 and certainly agrees that the amendment under discussion does something to close the door on the opportunity for the Internal Revenue Service (IRS) to determine that the PF is not currently being used for a public purpose. She noted that HJR 49 does allow some room in the Alaska State Constitution for a public purpose, nevertheless, it is still very vague. She is not sure it would work, but it is moving in the right direction. Number 2845 REPRESENTATIVE HUDSON asked if he could speak about Representative Ogan's amendment or if it could be brought before the committee for discussion purposes. REPRESENTATIVE OGAN offered Amendment 1, which would change Section 3 and add Section 4 of what he has written as a sponsor substitute to HJR 49. The change read as follows: Sec. 3. Article XV, Constitution of the State of Alaska, is amended by adding a new section to read: Section 30. Effective Date of Permanent Fund Amendment. The 2000 amendment to the Alaska permanent fund (art. IX, sec. 15) takes effect on the day after the date of a final decision by the Internal Revenue Service deciding that, under the language of the 2000 amendment, the income of the permanent fund will not be subject to federal taxation while it is under the control of the State or an entity of the State. In this section, "final decision" means a ruling, order, or decision that cannot be appealed to the agency, all possible appeals to the agency have been taken, or the time for taking an appeal to the agency has expired without appeal. Number 2897 REPRESENTATIVE HUDSON objected. He said he reads the amended version in such a way that everything that exists in statute today would be embodied constitutionally when adopted by the public. He noted that essentially the formula that predicates the PFD is the earnings of the PF or half of the earnings reserve account (ERA) minus unrealized gains in the PF (whichever is less). He explained that the problem some of the legislators had with the existing language is now embodied in the constitution, and the concern he has is that if the legislature embodies HJR 49 in the constitution, the legislature is asking the people to vote on elimination of the PFD. He commented that this is so because income in the ERA is accessible by 21 votes even now and would continue to be available, but the dividend would be gone by the year 2007 at the earliest and by 2010 at the latest. REPRESENTATIVE HUDSON mentioned that he has tried to recognize all along that the current PFD formula deals with inflation proofing and distribution of income for the dividend but does not discuss the balance of the PF. Nevertheless, he indicated that the balance of the PF is left available. He informed the committee that by passing HJR 49 the legislature would be constitutionally leaving those monies available, and he thinks that it would almost guarantee elimination of the PFD all with the understanding that maybe the legislature was fixing the PF by putting it in the Alaska State Constitution. He emphasized that unless the PF formula is changed and something is done similar to what he was talking about in HB 411, he thinks the PFD will be eliminated by the HJR 49 constitutional fix. TAPE 00-29, SIDE B Number 2984 CHAIR JAMES said she thinks [Representative Hudson's reasoning] is an assumption. She acknowledged that if no taxes were imposed and no budget cuts were made, then Representative Hudson is speaking truly but she still thinks the legislature needs to look for efficiencies in government. She noted that there are many things on which the legislature is not spending money but should be; during the interim this year she is going to work on producing a zero-based budget to find out just exactly what she thinks a reasonable amount for state spending should be. She explained that the legislature could be spending PF earnings as they come in if the legislature had the appropriation to do that. Consequently, she commented that half of the earnings of the PF would be less than the dividend calculation so it could certainly affect the dividend, but it takes many assumptions to come to that conclusion. She mentioned that one of the problems with this whole [budget] situation is assumptions; yet the legislature has to base its decisions on something. She inquired as to Representative Ogan's response to the [assumptions] issue. Number 2900 REPRESENTATIVE OGAN indicated that he would support using some of the PF earnings if some PF earnings were re-deposited into the PF, which the legislature has not done in the last few years, and constitutionally protect the PFD. He reiterated that he would support some use of PF earnings if the PFD program was off the table. He said that anybody that thinks that the legislature is going to be able to use those PF earnings without constitutionally protecting them is fooling themselves because he does not think that the public will allow it. He noted that HJR 49 is the key to opening discussion of what the legislature is going to use for money after the PFD program is protected. Number 2821 CHAIR JAMES noted that the PF is currently managed so that all earnings (including unrealized gains) of the fund go into the ERA and the dividend is calculated on a five-year average (thus lowering the average) of the income. The reason is so that current income, which is probably a lot higher than it was five years ago, would not be the determining dividend calculation factor. She said she believes that [investments] are going to go down because she is just waiting for somebody to tell her that the bubble has burst. She stated that she sees a whole different investment concern on the stock market - where it is not necessarily tied to income and/or dividends - as the reason why people are willing to pay more for shares. She noted that when [the stock market] starts going [up], the high income brings the average of the income this year up, yet the PF is being paid out of the current income stream, which could be a problem. CHAIR JAMES explained that calculating the PFD on an average in conjunction with the overall system as an endowment percentage that is good over time certainly does a couple of things. She commented that first, it would make the dividend more stable because she thinks people do count on the dividend. She mentioned that people know how much the dividend was last year, and they think it will be at least that much and maybe a little bit more next year. CHAIR JAMES indicated that second, it gives the PF board more flexibility in its investment policy because it knows how much money is going to be drained off. She informed the committee that one of the things that the legislature has done consistently and will probably do again this year is put some more money back into the PF from the ERA. She emphasized that one of the advantages of putting money back into the PF, which is protected from ever being spent, is it gives PF managers more opportunities to make money with longer investments and different kinds of investments. She recognized that putting money back into the PF is one of the reasons why the PF has been so successful. She acknowledged that she is not convinced at this time that the current PF system is what the state ought to have over the long term, but she thinks the legislature needs to spend much time thinking about it. She remarked that she is convinced, however, that the state does need to have a healthy dividend over the long term, but she does not know what the long term is; that is yet to be discussed in the whole concept of everything. She reiterated that she thinks that it would be a huge mistake to put everything into law today. CHAIR JAMES reminded the committee that she does have a bill in the [House] Finance Committee that would first inflation-proof [the PF]. She'd presented her bill because the PF should be inflation proofed first before anything is calculated. She recognized that some people argue that the PF has already been inflation proofed, but she contends that it is not because the way the PF is designed, inflation is not taken into account at all unless the legislature puts inflation proofing in the PF. She said she would have no problem making a constitutional amendment, but the PF must be inflation proofed before the legislature does any spending whatsoever because she thinks that the value of the money there needs to be protected over the long term. Number 2714 CHAIR JAMES noted that there needs to be a "fence" around state spending. She inquired as to how much the budget can be increased each year without obtaining a "supermajority" vote to cover emergencies and/or special projects. She acknowledged that with 21 votes only so much can be done; the issue under discussion today is not simple. She reminded the committee that the legislature had tried to solve the issue in a simple way last year, and that did not work, but the legislature did get some ideas out there. She explained that now the people are tuned in, and the legislature needs to concentrate seriously on coming up with a plan that will work over the long term. REPRESENTATIVE OGAN said he agreed with much of what Chair James had stated, especially regarding putting a fence around state spending, since that is another piece of the puzzle not yet under consideration. He noted that he'd heard Chair James say a number of times that she'd moved things she did not support, but she needed to get the bill to the Finance Committee so that it could have tools to build a solution; without at least HJR 49 being moved on to Finance, this committee would not be giving Finance a full tool box. Number 2561 CHAIR JAMES reminded the committee that she had a tax bill in this committee and had not moved that either because she had no intention of her bill passing this year. She added that she had moved HB 137, the Municipal Dividends bill, because there is an interest in it, and a number of folks thought it might be something they wanted to do. She observed that she moved HB 411 not because she liked it but because she had promised some people that she would move it. She stated that she does not think that HJR 49 has any chance, but she could put it to Finance, but she does not want to unless she gets permission from Finance Committee due to the pressure it might get with HJR 49 in the committee. Number 2490 MARY GRISWOLD testified via teleconference from Homer in opposition to HJR 49. She read her testimony as follows: I am opposed to HJR 49. HJR 49 is a poor idea from a policy perspective because it takes away the legislature's authority to appropriate funds. HJR 49 is a poor idea from a financial perspective for all the reasons that changing to a percentage of market value distribution is a better idea. Although there are no performance guarantees with the market value approach, it does remove the dependence on volatile realized earnings and offers a more stable dividend distribution based on the real return of the Permanent Fund investments. By guaranteeing the dividend in the Constitution, this bill may also trigger a federal income tax assessment on the Permanent Fund's earnings. However, the most important consideration of HJR 49 is a philosophical one: whether decreasing our Permanent Fund dividend should be an option to help bridge our growing fiscal gap. I support a healthy dividend distribution. I think a long range fiscal plan including better control of government spending and a combination of reasonable taxes should be developed before the dividend program or the fund's undistributed income is tapped. However, adjusting the dividend should remain a legislative option for balancing personal benefit and the common good for all Alaskans as other general fund revenue sources are depleted. Shortchanging funding for essential public services or raising exorbitant taxes in order to sustain a large personal dividend does not serve our best interests or the purposes for which the Permanent Fund was established. Many people who support HJR 49 believe it will preserve the value of their dividend. There are no guarantees for a continued high dividend, no matter what formula is applied. Other people want the government to keep its hands off the dividend program no matter how much essential public services must be cut. I hope that with continued discussion the public will come to understand the real fiscal picture and agree to a well- reasoned long-term financial plan that controls spending, taps additional sources of revenue including a combination of taxes, and then uses Permanent Fund earnings to balance personal and common good for the benefit of all Alaskans. I think you have your work cut out for you to develop this plan and sincerely hope you are willing to tackle it soon. Number 2352 MARY RAYMOND testified via teleconference from Homer in opposition to HJR 49. She said she thinks it would be folly to tie into such an agreement, and she does not think that the people of Alaska really put their PFDs ahead of services, ahead of the importance of the whole, and goodness to the state because Alaskans are reasonable. She noted that in referring to the vote of September 14, one of the committee said it best "they are going to say no because they do not trust us", and people did not understand what this was all about. She commented that a plan was referred to, but there was no plan offered to the people; they had no idea of what that meant just to say "yes, do whatever." She mentioned that if the committee wanted to listen to its constituents and believes that citizens do want to further and better the life of everyone in Alaska, she thinks the committee will do alright. Number 2260 CHAIR JAMES asked if there was any further objection to Amendment 1. There being no objection, Amendment 1 was adopted. REPRESENTATIVE OGAN made a motion to move HJR 49 [as amended] out of committee. REPRESENTATIVE HUDSON objected. A roll call vote was taken. Representatives Green, Ogan, Whitaker, and James voted in favor of moving the bill. Representatives Hudson, Kerttula, and Smalley voted against it. Therefore, CSHJR 49(STA) moved from the House State Affairs Standing Committee by a vote of 4-3.
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