Legislature(2001 - 2002)
03/19/2002 08:05 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 304-PERMANENT FUND INCOME CHAIR COGHILL announced that the first order of business was HOUSE BILL NO. 304, "An Act relating to disposition of income of the permanent fund; and providing for an effective date." Number 0125 REPRESENTATIVE JIM WHITAKER, Alaska State Legislature, told the committee that the proposed bill would require that $200 million of the earnings from the earnings reserve account (ERA) be transferred to the general fund. CHAIR COGHILL mentioned a new section giving a calculation. He asked Representative Whitaker to explain the calculation that "may be different than the $200 million." REPRESENTATIVE WHITAKER answered that the lesser amount will be transferred if the earnings, less inflation-proofing and less dividend distribution, are less than $200 million. CHAIR COGHILL indicated that there were two specific years mentioned in the bill: "one deals under the calculation, and one is a straightforward $200 million, if I understand correctly." REPRESENTATIVE WHITAKER said, "That's correct." He continued: After the initial year, assuming that the law remains in effect, an inflation index will begin from that year. And that year is 2003. Also, a population index calculation will ... ensue from that year. So this is an amount that is inflation indexed and population indexed. CHAIR COGHILL surmised that [the purpose of the proposed legislation] was to make a formula with parameters. REPRESENTATIVE WHITAKER said, "Correct." Number 0326 REPRESENTATIVE STEVENS quoted Representative Whitaker as having said more than once, "If we do nothing, the permanent fund dividend will be gone ... within a decade." He asked him to "carry us through that argument, so that people will understand that issue." REPRESENTATIVE WHITAKER responded, as follows: An imbalanced budget of, roughly, $1 billion per year, will utilize the earnings of the constitutional budget reserve (CBR) in less than three years. Thereafter, the general fund will have no balancing mechanism, other than the earnings reserve account. Given that the earnings reserve account is utilized to, essentially, hold harmless the permanent fund corpus, the draw down of general fund balancing and holding harmless for the permanent fund corpus will simply overwhelm the ability of the earnings reserve account. And therefore, it, too, will deplete. The best estimate that we can put forward, at this point, is that, before the end of this decade, both the constitutional budget reserve and the earnings reserve account will be gone. At that point, the dividend program will end, and the earnings from the corpus of the permanent fund will go directly to balance the general fund. That's the scenario. Some would say it's a "worst-case" and, therefore, should not be taken altogether seriously. I do no think that it's a "worst-case." The best information that I can gather, is that it is a "most probable case." That being the case, it is incumbent upon us to take action such as House Bill 304 to preclude that occurrence. REPRESENTATIVE STEVENS highlighted the importance of making the public aware that if [the legislature] does nothing, there could be a very serious reduction in permanent fund dividends. Number 545 REPRESENTATIVE FATE referred to Representative Whitaker's aforementioned testimony regarding the end of decade scenario, and asked whether the earnings of the corpus of the permanent fund might be in jeopardy, if, for example, the bottom falls out of the stock market, as it recently did. REPRESENTATIVE WHITAKER pointed out that [the U.S.] is in the third year of that particular scenario. However, it is improbable that the trend will continue. In fact, the stock market is beginning to rebound and have stability, if not upward mobility, he said. Number 681 REPRESENTATIVE JAMES asked if Representative Whitaker was talking solely about the income from the earnings reserve and not about the income of the corpus. REPRESENTATIVE WHITAKER said she was correct. REPRESENTATIVE JAMES asked what Representative Whitaker thought the long-term calculation for the dividend ought to be. REPRESENTATIVE WHITAKER, after further clarification of Representative James's question, said that his preference was to reformulate the dividend and have it reduced significantly. The "1999 vote" made the opportunity to do that "highly improbable." "This bill is intended to have the highest probability of passing the legislature in light of what happened in 1999," he said. He pointed out that [HB 304] does not touch the manner in which the permanent fund is formulated. REPRESENTATIVE JAMES said she agreed with that answer, "except for the last part." She noted that her evaluation of the 1999 vote is different than that of many others; people have told her that they have changed their minds about their vote in 1999. She asked Representative Whitaker whether people have related similar thoughts to him. REPRESENTATIVE WHITAKER answered "Yes," and added that others have asked him to not touch [the permanent fund]. He explained that he has come to the conclusion that [HB 304] is in the state's best interest. Number 0840 REPRESENTATIVE JAMES asked about "the amount that this calculates to here," and if it would be the lesser of $200 million. REPRESENTATIVE WHITAKER said, "Just one caveat to that: inflation and population indexing." REPRESENTATIVE JAMES asked, "Do you believe that we can tax ourselves enough and cut the budget enough to survive on $200 million out of the earnings reserve?" REPRESENTATIVE WHITAKER responded that he likes to give simple, straightforward answers, but Representative James's question requires more explanation. He explained: No, I do not believe that we can continue to either hold flat budgets, or cut the budget. I think it's going to be very, very difficult for the state to maintain an infrastructure that allows for economic growth into the future, if we do that. Therefore, while there must be some cost-control mechanism on government, as there should be on any economic endeavor - and if we look at government in the context of an economic endeavor, there is no conclusive argument that I have heard that leads me to the conclusion that there should not be a cost-control mechanism associated with government. Setting the cost-control portion of an overall plan ... aside then, and moving to, "Can we tax ourselves to a balanced budget?" No, we cannot. The State of Alaska is not designed, from its inception, to have been taxed at a high enough level that government would be paid for through taxation. And it would be foolish of us to think that our population of 600,000 can pay enough taxes to pay for the required services associated with government. Number 1052 So, no, I don't think we can tax ourselves to a balanced budget. You could requisite that some utilization of permanent fund earnings be used, in order to achieve that balance, yes. Do I think this is a first step? Unfortunately, I do. And I do, in particular, if we do not, as a state, accept our responsibility for the fourth component of a successfully balanced fiscal regime. That fourth component is economic growth. If we do not build our economy so as to sustain a reasonable tax base, we cannot exceed to the levels that I know we can attain. Instead, we will continue in a somewhat downward spiral, we will continue to flounder, and we will have great difficulty. Do I think that this, then, is the ultimate answer to the fiscal problems of the state - or a part of - as it currently sits? No, I do not. I think that future legislatures will have to revisit this issue. But, I think, given political reality, that this is a requisite first step. I think we've put ourselves at significant risk of taking any step, if we change the formulation of the permanent fund dividend. Number 1149 REPRESENTATIVE JAMES noted her agreement with Representative Whitaker's answer. She said that her evaluation of "why we are where we are today" is explained by the same problem that Representative Whitaker is relating to: the inability, or unwillingness of the legislature to do anything about this, before now, because the permanent fund dividend earnings seemed to be "out of the question." She suggested that something be put into statute that would change the formulation of the dividend, perhaps in a graduated manner, "so that we're not ripping it out from everybody's hands just that one time." She commented that those people opposed to touching the dividend also don't want earnings of the permanent fund touched. Number 1250 REPRESENTATIVE JAMES said she understands that this is a politically difficult issue, but she won't [give up thinking that] intelligence will win out. She indicated that she understands that part of the dilemma of not creating economic development is a result "of this particular activity, over the years." However, more money cannot be put into economic development if there is not money. Furthermore, the budget must be cut because "we have none." "But we have none, because we won't go here. Isn't that true," she asked. REPRESENTATIVE WHITAKER replied, "That is the conundrum we are faced with, Representative James, yes." REPRESENTATIVE WILSON said that this subject is frustrating for the reasons just pointed out by Representative James. [The committee members] have a responsibility to the state and to their constituents to do the right thing, after studying the issue, she said. However, sometimes that means making decisions that constituents don't understand. She described this as a "difficult situation." Number 1395 REPRESENTATIVE FATE indicated that there has been information stating that the permanent fund earnings reserve account can sustain up to $250 million, some say $300 million, a year without depleting the fund or stopping growth of that account. He asked Representative Whitaker whether $200 [million] would be a proper amount "under the formulation," or could that be amended up to $250 [million] in future years. REPRESENTATIVE WHITAKER replied that he would like to see the amount amended upwardly, this year, in order to fund university growth and pay for K-12 education; real needs necessary in order for the [state's] economy to grow. He said, "I can't tell you if it's either probable, or improbable, what the outcome might be. That fight is yet to be had." He acknowledged that Representative Fate was correct in his assertion that there is probably room for growth, in regard to the use of the earnings reserve account. Number 1518 REPRESENTATIVE CRAWFORD noted that he agreed that [the legislature] must do something. He said he believed that the earnings in the permanent fund is the people's money, and, as former governor Jay Hammond has indicated, [the legislature] should put the money into the hands of the people and let the government try to obtain what it can from the people, thereby preventing runaway growth of government. REPRESENTATIVE CRAWFORD continued by stating that he likes Representative Hudson's idea to "tax the dividend" because it's the most honest and straightforward way to access the earnings of the permanent fund. Furthermore, according to Representative Hudson's figures, that would save [the state] approximately $30 million in federal taxes. "It's not a hidden tax. I believe this would be hidden from view; people wouldn't ... ever feel like it was their money, if it were taken on the topside here," he said. REPRESENTATIVE CRAWFORD noted that he is a member of the fiscal policy caucus, which has been charged with filling the gap and doing so fairly. He explained that he doesn't intend to hold up HB 304 because he wants "all these things" to get onto "the floor," for debate. However, "I don't agree with your approach here," he said. Number 1651 REPRESENTATIVE JAMES said she considers herself to be one of the biggest proponents of economic development, and she emphasized that she looks for opportunity for it everywhere. However, she stated that she sees no hope for any new growth in economic development in Alaska until [the legislature] has balanced its "fiscal issue." Furthermore, the general public doesn't want to pay taxes. Representative James said, "No one's going to come in here and invest and create a business if they're the ones that are going to get stuck with paying the bill." She stressed the importance of moving this issue forward quickly, to fill the budget gap. She characterized this year's efforts [of the legislature] as only just the beginning. REPRESENTATIVE JAMES said she came to the legislature nearly ten years ago worrying about why "we" don't fix the things that "we" build. Although there has been some headway made regarding the issue, there is much left to do. She expressed concern that there has been a pause in progress and [the situation] continues to disintegrate. She listed school buildings, roads, access, and infrastructure as items needing [the state's] attention. Number 1788 REPRESENTATIVE JAMES said she could not tally, in her mind, the amount of money [the legislature] would need to encourage new economic development in the state nor could she sum the new money [necessary to] invest into businesses. She related her understanding that Representative Whitaker's [proposal] is to take a small bite out of something that has been, previous to now, untouchable." Representative James stated her uncertainty that this [bill] would "even go by the ... the third floor because of the promise to let [the] people vote on anything that touches any of this money, which, I was opposed to it last time. It didn't work. And I don't think it'll ever work again." She opined that if [the legislature] fails in this issue, it will be because it has not sufficiently explained to the public that [the legislature] is working [to address] the severity of the issue. REPRESENTATIVE JAMES said her choice would be to redesign the structure of the dividend. However, she said she believes the dividend is necessary, if for no other reason than to protect the fund itself. During the years when there was a permanent fund, but no dividend, people wanted to spend it on a variety causes, she pointed out. Number 1865 REPRESENTATIVE JAMES remarked that although she cannot support this provision, she is willing to move [HB 304] forward to have more discussion [in the House Finance Standing Committee]. She summarized the [reason] this issue exists, as follows: "Just because no one has been willing to spend any money of the earnings of the permanent fund." REPRESENTATIVE JAMES continued: By trying to design this to not go here, we have completely shut down economic activity in our state over the last few years. I don't necessarily believe that's our fault ..., because we are here to recognize people, and what they tell us to do is what we do. Just like with kids do. And that's what we've done. But I think we haven't worked hard enough on the explanation of the reality of the issue. And there will be a price to pay, sometime, for that. And every single one of us will pay it. Number 1934 REPRESENTATIVE FATE announced that he, also, was willing to move on this legislation. He clarified his belief that there is no one who has studied this [issue] who doesn't want good economic development in the state. He noted that he was formerly a businessman and a miner. He posited that it must be recognized that economic development in [Alaska] takes time, [and it takes time] before "we reap the proceeds." That time is not available, which is one of the reasons that [the legislature] has studied using the earnings reserve account (ERA). He noted that studies had been made, within the House State Affairs Standing Committee, in regard to a broad-based tax of one type or another. He also mentioned there has been consideration of a ceiling on spending. He concluded by expressing his thankfulness that this bill has been brought forward. He related his hope that the legislature can muster enough force so that it does go to the third floor because this kind of thinking and action is necessary. REPRESENTATIVE FATE expressed his eagerness to move the bill from committee. REPRESENTATIVE WILSON asked if a vehicle was needed to put HB 20 in place, to access the ERA, or would that bill be a vehicle in itself. REPRESENTATIVE WHITAKER answered that HB 20 is separate from [HB 304]. At this point, whether or not the two are linked is a discussion that will take place, but there is no link at this time, he said. He pointed out that the funds from which both [the proposed bills] would draw are finite; therefore, [the legislature] needs to proceed with caution. He indicated that [HB 340 is designed to] close the gap, whereas HB 20 would not; therefore, any general fund offset to the imbalance associated with [HB 304] is diminished by however much is spent under HB 20. That's the crux of that debate, he stated. REPRESENTATIVE WILSON asked if HB 20 would also use the ERA. REPRESENTATIVE WHITAKER explained that [HB 20] isn't specifically [linked] to the ERA but rather to the earnings of the permanent fund. However, the earnings of the permanent fund go in the ERA, so, in effect, it would be coming from the same fund source. Number 2139 REPRESENTATIVE JAMES mentioned, per her staff's research, that the estimated amount of the permanent fund inflation-proofing for this year will be $602 million. She stated that "even taking a holiday on inflation-proofing the fund might be a real good idea." She pointed out that the 18- to 44-year-olds have left [the state], because opportunities were not here. However, those are the people needed to build the economy in the future. Subsequently, if economic activity is stimulated, it will be necessary to bring people back in. Therefore, she said she believes there should be a simple, fair, and equitable income tax in order to ensure that there is the money from new growth to fund our police, fire, roads, schools, et cetera. Furthermore, the number of people in the state over 65 is growing, and there is a severe need for assisted living and other forms of care for the elderly and disabled people. REPRESENTATIVE JAMES concluded: "If we don't do something quick ... we're going to be in worse trouble ... and it's going to be harder for us to pull out of the hole." She stated her belief that the permanent fund was originally established for the purpose of helping [the state] when it is in stress, which is the current situation. Therefore, she suggested determining how to [get] the maximum benefit [from the fund]. Number 2259 REPRESENTATIVE HAYES moved to report HB 304 out of committee with individual recommendations and the accompanying zero fiscal note. There being no objection, HB 304 moved out of House State Affairs Standing Committee.
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