Legislature(2001 - 2002)

02/23/2002 10:05 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 35-DISTRIBUTION OF PERMANENT FUND INCOME                                                                                   
[Contains discussion of SSHB 199]                                                                                               
Number 0185                                                                                                                     
REPRESENTATIVE BILL HUDSON, Alaska  State Legislature, sponsor of                                                               
HB 35,  thanked the committee  for the opportunity to  present "a                                                               
series of  options."  He  noted that  he was bringing  before the                                                               
committee the  second half  of what  he'd presented  the previous                                                               
week in  the form of  SSHB 199.   He reminded the  committee that                                                               
his efforts  have been to try  to bridge, or fill,  the impending                                                               
fiscal gap of $850 [million] to $1.1 billion.                                                                                   
Number 0331                                                                                                                     
REPRESENTATIVE  WILSON  moved  to adopt  the  proposed  committee                                                               
substitute  (CS), version  22-LS0289\L, Cook,  2/6/02, as  a work                                                               
draft.  There being no objection, Version L was adopted.                                                                        
Number 0429                                                                                                                     
REPRESENTATIVE  HUDSON explained  that  [Version L]  incorporates                                                               
the permanent  fund board of  trustees' recommendation  to change                                                               
the method used to calculate  the annual dividend distribution to                                                               
the method used by most large, managed funds.  He continued:                                                                    
     By  distributing a  percentage of  the market  value of                                                                    
     the funds averaged  over five years - as  opposed to an                                                                    
     average  of the  earnings  of the  permanent fund  over                                                                    
     five  years -  we believe  ... we  can balance  out and                                                                    
     smooth  out  the  distribution, ...  with  an  expected                                                                    
     average  rate   of  return  on  the   permanent  fund's                                                                    
     investment  of 8.25  percent.   And we  heard from  the                                                                    
     permanent fund  board of trustees and  the experts that                                                                    
     were hired by  the board that 8.25  was the anticipated                                                                    
     annual earnings.                                                                                                           
     Paying  out  5  percent ensures  an  annual  inflation-                                                                    
     proofing factor  of around  3 percent.   So,  the first                                                                    
     thing the  bill tries  to do  is to  adopt a  method or                                                                    
     measure   in   distributing   income  from   this   ...                                                                    
     multibillion-dollar ... permanent fund.                                                                                    
Number 0558                                                                                                                     
     The board of trustees  recommended the 5-percent payout                                                                    
     limit.   HB 35 statutorily fixes  a distribution stream                                                                    
     for that  5-percent payout.   And then it  goes further                                                                    
     in order  to try  to both  maintain the  permanent fund                                                                    
     dividend  over  long  periods  of  time,  and  also  to                                                                    
     provide  for  some  makeup  of   the  deficit  that  is                                                                    
     currently  between  our   recurring  spending  and  our                                                                    
     annual revenues.  We have  a 50-percent contribution to                                                                    
     the general fund.                                                                                                          
     So, we take and  automatically inflation-proof the fund                                                                    
     by limiting  the payout, and  then we split  the payout                                                                    
     50-50:   50 percent into  the dividends and  50 percent                                                                    
     into   the   general  fund.      This   will  pay   for                                                                    
     approximately  one-half   of  the  $1   billion  budget                                                                    
     deficit each year, while  allowing for the continuation                                                                    
     of the permanent fund dividend.                                                                                            
Number 0648                                                                                                                     
     The   permanent  fund   dividends   would  be   reduced                                                                    
     initially,  but   would  continue  to  grow   with  the                                                                    
     infusion of  inflation-proofing dollars.   This  is not                                                                    
     capping   the   dividend.     This   is,   essentially,                                                                    
     statutorily constraining the amount  of money that goes                                                                    
     into the  dividend - 50  percent of the earnings  - and                                                                    
     how much can go in to  make up the deficit loss that we                                                                    
     have on an annual basis.                                                                                                   
     We  believe that  HB 35  will give  the permanent  fund                                                                    
     strength, security, and stability  far into the future.                                                                    
     It  will  ensure the  commitment  to  pay dividends  to                                                                    
     Alaska, while  also [ensuring that  the] infrastructure                                                                    
     of the state will not fall into further neglect.                                                                           
Number 0735                                                                                                                     
     And I  point out that some  of you have served  on that                                                                    
     special committee that went around  the state of Alaska                                                                    
     to find out  what the condition of our  schools and all                                                                    
     other governmental  assets were.   And  an excess  of a                                                                    
     billion  dollars  was  determined  to  be  in  deferred                                                                    
     maintenance.      And   so,  this   would   allow   the                                                                    
     continuation to that.                                                                                                      
REPRESENTATIVE  HUDSON  remarked  that  Representative  Fate  had                                                               
spoken  eloquently  regarding the  need  to  "grow the  State  of                                                               
Alaska"    to   provide    new   opportunities,    for   example.                                                               
Representative  Hudson offered  his belief  that maintaining  the                                                               
Constitutional  Budget   Reserve  (CBR)  and   substituting  "the                                                               
essence of HB  35" would provide [the state] with  a "pretty good                                                               
guarantee" of over $1 billion for  at least the next seven to ten                                                               
years.    [That money]  would  be  available for  the  following:                                                               
catastrophic   emergencies;  growth,   development,  and   taking                                                               
advantage of new opportunities;  deferred maintenance; and giving                                                               
the next  governor the  opportunity and time  to attempt  to find                                                               
new income.                                                                                                                     
REPRESENTATIVE HUDSON summarized the  combination he'd put before                                                               
the committee as follows:                                                                                                       
     $285  million  from  the ...  minimal  income  ...  tax                                                                    
     stream -  which is 2.25  percent of the  adjusted gross                                                                    
     earnings,   [a]  flat   tax   [that]  hits   everybody,                                                                    
     essentially, the same way -  coupled with HB 35, taking                                                                    
     50 percent  of a  5-percent payout and  distributing it                                                                    
     to dividends, and 50 percent to the state.                                                                                 
Number 0916                                                                                                                     
REPRESENTATIVE  HUDSON   referred  to  charts  provided   by  the                                                               
Department of Revenue.  He  said although the "split" proposed is                                                               
50-50, anyone in  the House or Senate could  [change that ratio];                                                               
it would  depend on  the goal.   He explained  that his  goal has                                                               
been to attempt to fill a major portion of the fiscal gap.                                                                      
Number 1022                                                                                                                     
REPRESENTATIVE  HUDSON   referenced  a  past  remark   of  former                                                               
Governor Hammond  that if  income is  going to  be used  from the                                                               
permanent fund, it shouldn't be the  first source.  He noted that                                                               
the first  thing he'd  presented to the  committee was  an income                                                               
tax, which  he believes fits  with Governor Hammond's ideas.   He                                                               
also  noted that  Governor  Hammond  had said  if  income of  the                                                               
permanent fund  is to be  used, it ought  to be specified  in law                                                               
"so that any future legislators would  not be able to just willy-                                                               
nilly  modify that  thing  and cause  disrepair  to the  dividend                                                               
program."  He mentioned Governor  Hammond's strong commitment and                                                               
concern  regarding the  growth and  sustaining  of the  permanent                                                               
fund dividend (PFD).                                                                                                            
REPRESENTATIVE  HUDSON  mentioned  that the  "50-50"  [split]  is                                                               
"because  of today's  conditions."   He indicated  losses in  the                                                               
permanent fund  and the [subsequent]  reduction in the  amount of                                                               
money the permanent fund has  available for distribution, between                                                               
$1.2 billion to $1.4 billion "at  the 5-percent payout."  He said                                                               
that has been  testified about by the  permanent fund [trustees].                                                               
He remarked,  "So, we've essentially developed  the proposal that                                                               
the permanent  fund trustees desire  to do  constitutionally, and                                                               
that may go  forward - there's a  separate bill to do  that."  He                                                               
opined that  "this bill  absolutely fits ...  hand in  glove into                                                               
that concept."  He continued:                                                                                                   
     We  have not  modified  anything or  put anything  into                                                                    
     this  bill that  will  alter or  negatively affect  the                                                                    
     board of  trustees' efforts to try  to constitutionally                                                                    
     fix the inflation-proofing.  That's  their goal, ... to                                                                    
     guarantee  that  the  permanent fund  continue  on  and                                                                    
     continue  to  grow.  ... They  say  nothing  about  the                                                                    
     distribution,  because that's  not their  ... business.                                                                    
     That's our business; that's what we do.                                                                                    
Number 1145                                                                                                                     
CHAIR  COGHILL recalled  that the  constitutional amendment  came                                                               
through the  House State Affairs Standing  Committee the previous                                                               
year  and is  in  the  House Judiciary  Standing  Committee.   He                                                               
indicated  part  of  the  policy   call  was  in  regard  to  the                                                               
constitutionality of the issue.                                                                                                 
Number 1227                                                                                                                     
REPRESENTATIVE HUDSON  said he'd supported that  measure's coming                                                               
forward for public  hearings, and he emphasized the  need to have                                                               
it  be  a  major  policy  consideration.   Whether  or  not  that                                                               
happens, he said,  [HB 35] can stand on its  own; it provides the                                                               
permanent  fund  trustees   what  they  want,  but   not  in  the                                                               
constitution.     He   explained   that  it   defers  to   future                                                               
legislatures   the   option   of  modification   regarding   [the                                                               
percentage].  He  reiterated that "all we're  talking about here"                                                               
[in regard  to HB 35] is  the 5-percent payout split  between the                                                               
dividend and the government.                                                                                                    
REPRESENTATIVE   HUDSON   acknowledged  that   this   legislation                                                               
wouldn't fill the entire $1 billion  gap.  Even if the income tax                                                               
and  the  distribution of  50  percent  of  the earnings  of  the                                                               
[permanent fund] are adopted, it's  still only about $825 million                                                               
of  a   billion-dollar  gap.     He  posited  that   the  current                                                               
legislature and those  to follow would be required  to cut almost                                                               
all of the  inflation out of government for the  next five to ten                                                               
years,  or until  a major  income stream  is discovered,  such as                                                               
[through opening to  oil and gas exploration  the Arctic National                                                               
Wildlife Refuge (ANWR)].                                                                                                        
Number 1393                                                                                                                     
CHAIR COGHILL  referred to  a comparison  in members'  packets of                                                               
the  three  [proposed  plans   entitled  "CBRF  Balances  FY2002-                                                               
FY2010,"   with  Representative   Hudson's  plan   "A"  and   the                                                               
Department  of   Revenue's  plans  "B"   and  "C"].     He  asked                                                               
Representative   Hudson  to   review  the   comparison  for   the                                                               
REPRESENTATIVE HUDSON  requested that his staff  and Mr. Persily,                                                               
who had prepared  the graphs, join him at the  witness table.  He                                                               
referred  to the  "A" plan,  the  first page  of graphs,  labeled                                                               
"POMV 5%  (50% to  dividend program /  50% to  state government):                                                               
approximately  $630 million  starting FY  2003."   He noted  that                                                               
he'd asked  Mr. Persily  to provide two  other plans  whereby the                                                               
[legislature]  chooses to  make  a  split of  60  percent to  the                                                               
dividend  and 40  percent to  government,  or 70  percent to  the                                                               
dividend  and 30  percent  to  government -  plans  "B" and  "C,"                                                               
respectively.   He said, "The  arcing line is  the Constitutional                                                               
Budget Reserve."                                                                                                                
REPRESENTATIVE HUDSON  reminded members that he  is attempting to                                                               
eliminate  [the current  legislative practice]  of balancing  the                                                               
budget through  use of the  CBR, and [to prevent]  elimination of                                                               
the CBR.   He noted  that former Governor Hammond's  sentiment is                                                               
that if the  legislature continues to balance  the budget through                                                               
use  of the  CBR and  it is  consumed by  2004, the  only funding                                                               
source will be  the earnings reserve of the  permanent fund; when                                                               
that occurs,  the PFD  will suddenly  be at  risk, and  will very                                                               
likely be the  next thing to be consumed.   Representative Hudson                                                               
explained that there are probably  not enough people in Alaska to                                                               
pay enough taxes to fill this gap.                                                                                              
Number 1644                                                                                                                     
REPRESENTATIVE HUDSON noted that the  "A" plan shows the CBR fund                                                               
at just  under $2.5  billion, dropping  by the  year 2007.   Also                                                               
shown as  an element in  the graph is a  $25-per-passenger cruise                                                               
ship fee,  which wasn't part  of his own bill  but was put  in by                                                               
the  governor.   He indicated  the [proposed]  10-cents-per-drink                                                               
alcohol tax would  bring in $30 million and  would be implemented                                                               
for three quarters  of fiscal year 2003, if  adopted.  Mentioning                                                               
the effects of HB 35, he  pointed to the bottom-line amount of $1                                                               
billion and  told the committee  that was  his target.   He noted                                                               
that his  plan ["A"]  "does not  succeed when it  gets out  ... a                                                               
little past [the year] 2009."                                                                                                   
REPRESENTATIVE  HUDSON called  attention to  the "B"  plan, which                                                               
gives  60 percent  to the  dividend.   The graph  shows that  the                                                               
dividend would  be $1,237  in 2002  and would  grow to  $1,334 by                                                               
2010.   He  said the  40 percent  [in this  plan] "reflects  less                                                               
money  to make  up that  cap."   He said  one of  former Governor                                                               
Hammond's  concerns was  not wanting  the PFD  to be  capped, but                                                               
Representative Hudson  indicated that would require  using up the                                                               
CBR sooner.   He noted that under all three  plans, there is time                                                               
for  the future  legislature and  the  next governor  to act  and                                                               
"still have a billion dollars out there."                                                                                       
Number 1924                                                                                                                     
REPRESENTATIVE  JAMES asked  what the  Department [of  Revenue's]                                                               
calculation was that resulted in the numbers shown.                                                                             
Number 1990                                                                                                                     
LARRY PERSILY,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department  of  Revenue,  answered  that [the  graph  before  the                                                               
committee]  assumed none  of the  following:   population growth,                                                               
inflation, or additional economic  activity other than oil fields                                                               
that are known to be coming online in the next few years.                                                                       
REPRESENTATIVE  JAMES remarked,  "Representative  Coghill was  so                                                               
great to ask  Scott Goldsmith for some information  about the job                                                               
loss   on   the   various  different   options."      She   asked                                                               
Representative Hudson if he had considered that at all.                                                                         
REPRESENTATIVE  HUDSON  said a  1-percent  growth  had been  left                                                               
"down there."   He indicated the inflation is  about 2.25 percent                                                               
to  2.5 percent  currently.   He  remarked, "We  believe, as  the                                                               
chairman has stated  a number of times, that  government is going                                                               
to have to  suck it up, so  to speak, here."  He  noted that just                                                               
the  day  before  he'd  seen  the  aforementioned  paper  of  Mr.                                                               
Goldsmith, which indicates the number  of jobs that would be lost                                                               
by cutting the  budget, [adding] an income tax,  and reducing the                                                               
CBR.    Representative Hudson  said  he  had  taken all  of  that                                                               
information  into  consideration.   He  again  cautioned  against                                                               
balancing the  budget from the CBR  for two more years,  at which                                                               
time there would be steep  decline and then "the terrible decline                                                               
in the economy and the number of jobs that are lost."                                                                           
Number 2200                                                                                                                     
REPRESENTATIVE  JAMES  indicated   agreement  that  nothing  much                                                               
really happens if the CBR is used  to fill the fiscal gap for the                                                               
next two  years, after  which the  "real mess hits  the fan."   A                                                               
great  hole will  be  created  if no  action  is  taken now,  she                                                               
opined.  Representative  James stated concern that  income tax or                                                               
sales tax  won't solve the  billion-dollar problem.  She  said no                                                               
matter where "you take that from"  out of the economy, there will                                                               
be some immediate job loss.   She indicated some people may leave                                                               
to look for better opportunities.                                                                                               
Number 2309                                                                                                                     
REPRESENTATIVE HUDSON indicated open-town  meetings had been held                                                               
throughout the  summer, the  last of which  was in  Anchorage; 25                                                               
people  met,  including  Democrats,  Republicans,  Senators,  and                                                               
Representatives.  He  mentioned people from the  oil industry and                                                               
facilitators  who "really  come  from business."   The  essential                                                               
[message], he said,  was that if nothing is done,  the PFD likely                                                               
will be lost  by 2007 or 2008.   He said, "We think  it's a whole                                                               
lot better to  have a small income tax, use  some of the earnings                                                               
of the  permanent fund, [and]  still have that  $600-$700 million                                                               
annual infusion of dividends hitting the street out there."                                                                     
REPRESENTATIVE   HUDSON   mentioned   letters  on   record   from                                                               
corporations, from Alaskans United,  and from "the 20-20 people,"                                                               
for example.  He reemphasized  former Governor Hammond's  message                                                               
not to use  the dividends first or the earnings  of the permanent                                                               
fund,  without  specified  limits.   He  indicated  it  would  be                                                               
difficult for  future legislators  to automatically take  the PFD                                                               
away, if it were put into law.                                                                                                  
Number 2259                                                                                                                     
REPRESENTATIVE JAMES  remarked that  she didn't  necessarily have                                                               
the same confidence in former  Governor Hammond.  She added, "But                                                               
what I don't like  to see is this sort of thing  going out to the                                                               
public, because it  shows a real disaster, no matter  what we do,                                                               
when we  get down there."   She mentioned  the need to  factor in                                                               
population growth and  questioned the ability to  hold the budget                                                               
flat or  at 1  percent.   She also indicated  the need  to assist                                                               
Number 2647                                                                                                                     
REPRESENTATIVE  HUDSON acknowledged  that this  isn't a  pleasant                                                               
thing  to  recommend  to  Alaskans, but  said  it  is  "extremely                                                               
responsible."    He  pointed  out  that  [the  possibilities  of]                                                               
increased  oil revenues,  a  gas line,  and  [opening] ANWR,  for                                                               
example, were not included.  He  said, "You have to almost depend                                                               
upon  the next  administration  to  come in  and  figure out  how                                                               
they're going  to fit the  bodies that  they will inherit  to the                                                               
money that they  will have available to them -  providing we make                                                               
it available to them."                                                                                                          
REPRESENTATIVE  HUDSON  mentioned  potential  problems  with  the                                                               
pipeline,  earthquakes,   or  natural  disasters  that   must  be                                                               
responded to, should they occur.   He cautioned about the need to                                                               
have  the CBR  and  permanent  fund available.    Given that  oil                                                               
reserves  are finite,  he said  the level  of spending  has grown                                                               
beyond the state's ability to sustain it over the long term.                                                                    
Number 3000                                                                                                                     
MR. PERSILY  referred to the  discussion by  Representative James                                                               
and mentioned the  $285 million in fiscal year 2004  and the same                                                               
amount in 2010.  He  said [the department] had spent considerable                                                               
time attempting  to figure out if  there is some way  to show how                                                               
much  income tax  might  be  taken in  during  fiscal year  2010.                                                               
However,  [the  department]  had  concluded  that  it  is  nearly                                                               
impossible to  know what the economy  will look like in  2010; it                                                               
would depend  on many factors,  including the price of  oil, [oil                                                               
and gas]  production, [whether  there is  drilling in]  ANWR, the                                                               
National Petroleum Reserve - Alaska  (NPR-A), and [the potential]                                                               
gas line.                                                                                                                       
MR.  PERSILY offered  that  the economy  and  the revenues  would                                                               
"closely track."   If new development occurred and  there were an                                                               
increase in population - and  therefore a greater need for public                                                               
services  such  as  "school,  reimbursement,   and  the  rest"  -                                                               
expenses would  increase.  With  a broad-based tax, however  - in                                                               
this case,  an income tax -  because of that activity  the income                                                               
tax revenue  and some other revenue  would increase as well.   He                                                               
said "income  and the need  for that income" would  run parallel,                                                               
and "for  the sake of  models, we'd  just leave it  flat, because                                                               
what we're trying  to show here is  the balance in the  CBR."  He                                                               
said Representative James was correct  that "we could end up with                                                               
more revenue out here than we show."                                                                                            
Number 3207                                                                                                                     
CHAIR COGHILL concurred [with  Representative James], adding that                                                               
if [the  legislature] had  the ability to  "get our  hands around                                                               
something that  we knew was coming,  we could factor it  in," but                                                               
that  there  were  many unknowns  regarding  forestry,  oil,  and                                                               
mining, for  example.  He remarked,  "In fact, some of  the state                                                               
growth has  been in direct  relation to our inability  to produce                                                               
on our public lands."                                                                                                           
Number 3255                                                                                                                     
REPRESENTATIVE WILSON  pointed out  that there are  more expenses                                                               
than shown in  the equation.  For example, there  is more than $1                                                               
billion  in  deferred  maintenance, including  harbors  that  are                                                               
deteriorating and buildings that have recently caved in.                                                                        
CHAIR COGHILL  offered his belief that  it is part of  "the other                                                               
$200   million,"   as   Representative  Hudson   had   previously                                                               
mentioned,  which is  going to  be  "squeezed into  some kind  of                                                               
action,"  for  example,  reducing  government  services  or  even                                                               
selling assets.   He  said, "We'll have  this discussion  when we                                                               
have all three of them on the table."                                                                                           
CHAIR COGHILL said the policy call  would be the 5 percent, which                                                               
mirrors the  constitutional amendment  proposed by  the permanent                                                               
fund board,  and the 50-50 payout  of that 5 percent,  which will                                                               
go half to the state general  fund and half to dividends, "having                                                               
already settled  the inflation-proofing  question."  He  asked if                                                               
he was correct in the "mechanism of that."                                                                                      
Number 3440                                                                                                                     
REPRESENTATIVE  HUDSON told  Chair Coghill  he was  correct.   He                                                               
indicated  a  recent  hearing during  which  the  permanent  fund                                                               
trustees  discussed  the  5-percent   payout  and  the  automatic                                                               
inflation-proofing,  versus  the  present system,  which  is  the                                                               
average  of the  [most recent]  five years'  earnings.   He noted                                                               
that recently  there had been  14-15 percent in  earnings [during                                                               
times of high  economic growth nationwide], which  dropped by 3.5                                                               
percent.  The  amount of the PFD therefore has  varied.  The same                                                               
would happen  to the income stream  if the decision were  made to                                                               
use some  of the earnings of  the permanent fund on  a percentage                                                               
basis, unless the  5-percent payout is adopted.   He suggested it                                                               
would create  an almost impossible  task for  future legislators,                                                               
because "how  in the world are  they going to know  what programs                                                               
to put into effect this year, that goes for the next three."                                                                    
Number 3607                                                                                                                     
REPRESENTATIVE  STEVENS stated  his  appreciation  of the  visual                                                               
aids  supplied  by  Representative  Hudson.    He  surmised  that                                                               
Representative  Hudson hadn't  chosen  to put  more [money]  into                                                               
state government  and reduce the  dividend because of  wanting to                                                               
maintain approximately $1,000 a  year into the foreseeable future                                                               
[for PFDs].                                                                                                                     
REPRESENTATIVE  HUDSON concurred  that  that was  his  goal.   In                                                               
response  to a  question by  Representative Wilson,  he said  the                                                               
income tax incorporated [would be] at 2.25 percent.                                                                             
Number 3700                                                                                                                     
CHAIR COGHILL said  that is in keeping with SSHB  199.  He stated                                                               
his intention that  if there were sufficient time  at the present                                                               
hearing, he would entertain a  motion to "adopt an amendment into                                                               
it that we can discuss on Tuesday."                                                                                             
REPRESENTATIVE  HUDSON  said  he  would  like  to  speak  to  the                                                               
amendment on  SSHB 199  whenever it  is ready.   [HB 35  was held                                                               
HB 398-DISPOSITION OF PERMANENT FUND INCOME                                                                                   
[Contains discussion of HB 35, HB 304, and HB 413]                                                                              
CHAIR COGHILL  announced the next  order of business,  HOUSE BILL                                                               
NO. 398, "An Act relating to  disposition of income of the Alaska                                                               
permanent fund; and providing for an effective date."                                                                           
Number 3142                                                                                                                     
REPRESENTATIVE DREW SCALZI, Alaska  State Legislature, sponsor of                                                               
HB 398, noted  that his proposed legislation is similar  to HB 35                                                               
and  HB 304.   He  stated that  it is  not a  "stand-alone" bill;                                                               
other revenue streams would need to  be incorporated.  He said it                                                               
does take  "a little angle"  regarding use of the  permanent fund                                                               
earnings.   He  noted that  the recent  fiscal policy  caucus has                                                               
included discussion  about maintaining the  Constitutional Budget                                                               
Reserve  (CBR) at  some level  - whether  at $1  billion or  $1.5                                                               
billion - to use as a shock absorber for [unpredicted]                                                                          
expenditures related to the fluctuation of oil [prices].                                                                        
REPRESENTATIVE   SCALZI  indicated   his  friend,   former  state                                                               
Representative  and Senator  Clem  Tillion, was  involved in  the                                                               
past "at  this level  of creating the  dividend program,"  with a                                                               
plan to somehow tie  the permanent fund to the price  of oil.  He                                                               
then paraphrased the written sponsor statement as follows:                                                                      
     [House  Bill  398 is]  a  mechanism  that maintains  an                                                                    
     adequate balance  of the constitutional  budget reserve                                                                    
     for  public  services.   It  would  restore the  budget                                                                    
     reserve fund at  [the] start of each  [fiscal] year, to                                                                    
     $1.5  billion,   [a]  reasonable  amount   to  preserve                                                                    
     services, while  providing a  cushion against  any one-                                                                    
     time, one-year risk in low oil prices.                                                                                     
     [House Bill  398] would use permanent  fund earnings to                                                                    
     refill the  budget reserve  each year,  while providing                                                                    
     for a healthy dividend for Alaskans.                                                                                       
     [House Bill  398] would  serve as  an incentive  to the                                                                    
     legislature,  the governor,  and the  public, to  adopt                                                                    
     new revenue  sources to help  close the budget  gap and                                                                    
     to  preserve the  dividend for  future legislatures  to                                                                    
     In  HB  398,  it   would  encourage  responsible  state                                                                    
     spending  and the  linking of  state spending  with the                                                                    
     annual  dividend.   [House  Bill]  398  would link  the                                                                    
     amount of  each year's  dividends to  the price  of oil                                                                    
     and the  state spending, which would  make the dividend                                                                    
     more relevant to an Alaska  economic situation than the                                                                    
     existing program  that links  the dividend only  to the                                                                    
     permanent fund's Wall Street investments.                                                                                  
     [The legislation would] use  ... the existing statutory                                                                    
     formula to  determine the amount of  the permanent fund                                                                    
     earnings available  for distribution each year.   There                                                                    
     would  be  no  change   in  the  current  formula  that                                                                    
     averages  the  fund's  earning[s] over  the  past  five                                                                    
     years.  That would remain the same.                                                                                        
     [The  legislation  would]  use the  existing  statutory                                                                    
     formula  to inflation-proof  the fund's  principal; but                                                                    
     before  any  money  is  distributed  for  any  purpose,                                                                    
     sufficient  funds  would  be moved  from  the  earnings                                                                    
     reserve  account   to  the   principal  to   cover  ...                                                                    
     inflation over the past year.                                                                                              
     Then,  the budget  reserve ...  trigger  ... would  ...                                                                    
     kick in at  that point.  In any year  [that] the CBR is                                                                    
     below $1.5  billion on June  30 ...  - the last  day of                                                                    
     the fiscal  year - this  legislation would  direct that                                                                    
     an  amount  sufficient  to  restore  the  CBR  to  $1.5                                                                    
     [billion]  ... be  taken from  the funds  available for                                                                    
     This does not go into  the earnings reserve [account] -                                                                    
     only  the  excess  earnings  that   are  used  for  the                                                                    
     permanent fund  dividend program.   And that has  to be                                                                    
     very  clear,   because  if  we  don't   do  that,  then                                                                    
     obviously we're  going to eat  up the  earnings reserve                                                                    
     [account],  just  like Representative  Whittaker  said,                                                                    
     and then  we don't have  anything but the  corpus left.                                                                    
     So  this  would ...  take  an  amount to  restore  that                                                                    
     [$]1.5 [billion]  from the calculated amount  that goes                                                                    
     through the dividends.                                                                                                     
     Now, as I  said before, this is not  a stand-alone bill                                                                    
     by  any means,  and I  did  not try  to incorporate  an                                                                    
     income tax or sales tax  or anything else into that, or                                                                    
     projections  on what  would happen  if we  did have  an                                                                    
     economic  stimulus,  or  if  we  had  tremendously  low                                                                    
     prices in oil, or low production.                                                                                          
Number 2725                                                                                                                     
     But I do think we need  a shock absorber to have a fund                                                                    
     balance,  so to  speak, like  most boroughs  and cities                                                                    
     do, that  they need to rely  on.  And that's  what that                                                                    
     CBR, in my belief, is for.                                                                                                 
     So, in years  of low oil prices, we would  have to take                                                                    
     more of  those earnings.   This does  not set,  like HB                                                                    
     304,  a   level  of  $200   million  each   year;  it's                                                                    
     whatever's necessary.   It could  be more; it  could be                                                                    
     less.   But that is going  to have to be  attributed to                                                                    
     all  those things  that will  kick in:   price  of oil,                                                                    
     production  of oil,  what  we pay  in  income taxes  or                                                                    
     sales  taxes,  [and]  any   of  the  other  mechanisms.                                                                    
     That's our choice.                                                                                                         
     How  bad do  we  want to  tax ourselves?    We ask  the                                                                    
     people, "How  valuable is that permanent  fund dividend                                                                    
     to you?"   You make the call.  You  tell us, because if                                                                    
     you  don't,  it's  going  to   take  more  out  of  the                                                                    
     permanent fund dividend to supplement the CBR.                                                                             
     So what I've done  in this bill - HB 398  - is start at                                                                    
     the  $1.5  billion  and  work  backwards.    It's  just                                                                    
     another option  to the  two bills  that you  had before                                                                    
Number 2607                                                                                                                     
REPRESENTATIVE  BILL HUDSON,  Alaska  State Legislature,  offered                                                               
his belief that Representative [Scalzi]  has offered an excellent                                                               
idea.   He  added  that he  saw  no reason  that  the concept  of                                                               
percentage of  market value (POMV)  couldn't be cranked  into his                                                               
bill   as   well,  because   it   would   provide  leveling   and                                                               
stabilization over  time.  He  indicated positive  [results] from                                                               
using this concept, providing that  "we come up with the leveling                                                               
effect of the POMV."                                                                                                            
REPRESENTATIVE HUDSON noted  that under [Representative Scalzi's]                                                               
approach, as  [the CBR funds] are  spent, they fill back  up, but                                                               
only to the amount necessary.   He compared that with his own [HB                                                               
35], in  which he has  chosen an  "automatic 50-50 [split]."   He                                                               
said  the  advantage of  putting  it  into  the  CBR is  that  it                                                               
requires a  [three-fourths] vote of  the House and  Senate before                                                               
it  can be  tapped.   He added,  "We put  that in  there when  we                                                               
created  the  constitutional  budget reserve,  to  constrain  the                                                               
growth of government,  to constrain the amount of  spending."  He                                                               
noted that  some people  want to  do away with  that and  allow a                                                               
simple majority  vote to tap  those funds; however, he  said that                                                               
wasn't the original intent in creating the CBR.                                                                                 
REPRESENTATIVE HUDSON  told the  committee he liked  aspects from                                                               
both his  own and Representative  Scalzi's bills and  thought the                                                               
two could be "quite nicely accommodated."                                                                                       
Number 2411                                                                                                                     
CHAIR  COGHILL  reminded  members  that when  the  committee  had                                                               
considered one of  the income tax proposals, there  was a trigger                                                               
mechanism that  dealt with  keeping the CBR  at a  certain level.                                                               
He added,  "Somewhere along  the line,  if we  need to,  we might                                                               
want to reconcile those."                                                                                                       
Number 2360                                                                                                                     
REPRESENTATIVE  JAMES offered  the following  understanding, "You                                                               
calculate  the  dividend in  the  same  way that  it's  currently                                                               
calculated, which is  ... 21 percent of  [the] five-year average,                                                               
or  half of  the  earnings reserve  [account],  whichever is  the                                                               
smaller."    Indicating  HB  398 presumably  was  based  on  $1.5                                                               
billion in  the CBR,  she asked  if the only  way "it  could drop                                                               
from that would be [by] having spent it."                                                                                       
REPRESENTATIVE SCALZI said, "That's correct."                                                                                   
REPRESENTATIVE  JAMES   asked,  "If  we   had  to  go   into  the                                                               
constitutional  budget  reserve to  fill  the  budget, then  that                                                               
money  essentially would  be coming  right out  of the  dividend,                                                               
REPRESENTATIVE SCALZI concurred.                                                                                                
REPRESENTATIVE JAMES asked if whatever  was left of the ERA would                                                               
be available for other spending, or would "sit there."                                                                          
REPRESENTATIVE  SCALZI  explained that  under  [HB  398] the  ERA                                                               
wouldn't be touched.   He said there  may be a time  when, if the                                                               
legislature spent  the CBR down  to $3 million, for  example, and                                                               
the available revenue  from the ERA calculation  for the dividend                                                               
program was only $1.1 billion,  then the budget reserve gap could                                                               
not be  filled to $1.5 [billion]  again.  He clarified,  "You can                                                               
only  take what  is available  from  the dividend  program."   He                                                               
noted that using the CBR  requires a [three-quarters] vote of the                                                               
Number 2210                                                                                                                     
CHAIR COGHILL  said, "So,  if we  went to $8  [a barrel  for] oil                                                               
again -  heaven forbid - at  a spending level that  we're at now,                                                               
it  would be,  easily, right  at [$1.5  billion], and  that could                                                               
take the whole CBR, going beyond what the dividend could give."                                                                 
REPRESENTATIVE SCALZI concurred.   He paraphrased an example from                                                               
the second page of his sponsor statement, which read as follows:                                                                
     If, after a broad-based  tax and other revenue measures                                                                    
     were adopted to  raise a total of $600  million a year,                                                                    
     and  if  the  remaining   budget  gap  were  then  $500                                                                    
     million,  then   $500  million  would  be   taken  from                                                                    
     permanent fund earnings to refill the [CBR].                                                                               
     And, if  $1.1 billion  in permanent fund  earnings were                                                                    
     available  for distribution  under  the 5-year  income-                                                                    
     averaging  formula, there  would be  $600 million  left                                                                    
     for  dividends after  $500 million  was used  to refill                                                                    
     the  [CBR].   That  would  equal  a dividend  of  about                                                                    
     $1,000 per Alaskan.                                                                                                        
CHAIR COGHILL noted,  "It wouldn't grow beyond the  formula if we                                                               
became very prosperous."                                                                                                        
REPRESENTATIVE SCALZI responded as follows:                                                                                     
     If  we  became  prosperous through  other  means,  that                                                                    
     mechanism would still be in  place to go the other way.                                                                    
     If, for instance, as  Representative Hudson was saying,                                                                    
     ... you  have a floating  measure in this --  you don't                                                                    
     really have  that in the  other ... bills,  because you                                                                    
     can't really flex your income  tax yearly.  I mean, you                                                                    
     have to  vote on what  the income  tax is going  to be.                                                                    
     You  can ...  raise  your sales  tax,  but it's  always                                                                    
     retroactive as to  what happened before.   We know that                                                                    
     when we have  to fill the gap, we go  right to that CBR                                                                    
     and we make  a vote at the end of  session to fill that                                                                    
     gap.  And  that's why I think we  need something that's                                                                    
     flexible,  ... yet  very much  attainable.   So, that's                                                                    
     where the flexibility comes in,  in having it drawn out                                                                    
     this way.                                                                                                                  
Number 2007                                                                                                                     
REPRESENTATIVE  JAMES  asked  Representative Scalzi  if,  in  his                                                               
plan, the excess earnings of the  fund left in the ERA would also                                                               
REPRESENTATIVE SCALZI said, "That's correct."                                                                                   
REPRESENTATIVE  JAMES  noted that  there  would  be two  pots  of                                                               
money, then, guaranteeing  $1.5 [billion] in the  CBR and growing                                                               
the ERA of the permanent fund.                                                                                                  
REPRESENTATIVE SCALZI concurred.  He  said the intent was not "to                                                               
go into"  the ERA because  once it is gone,  all that is  left is                                                               
the principal and there is  nothing to work with.  Representative                                                               
Scalzi said he is trying to  save both the principal and the ERA.                                                               
He suggested Mr. Persily could answer questions as well.                                                                        
REPRESENTATIVE JAMES noted two options  for future legislators to                                                               
address a "hole  in the budget":  a three-quarters  vote to go to                                                               
the CBR reserve,  or a majority vote  to take it out  of the ERA.                                                               
She said,  "I don't  know that  that's the  option that  we would                                                               
like to leave."                                                                                                                 
CHAIR COGHILL said it  is a policy call.  He  added, "And that is                                                               
actually   an   option  that   is   open   today,  according   to                                                               
Representative Berkowitz, and I think that's accurate."                                                                         
Number 1725                                                                                                                     
REPRESENTATIVE  HUDSON said  that was  precisely the  reason that                                                               
he'd amended  his bill.   He said  he believes that  the [budget]                                                               
gap  is so  atrocious that  he didn't  want to  have to  go to  a                                                               
three-quarters vote  on the  CBR.  He  stated that  he originally                                                               
had all of the  income "that we split" going into  the CBR in the                                                               
same manner as in [HB 398].  He continued as follows:                                                                           
     I have  seen the [three-quarters]  vote of the  [CBR] -                                                                    
     regardless [of]  whether the Democrats are  in control,                                                                    
     or the  Republicans are in  control - become,  "My vote                                                                    
     has got  to be  worth something; so,  you don't  get my                                                                    
     vote unless I get something else into the budget."                                                                         
CHAIR COGHILL said,  "It has been held hostage  to actually raise                                                               
the cost of spending, in many cases."                                                                                           
Number 1632                                                                                                                     
REPRESENTATIVE ETHAN BERKOWITZ,  Alaska State Legislature, stated                                                               
the following:                                                                                                                  
     During the time  that I have negotiated on  the CBR, we                                                                    
     have used  it as  a shield;  we have not  used it  as a                                                                    
     sword.  And if it does  anything, what it does is shift                                                                    
     spending  priorities,  rather  than  increase  spending                                                                    
     priorities.   The  amount  of  additional funds  [that]                                                                    
     have gone into the budget ...  on account of a CBR vote                                                                    
     have been  relatively minimal, compared to  the overall                                                                    
     size of the budget.                                                                                                        
CHAIR COGHILL commented, "It is a negotiation tool."                                                                            
Number 1520                                                                                                                     
CARRIE  WILLIAMS,  testifying   via  teleconference,  asked  that                                                               
everyone realize  that the  state must raise  more revenue.   She                                                               
said  the PFD  has become  very important  to many  people.   She                                                               
posited that  the "alternative tax  issue" needs to  be addressed                                                               
and asked that  the legislature consider the impact  of the local                                                               
issues.   Ms. Williams  mentioned a cruise  tax, income  tax, and                                                               
alcohol tax, asking  [the committee] not to  eliminate those from                                                               
local government.   She  asked the committee  to consider  in its                                                               
plans   that  local   government  needs   to  assume   increasing                                                               
responsibility for "its own support and its needs."                                                                             
MS.  WILLIAMS  noted  that  she didn't  have  possession  of  the                                                               
complete  bill, but  surmised that  HB 398  suggests a  temporary                                                               
transfer of  funds from the  CBR.  She  said, "In the  interim, I                                                               
would say, if we would go  that direction, please put an absolute                                                               
deadline on  when you  would come  up with  alternative revenues,                                                               
not depending on [the] CBR and withdrawing annually from that."                                                                 
CHAIR COGHILL clarified the following for Ms. Williams:                                                                         
     Just for your information,  it was the earnings reserve                                                                    
     account.  And it would be  a $200 million draw that has                                                                    
     been  calculated  to  be sustainable.    And  it  would                                                                    
     certainly be any  legislative session's prerogative not                                                                    
     to  take  it.    So,  you  know,  it  would  have  some                                                                    
MS. WILLIAMS, in response to  a question from Chair Coghill, said                                                               
she is from Cooper Landing.   She then stated her belief that [HB                                                               
398] would  allow the legislature  to maintain and  replenish the                                                               
CBR at  a certain level.   She asked, "Would this  ever equate to                                                               
the fact  that no PFD would  be available for the  public payout?                                                               
She asked  whether it  is possible  to withdraw  adequate [money]                                                               
from the CBR to [equal] earnings on the current market.                                                                         
CHAIR COGHILL affirmed that it  wouldn't be tied to the earnings.                                                               
If  [Alaska] had  a "bad  oil year,  it could  possibly take  the                                                               
whole dividend," he said.                                                                                                       
MS. WILLIAMS  said she thought  it might  be an issue  the public                                                               
would want to be educated on.   She said, "We look forward to Mr.                                                               
Lancaster coming  around and educating  us all."   She reiterated                                                               
the  need   to  consider  other  alternatives.     She  mentioned                                                               
depreciated  capital   facilities,  harbors,  and   schools,  for                                                               
example, that are in near-disaster condition and need attention.                                                                
MS.  WILLIAMS  indicated  she  would   be  listening  to  further                                                               
testimony.   At present, without  additional education,  she said                                                               
she would  be in  support of looking  at the  $200,000 withdrawal                                                               
from the reserve.  She indicated  the time to "get those taxes in                                                               
place."  She said she  thinks [Alaskans] want modern-day services                                                               
and need to be willing to help pay for those.                                                                                   
CHAIR COGHILL  pointed out  that the  amount [of  the withdrawal]                                                               
would be $200 million.                                                                                                          
Number 1041                                                                                                                     
ED  MARTIN,   JR.,  testifying   via  teleconference,   told  the                                                               
committee  he lives  in Cooper  Landing and  that his  father was                                                               
"the one who started the 'vote  no' campaign down [for a previous                                                               
year's  advisory  vote  on whether  the  legislature  should  use                                                               
permanent  fund  earnings  for  state  government]  here  on  the                                                               
peninsula."   Mr. Martin  told the committee  HB 35  would change                                                               
the formula  to "an unacceptable  amount."  He stated  his belief                                                               
that 86  percent of  the people  who went to  the polls  [in that                                                               
advisory vote] had voted, "No, do  not touch it without a vote of                                                               
the  people."   He said  [HB 35]  would circumvent  that, and  he                                                               
doesn't  agree  with it.    He  stated  his certainty  that  many                                                               
people, including every member of  his family, would vote against                                                               
it.   He  added, "That  portion  of [HB  35]  is the  one that  I                                                               
dislike the most."                                                                                                              
MR. MARTIN, turning  attention to HB 398, said  it is essentially                                                               
based  upon  the  same  principle,  tying  it  to  the  PFD,  oil                                                               
revenues, or state spending.  He  offered his belief that that is                                                               
"absolutely wrong."  Mr. Martin  indicated the permanent fund was                                                               
invested  for the  mineral wealth,  and that  at statehood  "they                                                               
decided the  state would retain that."   He offered that  it is a                                                               
rainy-day  account for  the people,  but isn't  supposed to  be a                                                               
rainy-day  account  for the  government.    He suggested  remarks                                                               
about capping  the permanent fund  [dividend] relate to  a "zero-                                                               
growth   atmosphere"  that   has   existed   under  the   current                                                               
administration.  He stated:                                                                                                     
     Apparently,  we  have  Democrats  right  now  that  are                                                                    
     introducing these  bills, because I can't  think, in my                                                                    
     mind, that we have  elected Republicans down there that                                                                    
     would cut  state spending, that would  look at revenues                                                                    
     other than taxation - an  encroachment on the liberties                                                                    
     of Americans and state residents,  by way of taxation -                                                                    
     when in  fact, we are  a resource-rich state  for which                                                                    
     there has been zero and flat development. ...                                                                              
     Nobody  is  putting together  a  hearing,  so far  this                                                                    
     year, on  revenue [matters] other than  taxation, and I                                                                    
     think it's  wrong.  I think  we should be looking  at a                                                                    
     lottery to help fund education,  like the Lower 48's in                                                                    
     Washington, Florida, and Georgia.   I recently was down                                                                    
     there,  so  I  had  the opportunity  ...  to  (indisc.)                                                                    
     tickets down  there.  So,  based upon any study  of the                                                                    
     lottery system, you surely would  want to include those                                                                    
     who would visit the state,  or transients that might be                                                                    
     in the military.                                                                                                           
Number 0728                                                                                                                     
REPRESENTATIVE  BERKOWITZ  told  Mr.   Martin  he  himself  is  a                                                               
Democrat, but  emphasized that  the efforts  to solve  this issue                                                               
are being  made as  Alaskans and  as a  legislature, and  that it                                                               
isn't a partisan problem.   He noted that considerable effort has                                                               
been invested in developing a  natural gas pipeline and promoting                                                               
the [oil  and gas]  development of  the Arctic  National Wildlife                                                               
Refuge  (ANWR).    He  told  Mr. Martin:    "I'm  sure  that  you                                                               
understand the  gravity of the  situation and you will  lend your                                                               
efforts as  an Alaskan,  and not  as a  partisan, to  solving the                                                               
MR. MARTIN responded  that he was not necessarily  trying to draw                                                               
a line of distinction between  both parties; however, he believes                                                               
there  are philosophical  difference between  them that  won't be                                                               
changed by "any conversation here."  He offered examples.                                                                       
Number 0445                                                                                                                     
MIKE SIGLER, Member, Harborview  Site Council, told the committee                                                               
his two  children attend Harborview Elementary  School in Juneau.                                                               
He explained  that the council, a  parent-teacher organization at                                                               
the  school, supports  the use  of  the permanent  fund and  new,                                                               
broad-based taxes  in order to  fund education.  Mr.  Sigler said                                                               
the State of  Alaska is an important partner  in funding Alaska's                                                               
schools.   With oil  revenues declining,  [the council]  sees the                                                               
only way  to maintain  education funding is  to seek  new revenue                                                               
sources,  now rather  than later.   He  remarked, "We  must reach                                                               
into our  pockets to ensure  a decent education for  our children                                                               
in  the  future."   He  noted  that  [the council]  supports  the                                                               
efforts of  Representative Hudson  and the  other members  of the                                                               
fiscal  policy  caucus  [to  resolve  the  budget  crisis].    He                                                               
     We also request that  you consider increasing education                                                                    
     funding for  children not meeting  education standards.                                                                    
     At Harborview [Elementary]  School, nearly one-third of                                                                    
     children  fall  below  state education  standards,  and                                                                    
     there are  too few  teachers to  provide extra  help to                                                                    
     all of these children.                                                                                                     
MR.  SIGLER said  he'd  handed  out a  fact  sheet on  Harborview                                                               
Elementary  School detailing  this challenge.   He  suggested the                                                               
school  is likely  representative of  many Alaskan  schools.   He                                                               
told the committee members that  the Quality Schools [Initiative]                                                               
and  [Learning]  Opportunity Grants  provided  this  year by  the                                                               
legislature  have   helped,  but  weren't  enough   to  meet  all                                                               
children's needs.  He concluded:   "Please continue these grants,                                                               
consider  increasing  them,  and ask  your  constituents  whether                                                               
their   schools   face   the  same   challenges   as   Harborview                                                               
[Elementary] School."                                                                                                           
Number 0238                                                                                                                     
SHERMAN C.  "RED" SMITH, testifying via  teleconference, told the                                                               
committee he  came to  Alaska [in  1948] and  has been  living in                                                               
Cooper Landing  since 1949; he  has been involved  politically to                                                               
varying degrees during  that period of time.  Mr.  Smith said one                                                               
thing  that  has come  to  his  attention  is  that "it  is  very                                                               
difficult for us to communicate with each other."  He continued:                                                                
     So, let  me see if I  can get a message  across to you.                                                                    
     Let's say  that in my youth  I milked a cow.   Now, the                                                                    
     permanent fund is  kind of like an udder on  a cow. ...                                                                    
     [There  are]  four appendages  to  that  udder, and  it                                                                    
     looks like we  have two of them in use  right now.  You                                                                    
     have a  reserve fund  and another  fund there,  and now                                                                    
     we're lookin'  for more ways  of milking that  one cow,                                                                    
     which is  [the] oil industry, basically,  that provides                                                                    
     that udder on that cow that we're milking.                                                                                 
     The thing  that we haven't  done, is we forgot  that if                                                                    
     we're going  to have  anything except  that one  cow to                                                                    
     milk,  we  should  have been  protecting  the  heifers,                                                                    
     'cause ...  cows reproduce, see.   Well,  our permanent                                                                    
     fund  should have  been reproducing  like the  cow, and                                                                    
     probably  some  of  that investments  left  in  Alaska,                                                                    
     here, would  have given us  another heifer or  two, and                                                                    
     we'd have had more than one cow to milk.                                                                                   
     The  oil  industry  cannot survive  without  industrial                                                                    
     minerals.     We  have  local  sources   of  industrial                                                                    
     minerals  that   should  be  in  production   up  here,                                                                    
     supplying the oil  industry.  We also  have people that                                                                    
     are  knowledgeable, like  myself,  that  know that  ...                                                                    
     they  don't always  have  to  be petrochemical  plants;                                                                    
     there can  [be] chemical plants utilizing  our dead and                                                                    
     dying forests. ...                                                                                                         
     We can't change  the past, but let's see if  we can get                                                                    
     some  of these  smaller --  like the  heifers that  I'm                                                                    
     referring to.   Let's help 'em  grow up so we  can milk                                                                    
     them, too,  you see.   And  then we'll  be able  to ...                                                                    
     maintain some of this social  structure that we have in                                                                    
     our state.                                                                                                                 
TAPE 02-17, SIDE A                                                                                                              
Number 0001                                                                                                                     
MR. SMITH continued:                                                                                                            
     In all  these 50-some years  now, I don't  believe that                                                                    
     except   on  rare   occasions  that   I've  heard   our                                                                    
     representatives, like yourselves,  down there, sit down                                                                    
     and  discuss  something ...  positive  that  we can  do                                                                    
     other than just  milking the one existing cow.   So ...                                                                    
     this is  an opportunity for us.   We're going to  get a                                                                    
     new administration....   It  is time  that we  focus on                                                                    
     some of  these smaller-scale programs or  utilizing our                                                                    
     resources.  If  they do nothing else with  them ..., we                                                                    
     could   at   least    support   the   existing   larger                                                                    
     corporations within our state.                                                                                             
     I hope I haven't offended  anybody or misled you, but I                                                                    
     think that  this --  and I  reviewed and  listened here                                                                    
     during this discussion of the  bill that I've been able                                                                    
     to understand  here.  In  my understanding, I  would be                                                                    
     more  in  support of  HB  304.    I believe  it's  more                                                                    
     definitive.    I  believe  it  gives  ...  [a]  simpler                                                                    
     understanding and  less complicated bookkeeping,  and a                                                                    
     number  of   reasons  why  I  would've   supported  it.                                                                    
     I will not support  anything that expands government at                                                                    
     the present  time because I  think we've got  all kinds                                                                    
     of  government  that we  don't  need  in the  State  of                                                                    
     Alaska  right now.   Certainly,  I  understand that  we                                                                    
     have to  pay our bills.   Now, one  of the things  I do                                                                    
     when I pay my bills --  I [had a] fiscal crisis; I sold                                                                    
     off  some of  my  land.   And  I  think  that that's  a                                                                    
     possibility again,  if we could start  selling off some                                                                    
     state lands and allowing  developments to take place on                                                                    
     them.   There's  a number  of other  sources of  income                                                                    
     that haven't been  tapped.  Anyway, thank  you for your                                                                    
     time.  Thank you for hearing me.                                                                                           
Number 0313                                                                                                                     
REPRESENTATIVE  HUDSON thanked  Mr. Smith  for keeping  positive.                                                               
He informed  Mr. Smith that  there has  been review in  regard to                                                               
ways in which to harvest, to  a greater extent, the timber killed                                                               
by [spruce  bark] beetles.   There is also review  of value-added                                                               
use of  timber and oil.   However,  such tasks are  difficult and                                                               
MR. SMITH pointed  out that as of January 31,  2001, the State of                                                               
Alaska,  per  the  written   request  of  Alaska's  congressional                                                               
delegation,  sued the  U.S. Forest  Service  in federal  district                                                               
court.   In regard  to that litigation,  Mr. Smith  expressed the                                                               
need to "stop the people that have been killing the heifers."                                                                   
Number 0498                                                                                                                     
JOE  SONNEMAN came  forward to  testify.   He recalled  a comment                                                               
that taking  50 percent of the  dividend is a flat  tax, which is                                                               
true.   However, he disagreed that  [HB 398] would have  an equal                                                               
impact  on  everyone.    When  an  equal  amount  is  taken  from                                                               
everyone, those  at the lower  end of the economic  spectrum feel                                                               
it  more because  it  is  a larger  percentage  of their  smaller                                                               
incomes.   Therefore, reduction of the  [permanent fund] dividend                                                               
has  an unfortunate  effect  on  those with  lower  income.   The                                                               
permanent fund is  good because it's an inverted head  tax - that                                                               
is, it  gives an equal  amount to  everyone and thus  helps those                                                               
with  lower incomes  more, because  it's a  larger percentage  of                                                               
their smaller incomes.  Therefore,  Mr. Sonneman felt that is why                                                               
83  percent or  so voted  [in the  aforementioned advisory  vote]                                                               
against  using some  of the  permanent fund  to fund  government.                                                               
"Logically  speaking, when  you say  'no' to  some, it  means you                                                               
don't want any of it used," he remarked.                                                                                        
MR. SONNEMAN  remarked that although  the original intent  of the                                                               
permanent  fund was  to fund  government  when oil  ran out,  the                                                               
original  intent  was  changed  when  the  dividend  program  was                                                               
enacted.   Therefore,  he didn't  believe the  comments regarding                                                               
the original intent of the dividend apply.                                                                                      
MR. SONNEMAN  recalled the sponsor's  discussion saying  that the                                                               
real problem is  excess spending over income,  which Mr. Sonneman                                                               
believes to  be true.   He suggested addressing that  by reducing                                                               
spending and increasing  income, not by trying to  break into the                                                               
permanent  fund.   Mr. Sonneman  informed the  committee that  in                                                               
1969, when  oil was  discovered on the  North Slope,  the state's                                                               
annual budget was  $150 million.  He noted that  he has read that                                                               
the current  budget proposals  are over  $7 billion.   Therefore,                                                               
there is  an unsustainable level of  spending.  That part  of the                                                               
problem  needs to  be addressed,  rather than  breaking into  the                                                               
permanent fund.                                                                                                                 
MR. SONNEMAN agreed with an  earlier comment that economic growth                                                               
should be  part of the  solution.  However,  he noted that  he is                                                               
less  confident in  the comment  expressing the  need to  work on                                                               
basic  extractive industries  and transportation.   Mr.  Sonneman                                                               
noted that  he has a  Ph.D. in  Government Finance.   He informed                                                               
the  committee that  for years,  economic studies  have said  the                                                               
terms of  trade favor  the producers  of manufactured  goods over                                                               
those  of  raw materials.    In  other  words, those  buying  raw                                                               
materials from Alaska  and turning them into  something make more                                                               
money than Alaskans do by  selling the raw materials.  Therefore,                                                               
Alaska  should encourage  its  manufacturing  industries and  the                                                               
processing of ideas, such as with Microsoft.                                                                                    
Number 0945                                                                                                                     
MR. SONNEMAN  cited a recent  economic study that refers  to "The                                                               
Curse of Resources," which [reports]  that most places with large                                                               
amounts of  natural resources haven't  fared well.   Mr. Sonneman                                                               
reiterated  the   need  to  encourage   [Alaska's]  manufacturing                                                               
industries as well  as taxing them.  In  conclusion, Mr. Sonneman                                                               
noted his opposition to both bills [HB 304 and HB 398].                                                                         
CHAIR COGHILL suggested that $1 billion  of the budget is the PF)                                                               
payout.  Therefore, $1 billion could  be taken off the top of the                                                               
$7  billion  in  budget  proposals,   and  then  there  could  be                                                               
discussion of overspending.                                                                                                     
REPRESENTATIVE  BERKOWITZ  clarified  that $1.2  billion  of  the                                                               
budget is the  PFD payout.  There is also  about $500-600 million                                                               
in  inflation-proofing,  and  a  substantial  amount  comes  from                                                               
federal  funds.   Representative  Berkowitz  estimated that  $150                                                               
million in the year 1960 would equal $2.4 billion in 2000.                                                                      
Number 1215                                                                                                                     
REPRESENTATIVE  JAMES agreed  with Mr.  Sonneman.   She said  she                                                               
understood  that  money  is  made at  the  point  of  value-added                                                               
manufacturing and  processing because  that is where  people work                                                               
and create something.   However, Alaska has the  problem of being                                                               
disconnected.   This  disconnection requires  that the  materials                                                               
and supplies  be imported in  order to export the  final product.                                                               
The cost of transportation is prohibitive.                                                                                      
REPRESENTATIVE STEVENS  asked what Mr. Sonneman  would suggest to                                                               
reduce spending.                                                                                                                
MR.  SONNEMAN  answered  that  he didn't  know,  but  offered  to                                                               
provide an  answer later.  He  recalled the comment that  part of                                                               
the perceived  need is to keep  the CBR.   If the CBR is  used to                                                               
grow more "heifers" and those  other growth industries are taxed,                                                               
that's a better  solution than keeping a pot of  money and taking                                                               
the dividend from the people who would be hurt the most by that.                                                                
Number 1450                                                                                                                     
JIM  KELLY, Director  of  Communications,  Alaska Permanent  Fund                                                               
Corporation,  Department  of Revenue,  began  by  referring to  a                                                               
document  entitled  "Big  Picture"  that  he'd  provided  to  the                                                               
committee.    He   said  all  of  the   legislation  before  [the                                                               
committee] works in terms of the  big picture.  Looking back over                                                               
the first 25 years of the  permanent fund, the permanent fund has                                                               
produced  a little  less than  half the  money oil  has produced.                                                               
The fund began  with oil money that was then  invested in stocks,                                                               
bonds, and  real estate, after  which it produced $25  billion in                                                               
income.   This  occurred during  a time  when state  oil revenues                                                               
reached $55 billion.                                                                                                            
MR.  KELLY agreed  with  earlier  comments regarding  recognizing                                                               
those  who have  saved  the money  and placed  the  state in  its                                                               
current position of having $25 billion.   If the decision to have                                                               
the permanent fund hadn't been  made, today's discussion would've                                                               
been completely  different.   Mr. Kelly  emphasized, "I  say that                                                               
because  I want  you to  know that  the decisions  that you  make                                                               
today are going to be looked at  the same way 25 years from now."                                                               
He predicted  that 25 years  from now,  people will say  that oil                                                               
produced  about  $20  billion  worth of  benefit  to  the  state,                                                               
whereas the  income of  the permanent fund  will total  about $75                                                               
billion.   He noted that  a significant amount of  [the permanent                                                               
fund]  will have  to be  reinvested in  order to  accomplish [$75                                                               
billion  worth] of  income.   Appropriable income  after covering                                                               
inflation will  be more  than twice  as much  as can  be expected                                                               
from oil.                                                                                                                       
MR. KELLY  summarized that  the decisions  made today  matter for                                                               
the future.   Furthermore, the  decisions made regarding  the use                                                               
of the permanent fund earnings,  because it's the state's largest                                                               
expected  source of  revenue, are  the most  important decisions.                                                               
Therefore,  the decisions  need  to take  into consideration  the                                                               
protection of that income stream.                                                                                               
Number 2000                                                                                                                     
MR.  KELLY  turned   to  a  document  entitled   "SJR  13/HJR  15                                                               
Projections" that  he'd provided to  the committee.  On  the back                                                               
of  this document,  the top  spreadsheet refers  to the  total 5-                                                               
percent  payout,   which  the   [corporation]  believes   is  the                                                               
sustainable  income  the  state  can  expect  to  earn  from  the                                                               
permanent  fund going  forward.   This  distribution in  residual                                                               
income  is based  on maintaining  the status  quo.   He explained                                                               
that  in  reference  to  HB  35,  the  middle  line  of  the  top                                                               
[spreadsheet]  would  be divided  in  half:    half would  go  to                                                               
government  and the  other half  would to  dividends.   Mr. Kelly                                                               
characterized that  [5-percent payout] as the  best-case scenario                                                               
because if  the permanent fund  income is the greatest  source of                                                               
wealth  in the  future,  that is  probably way  to  get the  most                                                               
wealth out of the permanent fund.                                                                                               
MR. KELLY  then turned  to a document  entitled "State  of Alaska                                                               
Sources of Revenue," which many  have described as the do-nothing                                                               
case.  Mr. Kelly viewed this  as the worst decision.  He directed                                                               
attention to  the columns  for fiscal  years 2008  and 2009.   He                                                               
informed   the  committee   that   earlier  in   the  year   [the                                                               
corporation] was asked  what would happen if the CBR  ran out and                                                               
the ERA  were treated in  the same fashion  [as the CBR]  and was                                                               
thrown at the fiscal  gap.  The result would be  that five to six                                                               
years  from now,  the ERA  would be  exhausted.   Therefore, [the                                                               
state] would be dependent upon what is earned in that year.                                                                     
MR. KELLY  pointed out that  some years,  no money is  earned [by                                                               
the permanent fund], which occurred this  year and last.  In such                                                               
a situation five  or six years from now, the  fiscal gap wouldn't                                                               
be solved and  the ability to protect the  permanent fund against                                                               
inflation  - and  to  provide dividends  - would  be  lost.   The                                                               
picture  would be  bleak.   Therefore,  the desire  is to  arrive                                                               
somewhere between the worst and best scenarios.                                                                                 
MR.  KELLY concluded  by stressing  that  although the  permanent                                                               
fund is  large, it  isn't large  enough to  be everything  to all                                                               
people.  It isn't large  enough to allow full inflation-proofing,                                                               
pay  dividends according  to current  statutes, and  pay for  the                                                               
state fiscal gap.   The permanent fund can do  two of those three                                                               
things  fairly well.    Mr. Kelly  emphasized  the importance  of                                                               
inflation-proofing because  it will generate  the money  that can                                                               
be used for the other two parts.                                                                                                
Number 2210                                                                                                                     
REPRESENTATIVE JAMES remarked, "I  agree and have said repeatedly                                                               
that we  can maintain a healthy  dividend over the long  term and                                                               
utilize some of  the earnings of the permanent fund  to help fill                                                               
the gap, but we can't if we wait.   If we do it this year, we can                                                               
do that, and we can guarantee that over the long term."                                                                         
REPRESENTATIVE  HUDSON  noted  that   Mr.  Kelly  and  the  chief                                                               
executive officer of the Alaska  Permanent Fund [Corporation] had                                                               
attended  all meetings  throughout  the previous  summer [of  the                                                               
fiscal policy caucus].                                                                                                          
CHAIR COGHILL  noted his appreciation  of the town  meetings held                                                               
by the fiscal policy caucus.                                                                                                    
Number 2430                                                                                                                     
LARRY PERSILY,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department of  Revenue, came forward to  comment on HB 398.   Mr.                                                               
Persily recalled  earlier discussion  regarding new  revenues and                                                               
building  the   economy,  which  is   one  thing  HB   398  would                                                               
accomplish.   As the  economy grows and  there are  new revenues,                                                               
there  would be  a  direct  effect on  the  dividend because  the                                                               
dividend payout  would be linked  to how  much is needed  to fill                                                               
the fiscal  gap.  As the  budget gap closed, more  funds would be                                                               
available  for the  dividend because  less would  be required  to                                                               
replenish the  CBR under HB 398.   Mr. Persily said  HB 398 could                                                               
be used  to link  oil prices  to state  spending to  the economy.                                                               
That could  be merged with the  percentage of market value.   For                                                               
example,  5  percent would  be  available  for distribution  each                                                               
year, what  was necessary to refill  the CBR would be  taken as a                                                               
line of credit, and the remainder would be used for dividends.                                                                  
CHAIR COGHILL  asked if the  trigger mechanism in  the governor's                                                               
bill [HB 413] was based on  the tax-rate formula using the CBR as                                                               
part of the formula.                                                                                                            
MR. PERSILY  explained that  the governor's  income tax  bill had                                                               
the following two triggers:  it  would cut the income tax rate in                                                               
half  at  $2  billion,  and  cut  it  again  at  $2.5  [billion].                                                               
However, HB  398 says  only $1.5 [billion]  is necessary  for the                                                               
CBR regardless of  the economy, revenue generated  from taxes, or                                                               
the state budget.                                                                                                               
MR. PERSILY referred  to a chart that shows a  band at $1 billion                                                               
and  at  $2  billion  with   the  understanding  that  even  with                                                               
additional  new revenues,  one would  probably not  want to  drop                                                               
below $1  billion on  the CBR.   Although  a certain  amount each                                                               
year would be needed, he  said the public doesn't want government                                                               
to accumulate more savings that it needs.                                                                                       
Number 2749                                                                                                                     
REPRESENTATIVE JAMES expressed concern  with the requirement that                                                               
the CBR be refilled every year  at June 30 with whatever money is                                                               
available.   She said  it seems  the CBR should  be filled  up or                                                               
there should be  a different mechanism.  She  emphasized the need                                                               
to  have  extra  money.    She  noted  her  caution  regarding  a                                                               
constitutional  amendment   that  would   place  Alaska   in  the                                                               
situation that  Representative Hudson's bill does.   She remarked                                                               
that she  doesn't have a  problem with  [following Representative                                                               
Hudson's bill]  for a while,  and if  it works out,  that's fine,                                                               
and then  there could  be a  constitutional amendment.   However,                                                               
she said she wasn't willing "to  go there first" and find out how                                                               
it works  because she didn't want  the state to find  itself in a                                                               
disastrous situation in which the  only option would be to borrow                                                               
MR. PERSILY pointed out that  a constitutional amendment wouldn't                                                               
have to be done.   A percentage-of-market-value payout in statute                                                               
could be used  as Representative Hudson uses  in his legislation.                                                               
Mr. Persily related  his belief that there  would probably always                                                               
be  a need  for something  like the  CBR, a  line of  credit, [or                                                               
other] cash flow.   Currently, 80 percent of  the state's revenue                                                               
comes from oil; even by the end  of the decade, oil will remain a                                                               
significant source of the state's  revenue.  However, that source                                                               
of revenue fluctuates  such that there is the need  for a line of                                                               
credit,  cash  flow to  pay  for  government services  until  tax                                                               
revenues come in later in the year.                                                                                             
Number 2956                                                                                                                     
CHAIR  COGHILL  posed a  situation  in  which  HB 398  is  passed                                                               
[along] with  a tax bill  such as  that proposed by  the governor                                                               
[HB 413].  He surmised that  there would probably be an increased                                                               
take  of the  dividend before  moving  to a  reduction of  taxes,                                                               
because at $1.5  billion [the state] would  take dividends before                                                               
any changes  were made  to the tax  structure.   Therefore, there                                                               
would be tremendous  pressure to increase that  to $2.5 [billion]                                                               
in order to avoid [impacting] the dividends.                                                                                    
MR. PERSILY  specified that one  assumption under HB 398  is that                                                               
for  it  to  work,  some  additional  revenue  sources  would  be                                                               
necessary and  some broad-based taxes would  be necessary because                                                               
the  entire  [fiscal]  gap  couldn't  be  filled  even  with  the                                                               
permanent fund  earnings [under] the percentage  of market value.                                                               
The incentives  under HB 398 are  tied to state spending  and the                                                               
state's accounted  price of  oil, but would  really only  work if                                                               
additional revenue measures are passed.                                                                                         
CHAIR COGHILL  said that is his  point.  He noted  that a segment                                                               
of his district  feels there should be a tax  before touching the                                                               
permanent fund; however, [HB 398] proposes the inverse.                                                                         
MR. PERSILY said  if some form of HB 398  were adopted along with                                                               
an income  tax, HB 398  probably wouldn't become  effective until                                                               
fiscal  year  2004,  depending  upon  the  amount  of  additional                                                               
revenue raised.                                                                                                                 
Number 3215                                                                                                                     
REPRESENTATIVE  JAMES related  her understanding  that when  that                                                               
point is reached, the dividend  will be used [immediately] rather                                                               
than using the excess earnings of the fund.                                                                                     
MR.  PERSILY agreed  that would  be  the case  under the  current                                                               
language  [of HB  398].    However, if  HB  398  were amended  to                                                               
include the percentage of market  value, then it wouldn't take as                                                               
much from the dividend [distribution]  because the full 5 percent                                                               
would be utilized rather than  dividends, which equate to about 4                                                               
percent of the permanent fund earnings.                                                                                         
REPRESENTATIVE BERKOWITZ requested that  Mr. Persily contrast the                                                               
alternative of doing nothing with  following HB 398 or generating                                                               
income off the CBR.                                                                                                             
CHAIR COGHILL recalled that Mr.  Kelly had already spoken to that                                                               
when [he said] the decline would be severe and rapid.                                                                           
REPRESENTATIVE BERKOWITZ  asked, then, whether [HB  398] would be                                                               
preferable of the "two bad choices."                                                                                            
MR. PERSILY answered that the  Department of Revenue believes [HB                                                               
398] is  preferable.  Furthermore,  by keeping money in  the CBR,                                                               
interest is  earned that is  available for public  services, thus                                                               
reducing the need to take permanent fund earnings.                                                                              
Number 3400                                                                                                                     
REPRESENTATIVE COGHILL  announced that  he would  like to  end up                                                               
with  one bill  that would  be the  House State  Affairs Standing                                                               
Committee  committee  substitute.    He said  he  is  using  this                                                               
discussion  as  momentum   to  "push"  the  other   side  of  the                                                               
discussion  in regard  to  government growth  and  programs.   He                                                               
highlighted  that at  least $200  million  has to  come from  the                                                               
government  in some  fashion.    Representative Coghill  remarked                                                               
that part  of the issue  is in  regard to whether  government can                                                               
take the responsibility  of an economy that  should be generating                                                               
the  money.   Furthermore,  the permanent  fund  has created  the                                                               
expectation  that  government can  give  something  that [is]  an                                                               
economic  generator; at  the same  time, it  discourages economic                                                               
generation.  [HB 398 was held over.]                                                                                            

Document Name Date/Time Subjects