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 304-PERMANENT FUND INCOME                                                                                                  
[Contains discussion of SSHB 199]                                                                                               
CHAIR COGHILL  announced the next  order of business,  HOUSE BILL                                                               
NO.  304,  "An Act  relating  to  disposition  of income  of  the                                                               
permanent fund; and  providing for an effective date."   He noted                                                               
that Representatives Berkowitz and Lancaster were present.                                                                      
Number 3819                                                                                                                     
REPRESENTATIVE  JIM WHITAKER,  Alaska State  Legislature, sponsor                                                               
of  HB 304,  presented the  bill.   He referenced  Representative                                                               
Hudson's  earlier  allusion  to the  significant  fiscal  problem                                                               
before [the  legislature].  He  offered that four  options exist:                                                               
cost control; broad-based taxes;  utilization of some earnings of                                                               
the  permanent fund;  and most  important, economic  growth.   He                                                               
concluded  that  all  four  options  must be  used  to  ensure  a                                                               
successful result.                                                                                                              
Number 3904                                                                                                                     
REPRESENTATIVE  WHITAKER  gave  a PowerPoint  presentation.    He                                                               
noted  the importance  of understanding  Alaska's finances  - how                                                               
the  general fund  works in  relationship  to the  Constitutional                                                               
Budget  Reserve  (CBR)  and  how  the  permanent  fund  works  in                                                               
relationship to the earnings reserve  account (ERA).  The general                                                               
fund  receives  revenues  from   oil  royalties,  severance  tax,                                                               
property tax related  to the oil industry,  corporate income tax,                                                               
a  number of  fees,  and miscellaneous  sources.   Because  these                                                               
aren't sufficient to  pay the state's bills in  times of deficit,                                                               
however, the  CBR is used  as a  shock absorber; for  example, in                                                               
the  current  fiscal  year  $865  million  of  drawdown  must  be                                                               
absorbed.  He continued:                                                                                                        
     The permanent  fund has  a corpus  of $21  billion, and                                                                    
     the fund principal is protected.   So what can come out                                                                    
     of  the   principal?    The  answer   is  a  resounding                                                                    
     "Nothing."     It  cannot  be  used.   ...  What's  the                                                                    
     relationship  with the  earnings reserve  account which                                                                    
     ...  at the  end of  this  fiscal year  will have  $2.8                                                                    
     billion in it?   It, too, acts as a  ... shock absorber                                                                    
     for the permanent fund.                                                                                                    
     Debits and  credits to the permanent  fund are realized                                                                    
     by  the earnings  reserve account;  that is,  earnings,                                                                    
     losses, and  dividends all relate to  draws or deposits                                                                    
     to  the earnings  reserve account.    If the  permanent                                                                    
     fund corpus realizes a loss,  it is not the corpus that                                                                    
     absorbs that loss; it is  the earnings reserve account.                                                                    
     That's  an important  point to  remember  - the  corpus                                                                    
     never  loses;  it comes  out  of  the earnings  reserve                                                                    
Number 4119                                                                                                                     
REPRESENTATIVE WHITAKER mentioned the  ongoing budget deficit and                                                               
emphasized that the  funds are related.  At  the current spending                                                               
rate, the  CBR will  be gone  in 2004.   Therefore, the  ERA will                                                               
become  the shock  absorber for  both  the general  fund and  the                                                               
permanent fund;  that is not  sustainable.  If the  ERA functions                                                               
as  a  shock   absorber  for  both  funds,  it   likely  will  be                                                               
effectively drained  by the end  of the decade, and  the dividend                                                               
program  will therefore  cease.   He  remarked,  "At that  point,                                                               
there is  only one way to  fund government, and that  is directly                                                               
with  the earnings  of  the  permanent fund  ...  to the  general                                                               
CHAIR COGHILL asked  if this was discounting any  tax [that might                                                               
be instituted].                                                                                                                 
Number 4312                                                                                                                     
REPRESENTATIVE WHITAKER answered in the affirmative.  He said:                                                                  
     If we  do nothing, that's  what will happen by  the end                                                                    
     of the decade.  ... Those who stand if front  of us and                                                                    
     say  "by doing  nothing,  we are  saving the  permanent                                                                    
     fund dividend"  are simply  wrong.   If we  do nothing,                                                                    
     the dividend  is gone by  the end  of the decade.   And                                                                    
     the only hope that we have  to save that segment of the                                                                    
     Alaskan economy is by doing  something now.  So, as you                                                                    
     can see, then,  there were two - and those  two are the                                                                    
     permanent fund  and its earnings going  directly to the                                                                    
     general fund. ...                                                                                                          
     If  nothing is  done  by  the end  of  the decade,  the                                                                    
     dividend program  is gone, government spending  will be                                                                    
     significantly  reduced by  necessity,  and our  economy                                                                    
     will shrink.   Now what does a  shrinking economy mean?                                                                    
     It means  less prosperity;  it means  less opportunity;                                                                    
     and I  really don't want  to go  there, and I  think it                                                                    
     would  be terribly  irresponsible of  us to  let us  go                                                                    
     there.   Having said [that],  what can we do?  ... That                                                                    
     takes us back to the point at hand.                                                                                        
Number 4414                                                                                                                     
REPRESENTATIVE  WHITAKER offered  that the  state first  needs to                                                               
control  costs,   and  some  form  of   broad-based  taxation  is                                                               
necessary.  He commented:                                                                                                       
     I'm  a conservative  Republican,  and it  is a  painful                                                                    
     experience for me  to have to say that the  way that we                                                                    
     must go  in the  state of Alaska  is to  tax ourselves.                                                                    
     But  I'm also  a responsible  Republican.   And if  I'm                                                                    
     responsible, I  have to stand  up and say this  is what                                                                    
     we must do.                                                                                                                
REPRESENTATIVE WHITAKER  emphasized that  economic growth  has to                                                               
be a significant part of any plan  put forward.  He noted that HB
304 utilizes  $200 million of the  earnings of the ERA,  which is                                                               
transferred to the  general fund.  That is all  the bill does, he                                                               
CHAIR  COGHILL   asked  whether  the  $200-million   transfer  is                                                               
REPRESENTATIVE   WHITAKER    expressed   that   this    was   his                                                               
understanding  based on  information received  from the  [Alaska]                                                               
Permanent  Fund Corporation.    He added  that  his own  analysis                                                               
draws the same conclusion.                                                                                                      
CHAIR  COGHILL  asked, "And  that  would  be under  the  existing                                                               
formula as we stand right now?"                                                                                                 
Number 4632                                                                                                                     
REPRESENTATIVE FATE  inquired what - according  to permanent fund                                                               
personnel  - is  the maximum,  sustainable amount  that could  be                                                               
taken from the ERA.                                                                                                             
TAPE 02-16, SIDE B                                                                                                              
Number 4625                                                                                                                     
REPRESENTATIVE WHITAKER offered that  the [Alaska] Permanent Fund                                                               
Corporation has  indicated the state  can utilize  $1.25 billion;                                                               
currently,  over  $1  billion  is being  used  for  the  dividend                                                               
program.  Therefore, a $200-million level is sustainable.                                                                       
Number 4553                                                                                                                     
REPRESENTATIVE FATE asked if other  scenarios that include varied                                                               
amounts from  $150 million to $300  million have been tried.   He                                                               
asked whether  the 200 [million dollars]  seems to Representative                                                               
Whitaker to be the optimal amount to take out of the ERA.                                                                       
REPRESENTATIVE WHITAKER replied yes.                                                                                            
Number 4525                                                                                                                     
CHAIR  COGHILL offered  that using  $200 million  [from the  ERA]                                                               
leaves at least a $660-million question.   He surmised that it is                                                               
a part of the solution, according to Representative Whitaker.                                                                   
REPRESENTATIVE WHITAKER answered in the affirmative.                                                                            
CHAIR  COGHILL stated  that Representative  Whitaker's point  was                                                               
well  taken regarding  [the state's]  spending above  what it  is                                                               
able.   He  speculated that  the [decline]  in oil  [revenue] has                                                               
precipitated  this.     He  expressed   his  opinion   that  [the                                                               
legislature] has  to lead  with a  good-faith effort  of reducing                                                               
government.    These  questions   become  significant,  he  said,                                                               
because [government  spending cannot  be reduced by  $1 billion].                                                               
This would offer  a $200 million fix.  He  offered that he thinks                                                               
this is a legitimate discussion.                                                                                                
Number 4414                                                                                                                     
REPRESENTATIVE JAMES asked Representative  Whitaker whether it is                                                               
his  assumption,   with  this  legislation,  that   changing  the                                                               
calculation of the dividend isn't on the table.                                                                                 
REPRESENTATIVE WHITAKER replied:                                                                                                
     This  is an  idea  in  search of  a  better  idea.   If                                                                    
     there's a  better way to  approach it, then  we should.                                                                    
     And  certainly  reformulation  of the  distribution  of                                                                    
     permanent fund earnings is something  that should be on                                                                    
     the table.  It is not inclusive to this bill.  No.                                                                         
REPRESENTATIVE JAMES  asked if this  is or can be  made available                                                               
to the public.                                                                                                                  
CHAIR COGHILL said it could be  made available.  He noted that he                                                               
has  testimony from  Mr. Goldsmith  regarding  what would  happen                                                               
under the various scenarios with  regard to job opportunities and                                                               
the  economic  impact  in  Alaska.    He  offered  to  make  that                                                               
available as well.                                                                                                              
REPRESENTATIVE  JAMES expressed  concern  that  taking a  billion                                                               
dollars  from   the  economy  will  have   a  disastrous  impact.                                                               
Therefore, there  has been the  suggestion to [withdraw  it] over                                                               
time,  which  has  been done  with  the  [legislative  majority's                                                               
previous] five-year  plan that  she believes  has left  the state                                                               
better off.                                                                                                                     
REPRESENTATIVE JAMES  noted that  [the materials]  indicate there                                                               
would  be  2,600  jobs  lost  with the  income  tax  proposed  by                                                               
Representative Hudson  [SSHB 199],  while sales tax  would reduce                                                               
3,200 jobs, as would the dividend  cut.  A cut in operation would                                                               
reduce  jobs  by  6,500.     She  expressed  concern  that  these                                                               
projections  are  based  on  what is  known  today,  rather  than                                                               
projections of what  will happen tomorrow.  The  state needs more                                                               
business.   She  said  she  believes the  state  is  going to  be                                                               
totally dependent  upon oil and  gas production in order  to pull                                                               
out of this  [economic situation].  However, there  is the belief                                                               
that  the  state existed  before  oil  and  gas, and  thus  other                                                               
applications  such  as  mining,  fishing,  and  timber  could  be                                                               
utilized in order to have a  better economy.  She asked if [those                                                               
other applications] have been considered for the projections.                                                                   
Number 4035                                                                                                                     
REPRESENTATIVE  WHITAKER noted  that he,  too, is  concerned with                                                               
Alaska's economy and the fact  that Alaska's gross state product,                                                               
the true measure  of prosperity, has grown very slowly.   In some                                                               
measures, the gross  state product has even shrunk  over the last                                                               
decade.   In reviewing ways  that the aforementioned  trend could                                                               
turn, Representative Whitaker felt  that there were some choices.                                                               
He mentioned that the tourism  industry should never be forgotten                                                               
as  a  growth  opportunity.   Furthermore,  basic  transportation                                                               
infrastructure   ensures  that   Alaska  will   have  significant                                                               
opportunities that it doesn't today.   Moreover, Alaska's economy                                                               
is  directly  tied  to  the   oil  and  gas  industry  for  which                                                               
production has declined for a  significant period, although it is                                                               
currently somewhat stable.  If Alaska  is to grow the oil and gas                                                               
sector of  the economy, there  must be a  competitive environment                                                               
on the North Slope.  Additionally,  there must be a [natural] gas                                                               
line.  He continued:                                                                                                            
     If, indeed,  we are to  solve our economic  problem, we                                                                    
     need to  quit looking  at things  like this  and saying                                                                    
     that is  the future - and  [instead] say a gas  line is                                                                    
     our future, increased production  on the North Slope is                                                                    
     our future, increased  size of a tourism  sector of our                                                                    
     economy is our future, a railroad is our future.  The                                                                      
     basic stuff economies are built on is our future.                                                                          
Number 3816                                                                                                                     
CHAIR COGHILL  remarked that  the drop in  oil prices  has forced                                                               
this discussion.   "The pressure that is bringing it  to bear is,                                                               
can  we afford  the type  of government  we have,"  he said.   He                                                               
related his belief  that [Alaska] has fallen  into an entitlement                                                               
world, often  federally driven, that  has grown since  the 1960s.                                                               
That model isn't based on what  America is based on, which is the                                                               
part of  the discussion  Chair Coghill said  he is  attempting to                                                               
force.   He related his view  that the entitlement world  and the                                                               
production  world have  to  at least  grow  together, if  they're                                                               
going to grow.  In regard to  HB 304, Chair Coghill asked why the                                                               
bill [uses] the ERA rather than the CBR.                                                                                        
REPRESENTATIVE WHITAKER answered that using  the ERA is driven by                                                               
necessity.  Regarding  the state's options, some  earnings of the                                                               
permanent fund  must be  utilized in order  to balance  the state                                                               
budget, which  was the  intention of the  permanent fund  when it                                                               
was established.                                                                                                                
CHAIR COGHILL  clarified that the  policy call is whether  to use                                                               
the ERA  as put forth in  [Representative Whitaker's legislation]                                                               
or use other  mechanisms utilizing the CBR.   Chair Coghill noted                                                               
that  this  is  a  dynamic   discussion  because  other  proposed                                                               
legislation  may change  the CBR  or the  way the  permanent fund                                                               
payout is figured.                                                                                                              
Number 3600                                                                                                                     
REPRESENTATIVE   JAMES  turned   to   the  state's   demographics                                                               
regarding 18-  to 44-year-olds.   She questioned who is  going to                                                               
do the work  if all these jobs come to  pass.  Furthermore, there                                                               
is much anecdotal  information that for the years  in which there                                                               
has been  a permanent  fund and maximized  use of  federal funds,                                                               
there is  a large, growing  poor sector  who are unable  to work.                                                               
Although Representative James wanted to  take of Alaskans who are                                                               
needy, she  said she didn't want  them to come from  other states                                                               
because Alaska is more generous than other states.                                                                              
Number 3511                                                                                                                     
REPRESENTATIVE  BILL  HUDSON,  Alaska State  Legislature,  agreed                                                               
with Representative Whitaker that the  state has to look forward.                                                               
He explained that one reason he  has put forth his bills has been                                                               
his belief  in the need  to preserve  and, if possible,  grow the                                                               
CBR.   He  recalled being  in the  legislature when  the CBR  was                                                               
created as  a rainy-day fund  and a growth and  opportunity fund.                                                               
If  the income  of  a billion  dollars  or so  of  the CBR  isn't                                                               
available, there will be no  major opportunities for new kinds of                                                               
economic development in  the state.  "If you come  up with a plan                                                               
... that  preserves as much of  that as possible, has  the income                                                               
available  from  it  to  provide   for  the  maintenance  of  our                                                               
infrastructure, and  the growth  and opportunities to  the future                                                               
of the  State of Alaska,  I think we will  have done a  very good                                                               
piece of work," he concluded.                                                                                                   
CHAIR COGHILL commended  those who'd established the  CBR and the                                                               
permanent fund.                                                                                                                 
REPRESENTATIVE   KEN   LANCASTER,   Alaska   State   Legislature,                                                               
mentioned  the importance  of realizing  that prior  legislatures                                                               
put  in almost  half  of what  is in  the  permanent fund  corpus                                                               
today.   Without the corpus, the  earnings of the CBR  or the ERA                                                               
wouldn't exist.                                                                                                                 
CHAIR COGHILL indicated he would  hold the public testimony.  [HB
304 was held over.]                                                                                                             
HB 199-INCOME TAX: INDIVIDUALS/TRUSTS/ESTATES                                                                                 
[Contains discussion relating to HB 413]                                                                                        
CHAIR COGHILL brought  attention to the final  order of business,                                                               
SPONSOR SUBSTITUTE  FOR HOUSE BILL  NO. 199, "An Act  relating to                                                               
taxation, including  taxation of income of  individuals, estates,                                                               
and trusts."                                                                                                                    
Number 3730                                                                                                                     
REPRESENTATIVE BILL HUDSON, Alaska  State Legislature, sponsor of                                                               
SSHB 199, specified that the  amendment in packets is labeled 22-                                                               
LS0753\J.1, Kurtz, 2/18/02.  It read:                                                                                           
     Page 1, line 12:                                                                                                           
          Delete "(1)"                                                                                                          
     Page 1, line 13:                                                                                                           
          Delete ";"                                                                                                            
          Insert "."                                                                                                            
     Page 1, line 14, through page 2, line 1:                                                                                   
          Delete all material and insert:                                                                                       
               "As  soon as  practicable after  September 30                                                                    
     of  each   year,  the  department  shall   publish  the                                                                    
     applicable  tax  rate  under this  subsection  for  the                                                                    
     following calendar  year.  The applicable  tax rate for                                                                    
     a resident individual is                                                                                                   
               (1)    two  and  one-fourth  percent  of  the                                                                    
     individual's  taxable income  if the  unaudited balance                                                                    
     in the  budget reserve  fund created  by art.  IX, sec.                                                                    
     17,   Constitution  of   the   State   of  Alaska,   on                                                                    
     September 30,    was   equal    to    or   less    than                                                                    
               (2)  one percent  of the individual's taxable                                                                    
     income if  the unaudited balance in  the budget reserve                                                                    
     fund created by  art. IX, sec. 17,  Constitution of the                                                                    
     State  of  Alaska,  on   September 30,  was  more  than                                                                    
     $2,000,000,000 but less than $2,500,000,000; or                                                                            
               (3)   zero  if the  unaudited balance  in the                                                                    
     budget  reserve  fund  created by  art.  IX,  sec.  17,                                                                    
     Constitution of  the State of Alaska,  on September 30,                                                                    
     was $2,500,000,000 or more."                                                                                               
     Page 2, line 3:                                                                                                            
          Delete "(1)"                                                                                                          
     Page 2, line 6:                                                                                                            
          Delete ";"                                                                                                            
          Insert "."                                                                                                            
     Page 2, lines 7 - 10:                                                                                                      
          Delete all material and insert:                                                                                       
               "As  soon as  practicable after  September 30                                                                    
     of  each   year,  the  department  shall   publish  the                                                                    
     applicable  tax  rate  under this  subsection  for  the                                                                    
     following calendar year. The  applicable tax rate for a                                                                    
     nonresident  or part-year  resident individual,  or for                                                                    
     an estate interest is                                                                                                      
               (1)    two  and  one-fourth  percent  of  the                                                                    
     individual's,  estate's,  or  trust's  taxable  income,                                                                    
     multiplied  by a  fraction, the  numerator of  which is                                                                    
     taxable  income  from  sources in  the  state  and  the                                                                    
     denominator  of  which  is   taxable  income  from  all                                                                    
     sources,  if  the  unaudited   balance  in  the  budget                                                                    
     reserve fund created by art.  IX, sec. 17, Constitution                                                                    
     of the State  of Alaska, on September 30,  was equal to                                                                    
     or less than $2,000,000,000;                                                                                               
               (2)     one  percent  of   the  individual's,                                                                    
     estate's, or  trust's taxable  income, multiplied  by a                                                                    
     fraction,  the numerator  of  which  is taxable  income                                                                    
     from sources in the state  and the denominator of which                                                                    
     is taxable  income from all  sources, if  the unaudited                                                                    
     balance in the budget reserve  fund created by art. IX,                                                                    
     sec.  17,  Constitution  of the  State  of  Alaska,  on                                                                    
     September 30,  was more  than  $2,000,000,000 but  less                                                                    
     than $2,500,000,000; or                                                                                                    
               (3)  zero if the unaudited balance in the                                                                        
     budget  reserve  fund  created by  art.  IX,  sec.  17,                                                                    
     Constitution of  the State of Alaska,  on September 30,                                                                    
     was $2,500,000,000 or more."                                                                                               
REPRESENTATIVE  HUDSON explained  that the  amendment proposes  a                                                               
trigger mechanism on  SSHB 199, the flat-tax proposal.   It would                                                               
establish  three different  levels of  the constitutional  budget                                                               
reserve (CBR) and trigger the tax,  depending upon the level.  If                                                               
there  is more  than $2  billion in  the CBR  but less  than $2.5                                                               
billion, [the flat tax] would be  1 percent.  However, if the CBR                                                               
is  in excess  of $2.5  billion, the  [flat tax]  would be  zero.                                                               
Therefore, the tax would be  related to the need.  Representative                                                               
Hudson pointed out  that [the amendment] language  is included in                                                               
the governor's legislation  [HB 413].  Even  with this amendment,                                                               
there will be  no bearing on the ultimate production  of SSHB 199                                                               
because  it will  still draw  in $285  million to  help fill  the                                                               
fiscal gap.                                                                                                                     
REPRESENTATIVE  JAMES  asked  if  this the  only  amendment  that                                                               
Representative Hudson would entertain.                                                                                          
REPRESENTATIVE  HUDSON  answered  that   he  was  open  to  other                                                               
constructive suggestions.                                                                                                       
CHAIR  COGHILL noted  that  he had  specifically  asked for  this                                                               
amendment.   However, it doesn't  eliminate the ability  to place                                                               
other amendments before  the committee.  He said  he'd wanted the                                                               
committee to see the amendment before the next hearing.                                                                         
Number 4130                                                                                                                     
REPRESENTATIVE  JAMES  related  her  belief that  more  than  one                                                               
trigger is  necessary, as is  the other side  of the issue.   She                                                               
said she  isn't necessarily against  the amendment, but  there is                                                               
the  need to  see the  net result  first.   There needs  to be  a                                                               
leveling [mechanism] on both sides.                                                                                             
CHAIR COGHILL  clarified that  there was  [no intention]  to take                                                               
anything  off the  table.   Therefore, he  indicated the  need to                                                               
look at [all the bills  relating to generating more state income]                                                               
in   order  to   avoid  passing   out  contradictory   pieces  of                                                               
Number 4258                                                                                                                     
REPRESENTATIVE  HUDSON said  he  appreciated the  need to  ensure                                                               
that  government is  lean.    However, he  pointed  out that  the                                                               
budget process happens  outside of this committee;  thus he urged                                                               
the chair not to hold up  any essential elements.  He related his                                                               
belief  that  there  will  be   strong  support  for  significant                                                               
"holding the line"  [for state spending].  However,  there has to                                                               
be a  combination of  "holding the  line" and  filling the  gap -                                                               
with [some from  taxes], some coming from the CBR,  some from the                                                               
earnings reserve [account]  (ERA) of the permanent fund.   All of                                                               
those elements have  to meld together at the same  time.  If that                                                               
is the goal, Representative Hudson said he is supportive of it.                                                                 
CHAIR  COGHILL acknowledged  the purview  of the  [House] Finance                                                               
Committee.   However, he  also recognized that  as chair  of this                                                               
committee, he has this opportunity to have a say on the issue.                                                                  
Number 4521                                                                                                                     
REPRESENTATIVE JAMES  remarked that  some reductions  in spending                                                               
will require  statutory change.   Therefore, a  bill will  be the                                                               
mechanism, rather than  merely addressing the budget.   [SSHB 199                                                               
was held over.]                                                                                                                 

Document Name Date/Time Subjects