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 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                                                                    
     account.                                                                                                                   
                                                                                                                                
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                                                               
fund."                                                                                                                          
                                                                                                                                
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                                                               
concluded.                                                                                                                      
                                                                                                                                
CHAIR  COGHILL   asked  whether  the  $200-million   transfer  is                                                               
sustainable.                                                                                                                    
                                                                                                                                
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 398-DISPOSITION OF PERMANENT FUND INCOME                                                                                   
                                                                                                                                
[Contains discussion of HB 35, HB 304, and HB 413]                                                                              
                                                                                                                                
CHAIR COGHILL  announced the next  order of business,  HOUSE BILL                                                               
NO. 398, "An Act relating to  disposition of income of the Alaska                                                               
permanent fund; and providing for an effective date."                                                                           
                                                                                                                                
Number 3142                                                                                                                     
                                                                                                                                
REPRESENTATIVE DREW SCALZI, Alaska  State Legislature, sponsor of                                                               
HB 398, noted  that his proposed legislation is similar  to HB 35                                                               
and  HB 304.   He  stated that  it is  not a  "stand-alone" bill;                                                               
other revenue streams would need to  be incorporated.  He said it                                                               
does take  "a little angle"  regarding use of the  permanent fund                                                               
earnings.   He  noted that  the recent  fiscal policy  caucus has                                                               
included discussion  about maintaining the  Constitutional Budget                                                               
Reserve  (CBR) at  some level  - whether  at $1  billion or  $1.5                                                               
billion - to use as a shock absorber for [unpredicted]                                                                          
expenditures related to the fluctuation of oil [prices].                                                                        
                                                                                                                                
REPRESENTATIVE   SCALZI  indicated   his  friend,   former  state                                                               
Representative  and Senator  Clem  Tillion, was  involved in  the                                                               
past "at  this level  of creating the  dividend program,"  with a                                                               
plan to somehow tie  the permanent fund to the price  of oil.  He                                                               
then paraphrased the written sponsor statement as follows:                                                                      
                                                                                                                                
     [House  Bill  398 is]  a  mechanism  that maintains  an                                                                    
     adequate balance  of the constitutional  budget reserve                                                                    
     for  public  services.   It  would  restore the  budget                                                                    
     reserve fund at  [the] start of each  [fiscal] year, to                                                                    
     $1.5  billion,   [a]  reasonable  amount   to  preserve                                                                    
     services, while  providing a  cushion against  any one-                                                                    
     time, one-year risk in low oil prices.                                                                                     
                                                                                                                                
     [House Bill  398] would use permanent  fund earnings to                                                                    
     refill the  budget reserve  each year,  while providing                                                                    
     for a healthy dividend for Alaskans.                                                                                       
                                                                                                                                
     [House Bill  398] would  serve as  an incentive  to the                                                                    
     legislature,  the governor,  and the  public, to  adopt                                                                    
     new revenue  sources to help  close the budget  gap and                                                                    
     to  preserve the  dividend for  future legislatures  to                                                                    
     come.                                                                                                                      
                                                                                                                                
     In  HB  398,  it   would  encourage  responsible  state                                                                    
     spending  and the  linking of  state spending  with the                                                                    
     annual  dividend.   [House  Bill]  398  would link  the                                                                    
     amount of  each year's  dividends to  the price  of oil                                                                    
     and the  state spending, which would  make the dividend                                                                    
     more relevant to an Alaska  economic situation than the                                                                    
     existing program  that links  the dividend only  to the                                                                    
     permanent fund's Wall Street investments.                                                                                  
                                                                                                                                
     [The legislation would] use  ... the existing statutory                                                                    
     formula to  determine the amount of  the permanent fund                                                                    
     earnings available  for distribution each year.   There                                                                    
     would  be  no  change   in  the  current  formula  that                                                                    
     averages  the  fund's  earning[s] over  the  past  five                                                                    
     years.  That would remain the same.                                                                                        
                                                                                                                                
     [The  legislation  would]  use the  existing  statutory                                                                    
     formula  to inflation-proof  the fund's  principal; but                                                                    
     before  any  money  is  distributed  for  any  purpose,                                                                    
     sufficient  funds  would  be moved  from  the  earnings                                                                    
     reserve  account   to  the   principal  to   cover  ...                                                                    
     inflation over the past year.                                                                                              
                                                                                                                                
     Then,  the budget  reserve ...  trigger  ... would  ...                                                                    
     kick in at  that point.  In any year  [that] the CBR is                                                                    
     below $1.5  billion on June  30 ...  - the last  day of                                                                    
     the fiscal  year - this  legislation would  direct that                                                                    
     an  amount  sufficient  to  restore  the  CBR  to  $1.5                                                                    
     [billion]  ... be  taken from  the funds  available for                                                                    
     distribution.                                                                                                              
                                                                                                                                
     This does not go into  the earnings reserve [account] -                                                                    
     only  the  excess  earnings  that   are  used  for  the                                                                    
     permanent fund  dividend program.   And that has  to be                                                                    
     very  clear,   because  if  we  don't   do  that,  then                                                                    
     obviously we're  going to eat  up the  earnings reserve                                                                    
     [account],  just  like Representative  Whittaker  said,                                                                    
     and then  we don't have  anything but the  corpus left.                                                                    
     So  this  would ...  take  an  amount to  restore  that                                                                    
     [$]1.5 [billion]  from the calculated amount  that goes                                                                    
     through the dividends.                                                                                                     
                                                                                                                                
     Now, as I  said before, this is not  a stand-alone bill                                                                    
     by  any means,  and I  did  not try  to incorporate  an                                                                    
     income tax or sales tax  or anything else into that, or                                                                    
     projections  on what  would happen  if we  did have  an                                                                    
     economic  stimulus,  or  if  we  had  tremendously  low                                                                    
     prices in oil, or low production.                                                                                          
                                                                                                                                
Number 2725                                                                                                                     
                                                                                                                                
     But I do think we need  a shock absorber to have a fund                                                                    
     balance,  so to  speak, like  most boroughs  and cities                                                                    
     do, that  they need to rely  on.  And that's  what that                                                                    
     CBR, in my belief, is for.                                                                                                 
                                                                                                                                
     So, in years  of low oil prices, we would  have to take                                                                    
     more of  those earnings.   This does  not set,  like HB
     304,  a   level  of  $200   million  each   year;  it's                                                                    
     whatever's necessary.   It could  be more; it  could be                                                                    
     less.   But that is going  to have to be  attributed to                                                                    
     all  those things  that will  kick in:   price  of oil,                                                                    
     production  of oil,  what  we pay  in  income taxes  or                                                                    
     sales  taxes,  [and]  any   of  the  other  mechanisms.                                                                    
     That's our choice.                                                                                                         
                                                                                                                                
     How  bad do  we  want to  tax ourselves?    We ask  the                                                                    
     people, "How  valuable is that permanent  fund dividend                                                                    
     to you?"   You make the call.  You  tell us, because if                                                                    
     you  don't,  it's  going  to   take  more  out  of  the                                                                    
     permanent fund dividend to supplement the CBR.                                                                             
                                                                                                                                
     So what I've done  in this bill - HB 398  - is start at                                                                    
     the  $1.5  billion  and  work  backwards.    It's  just                                                                    
     another option  to the  two bills  that you  had before                                                                    
     us.                                                                                                                        
                                                                                                                                
Number 2607                                                                                                                     
                                                                                                                                
REPRESENTATIVE  BILL HUDSON,  Alaska  State Legislature,  offered                                                               
his belief that Representative [Scalzi]  has offered an excellent                                                               
idea.   He  added  that he  saw  no reason  that  the concept  of                                                               
percentage of  market value (POMV)  couldn't be cranked  into his                                                               
bill   as   well,  because   it   would   provide  leveling   and                                                               
stabilization over  time.  He  indicated positive  [results] from                                                               
using this concept, providing that  "we come up with the leveling                                                               
effect of the POMV."                                                                                                            
                                                                                                                                
REPRESENTATIVE HUDSON noted  that under [Representative Scalzi's]                                                               
approach, as  [the CBR funds] are  spent, they fill back  up, but                                                               
only to the amount necessary.   He compared that with his own [HB
35], in  which he has  chosen an  "automatic 50-50 [split]."   He                                                               
said  the  advantage of  putting  it  into  the  CBR is  that  it                                                               
requires a  [three-fourths] vote of  the House and  Senate before                                                               
it  can be  tapped.   He added,  "We put  that in  there when  we                                                               
created  the  constitutional  budget reserve,  to  constrain  the                                                               
growth of government,  to constrain the amount of  spending."  He                                                               
noted that  some people  want to  do away with  that and  allow a                                                               
simple majority  vote to tap  those funds; however, he  said that                                                               
wasn't the original intent in creating the CBR.                                                                                 
                                                                                                                                
REPRESENTATIVE HUDSON  told the  committee he liked  aspects from                                                               
both his  own and Representative  Scalzi's bills and  thought the                                                               
two could be "quite nicely accommodated."                                                                                       
                                                                                                                                
Number 2411                                                                                                                     
                                                                                                                                
CHAIR  COGHILL  reminded  members  that when  the  committee  had                                                               
considered one of  the income tax proposals, there  was a trigger                                                               
mechanism that  dealt with  keeping the CBR  at a  certain level.                                                               
He added,  "Somewhere along  the line,  if we  need to,  we might                                                               
want to reconcile those."                                                                                                       
                                                                                                                                
Number 2360                                                                                                                     
                                                                                                                                
REPRESENTATIVE  JAMES offered  the following  understanding, "You                                                               
calculate  the  dividend in  the  same  way that  it's  currently                                                               
calculated, which is  ... 21 percent of  [the] five-year average,                                                               
or  half of  the  earnings reserve  [account],  whichever is  the                                                               
smaller."    Indicating  HB  398 presumably  was  based  on  $1.5                                                               
billion in  the CBR,  she asked  if the only  way "it  could drop                                                               
from that would be [by] having spent it."                                                                                       
                                                                                                                                
REPRESENTATIVE SCALZI said, "That's correct."                                                                                   
                                                                                                                                
REPRESENTATIVE  JAMES   asked,  "If  we   had  to  go   into  the                                                               
constitutional  budget  reserve to  fill  the  budget, then  that                                                               
money  essentially would  be coming  right out  of the  dividend,                                                               
directly."                                                                                                                      
                                                                                                                                
REPRESENTATIVE SCALZI concurred.                                                                                                
                                                                                                                                
REPRESENTATIVE JAMES asked if whatever  was left of the ERA would                                                               
be available for other spending, or would "sit there."                                                                          
                                                                                                                                
REPRESENTATIVE  SCALZI  explained that  under  [HB  398] the  ERA                                                               
wouldn't be touched.   He said there  may be a time  when, if the                                                               
legislature spent  the CBR down  to $3 million, for  example, and                                                               
the available revenue  from the ERA calculation  for the dividend                                                               
program was only $1.1 billion,  then the budget reserve gap could                                                               
not be  filled to $1.5 [billion]  again.  He clarified,  "You can                                                               
only  take what  is available  from  the dividend  program."   He                                                               
noted that using the CBR  requires a [three-quarters] vote of the                                                               
legislature.                                                                                                                    
                                                                                                                                
Number 2210                                                                                                                     
                                                                                                                                
CHAIR COGHILL  said, "So,  if we  went to $8  [a barrel  for] oil                                                               
again -  heaven forbid - at  a spending level that  we're at now,                                                               
it  would be,  easily, right  at [$1.5  billion], and  that could                                                               
take the whole CBR, going beyond what the dividend could give."                                                                 
                                                                                                                                
REPRESENTATIVE SCALZI concurred.   He paraphrased an example from                                                               
the second page of his sponsor statement, which read as follows:                                                                
                                                                                                                                
     If, after a broad-based  tax and other revenue measures                                                                    
     were adopted to  raise a total of $600  million a year,                                                                    
     and  if  the  remaining   budget  gap  were  then  $500                                                                    
     million,  then   $500  million  would  be   taken  from                                                                    
     permanent fund earnings to refill the [CBR].                                                                               
                                                                                                                                
     And, if  $1.1 billion  in permanent fund  earnings were                                                                    
     available  for distribution  under  the 5-year  income-                                                                    
     averaging  formula, there  would be  $600 million  left                                                                    
     for  dividends after  $500 million  was used  to refill                                                                    
     the  [CBR].   That  would  equal  a dividend  of  about                                                                    
     $1,000 per Alaskan.                                                                                                        
                                                                                                                                
CHAIR COGHILL noted,  "It wouldn't grow beyond the  formula if we                                                               
became very prosperous."                                                                                                        
                                                                                                                                
REPRESENTATIVE SCALZI responded as follows:                                                                                     
                                                                                                                                
     If  we  became  prosperous through  other  means,  that                                                                    
     mechanism would still be in  place to go the other way.                                                                    
     If, for instance, as  Representative Hudson was saying,                                                                    
     ... you  have a floating  measure in this --  you don't                                                                    
     really have  that in the  other ... bills,  because you                                                                    
     can't really flex your income  tax yearly.  I mean, you                                                                    
     have to  vote on what  the income  tax is going  to be.                                                                    
     You  can ...  raise  your sales  tax,  but it's  always                                                                    
     retroactive as to  what happened before.   We know that                                                                    
     when we have  to fill the gap, we go  right to that CBR                                                                    
     and we make  a vote at the end of  session to fill that                                                                    
     gap.  And  that's why I think we  need something that's                                                                    
     flexible,  ... yet  very much  attainable.   So, that's                                                                    
     where the flexibility comes in,  in having it drawn out                                                                    
     this way.                                                                                                                  
                                                                                                                                
Number 2007                                                                                                                     
                                                                                                                                
REPRESENTATIVE  JAMES  asked  Representative Scalzi  if,  in  his                                                               
plan, the excess earnings of the  fund left in the ERA would also                                                               
grow.                                                                                                                           
                                                                                                                                
REPRESENTATIVE SCALZI said, "That's correct."                                                                                   
                                                                                                                                
REPRESENTATIVE  JAMES  noted that  there  would  be two  pots  of                                                               
money, then, guaranteeing  $1.5 [billion] in the  CBR and growing                                                               
the ERA of the permanent fund.                                                                                                  
                                                                                                                                
REPRESENTATIVE SCALZI concurred.  He  said the intent was not "to                                                               
go into"  the ERA because  once it is gone,  all that is  left is                                                               
the principal and there is  nothing to work with.  Representative                                                               
Scalzi said he is trying to  save both the principal and the ERA.                                                               
He suggested Mr. Persily could answer questions as well.                                                                        
                                                                                                                                
REPRESENTATIVE JAMES noted two options  for future legislators to                                                               
address a "hole  in the budget":  a three-quarters  vote to go to                                                               
the CBR reserve,  or a majority vote  to take it out  of the ERA.                                                               
She said,  "I don't  know that  that's the  option that  we would                                                               
like to leave."                                                                                                                 
                                                                                                                                
CHAIR COGHILL said it  is a policy call.  He  added, "And that is                                                               
actually   an   option  that   is   open   today,  according   to                                                               
Representative Berkowitz, and I think that's accurate."                                                                         
                                                                                                                                
Number 1725                                                                                                                     
                                                                                                                                
REPRESENTATIVE  HUDSON said  that was  precisely the  reason that                                                               
he'd amended  his bill.   He said  he believes that  the [budget]                                                               
gap  is so  atrocious that  he didn't  want to  have to  go to  a                                                               
three-quarters vote  on the  CBR.  He  stated that  he originally                                                               
had all of the  income "that we split" going into  the CBR in the                                                               
same manner as in [HB 398].  He continued as follows:                                                                           
                                                                                                                                
     I have  seen the [three-quarters]  vote of the  [CBR] -                                                                    
     regardless [of]  whether the Democrats are  in control,                                                                    
     or the  Republicans are in  control - become,  "My vote                                                                    
     has got  to be  worth something; so,  you don't  get my                                                                    
     vote unless I get something else into the budget."                                                                         
                                                                                                                                
CHAIR COGHILL said,  "It has been held hostage  to actually raise                                                               
the cost of spending, in many cases."                                                                                           
                                                                                                                                
Number 1632                                                                                                                     
                                                                                                                                
REPRESENTATIVE ETHAN BERKOWITZ,  Alaska State Legislature, stated                                                               
the following:                                                                                                                  
                                                                                                                                
     During the time  that I have negotiated on  the CBR, we                                                                    
     have used  it as  a shield;  we have not  used it  as a                                                                    
     sword.  And if it does  anything, what it does is shift                                                                    
     spending  priorities,  rather  than  increase  spending                                                                    
     priorities.   The  amount  of  additional funds  [that]                                                                    
     have gone into the budget ...  on account of a CBR vote                                                                    
     have been  relatively minimal, compared to  the overall                                                                    
     size of the budget.                                                                                                        
                                                                                                                                
CHAIR COGHILL commented, "It is a negotiation tool."                                                                            
                                                                                                                                
Number 1520                                                                                                                     
                                                                                                                                
CARRIE  WILLIAMS,  testifying   via  teleconference,  asked  that                                                               
everyone realize  that the  state must raise  more revenue.   She                                                               
said  the PFD  has become  very important  to many  people.   She                                                               
posited that  the "alternative tax  issue" needs to  be addressed                                                               
and asked that  the legislature consider the impact  of the local                                                               
issues.   Ms. Williams  mentioned a cruise  tax, income  tax, and                                                               
alcohol tax, asking  [the committee] not to  eliminate those from                                                               
local government.   She  asked the committee  to consider  in its                                                               
plans   that  local   government  needs   to  assume   increasing                                                               
responsibility for "its own support and its needs."                                                                             
                                                                                                                                
MS.  WILLIAMS  noted  that  she didn't  have  possession  of  the                                                               
complete  bill, but  surmised that  HB 398  suggests a  temporary                                                               
transfer of  funds from the  CBR.  She  said, "In the  interim, I                                                               
would say, if we would go  that direction, please put an absolute                                                               
deadline on  when you  would come  up with  alternative revenues,                                                               
not depending on [the] CBR and withdrawing annually from that."                                                                 
                                                                                                                                
CHAIR COGHILL clarified the following for Ms. Williams:                                                                         
                                                                                                                                
     Just for your information,  it was the earnings reserve                                                                    
     account.  And it would be  a $200 million draw that has                                                                    
     been  calculated  to  be sustainable.    And  it  would                                                                    
     certainly be any  legislative session's prerogative not                                                                    
     to  take  it.    So,  you  know,  it  would  have  some                                                                    
     safeguard.                                                                                                                 
                                                                                                                                
MS. WILLIAMS, in response to  a question from Chair Coghill, said                                                               
she is from Cooper Landing.   She then stated her belief that [HB
398] would  allow the legislature  to maintain and  replenish the                                                               
CBR at  a certain level.   She asked, "Would this  ever equate to                                                               
the fact  that no PFD would  be available for the  public payout?                                                               
She asked  whether it  is possible  to withdraw  adequate [money]                                                               
from the CBR to [equal] earnings on the current market.                                                                         
                                                                                                                                
CHAIR COGHILL affirmed that it  wouldn't be tied to the earnings.                                                               
If  [Alaska] had  a "bad  oil year,  it could  possibly take  the                                                               
whole dividend," he said.                                                                                                       
                                                                                                                                
MS. WILLIAMS  said she thought  it might  be an issue  the public                                                               
would want to be educated on.   She said, "We look forward to Mr.                                                               
Lancaster coming  around and educating  us all."   She reiterated                                                               
the  need   to  consider  other  alternatives.     She  mentioned                                                               
depreciated  capital   facilities,  harbors,  and   schools,  for                                                               
example, that are in near-disaster condition and need attention.                                                                
                                                                                                                                
MS.  WILLIAMS  indicated  she  would   be  listening  to  further                                                               
testimony.   At present, without  additional education,  she said                                                               
she would  be in  support of looking  at the  $200,000 withdrawal                                                               
from the reserve.  She indicated  the time to "get those taxes in                                                               
place."  She said she  thinks [Alaskans] want modern-day services                                                               
and need to be willing to help pay for those.                                                                                   
                                                                                                                                
CHAIR COGHILL  pointed out  that the  amount [of  the withdrawal]                                                               
would be $200 million.                                                                                                          
                                                                                                                                
Number 1041                                                                                                                     
                                                                                                                                
ED  MARTIN,   JR.,  testifying   via  teleconference,   told  the                                                               
committee  he lives  in Cooper  Landing and  that his  father was                                                               
"the one who started the 'vote  no' campaign down [for a previous                                                               
year's  advisory  vote  on whether  the  legislature  should  use                                                               
permanent  fund  earnings  for  state  government]  here  on  the                                                               
peninsula."   Mr. Martin  told the committee  HB 35  would change                                                               
the formula  to "an unacceptable  amount."  He stated  his belief                                                               
that 86  percent of  the people  who went to  the polls  [in that                                                               
advisory vote] had voted, "No, do  not touch it without a vote of                                                               
the  people."   He said  [HB 35]  would circumvent  that, and  he                                                               
doesn't  agree  with it.    He  stated  his certainty  that  many                                                               
people, including every member of  his family, would vote against                                                               
it.   He  added, "That  portion  of [HB  35]  is the  one that  I                                                               
dislike the most."                                                                                                              
                                                                                                                                
MR. MARTIN, turning  attention to HB 398, said  it is essentially                                                               
based  upon  the  same  principle,  tying  it  to  the  PFD,  oil                                                               
revenues, or state spending.  He  offered his belief that that is                                                               
"absolutely wrong."  Mr. Martin  indicated the permanent fund was                                                               
invested  for the  mineral wealth,  and that  at statehood  "they                                                               
decided the  state would retain that."   He offered that  it is a                                                               
rainy-day  account for  the people,  but isn't  supposed to  be a                                                               
rainy-day  account  for the  government.    He suggested  remarks                                                               
about capping  the permanent fund  [dividend] relate to  a "zero-                                                               
growth   atmosphere"  that   has   existed   under  the   current                                                               
administration.  He stated:                                                                                                     
                                                                                                                                
     Apparently,  we  have  Democrats  right  now  that  are                                                                    
     introducing these  bills, because I can't  think, in my                                                                    
     mind, that we have  elected Republicans down there that                                                                    
     would cut  state spending, that would  look at revenues                                                                    
     other than taxation - an  encroachment on the liberties                                                                    
     of Americans and state residents,  by way of taxation -                                                                    
     when in  fact, we are  a resource-rich state  for which                                                                    
     there has been zero and flat development. ...                                                                              
                                                                                                                                
     Nobody  is  putting together  a  hearing,  so far  this                                                                    
     year, on  revenue [matters] other than  taxation, and I                                                                    
     think it's  wrong.  I think  we should be looking  at a                                                                    
     lottery to help fund education,  like the Lower 48's in                                                                    
     Washington, Florida, and Georgia.   I recently was down                                                                    
     there,  so  I  had  the opportunity  ...  to  (indisc.)                                                                    
     tickets down  there.  So,  based upon any study  of the                                                                    
     lottery system, you surely would  want to include those                                                                    
     who would visit the state,  or transients that might be                                                                    
     in the military.                                                                                                           
                                                                                                                                
Number 0728                                                                                                                     
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  told  Mr.   Martin  he  himself  is  a                                                               
Democrat, but  emphasized that  the efforts  to solve  this issue                                                               
are being  made as  Alaskans and  as a  legislature, and  that it                                                               
isn't a partisan problem.   He noted that considerable effort has                                                               
been invested in developing a  natural gas pipeline and promoting                                                               
the [oil  and gas]  development of  the Arctic  National Wildlife                                                               
Refuge  (ANWR).    He  told  Mr. Martin:    "I'm  sure  that  you                                                               
understand the  gravity of the  situation and you will  lend your                                                               
efforts as  an Alaskan,  and not  as a  partisan, to  solving the                                                               
problem."                                                                                                                       
                                                                                                                                
MR. MARTIN responded  that he was not necessarily  trying to draw                                                               
a line of distinction between  both parties; however, he believes                                                               
there  are philosophical  difference between  them that  won't be                                                               
changed by "any conversation here."  He offered examples.                                                                       
                                                                                                                                
Number 0445                                                                                                                     
                                                                                                                                
MIKE SIGLER, Member, Harborview  Site Council, told the committee                                                               
his two  children attend Harborview Elementary  School in Juneau.                                                               
He explained  that the council, a  parent-teacher organization at                                                               
the  school, supports  the use  of  the permanent  fund and  new,                                                               
broad-based taxes  in order to  fund education.  Mr.  Sigler said                                                               
the State of  Alaska is an important partner  in funding Alaska's                                                               
schools.   With oil  revenues declining,  [the council]  sees the                                                               
only way  to maintain  education funding is  to seek  new revenue                                                               
sources,  now rather  than later.   He  remarked, "We  must reach                                                               
into our  pockets to ensure  a decent education for  our children                                                               
in  the  future."   He  noted  that  [the council]  supports  the                                                               
efforts of  Representative Hudson  and the  other members  of the                                                               
fiscal  policy  caucus  [to  resolve  the  budget  crisis].    He                                                               
continued:                                                                                                                      
                                                                                                                                
     We also request that  you consider increasing education                                                                    
     funding for  children not meeting  education standards.                                                                    
     At Harborview [Elementary]  School, nearly one-third of                                                                    
     children  fall  below  state education  standards,  and                                                                    
     there are  too few  teachers to  provide extra  help to                                                                    
     all of these children.                                                                                                     
                                                                                                                                
MR.  SIGLER said  he'd  handed  out a  fact  sheet on  Harborview                                                               
Elementary  School detailing  this challenge.   He  suggested the                                                               
school  is likely  representative of  many Alaskan  schools.   He                                                               
told the committee members that  the Quality Schools [Initiative]                                                               
and  [Learning]  Opportunity Grants  provided  this  year by  the                                                               
legislature  have   helped,  but  weren't  enough   to  meet  all                                                               
children's needs.  He concluded:   "Please continue these grants,                                                               
consider  increasing  them,  and ask  your  constituents  whether                                                               
their   schools   face   the  same   challenges   as   Harborview                                                               
[Elementary] School."                                                                                                           
                                                                                                                                
Number 0238                                                                                                                     
                                                                                                                                
SHERMAN C.  "RED" SMITH, testifying via  teleconference, told the                                                               
committee he  came to  Alaska [in  1948] and  has been  living in                                                               
Cooper Landing  since 1949; he  has been involved  politically to                                                               
varying degrees during  that period of time.  Mr.  Smith said one                                                               
thing  that  has come  to  his  attention  is  that "it  is  very                                                               
difficult for us to communicate with each other."  He continued:                                                                
                                                                                                                                
     So, let  me see if I  can get a message  across to you.                                                                    
     Let's say  that in my youth  I milked a cow.   Now, the                                                                    
     permanent fund is  kind of like an udder on  a cow. ...                                                                    
     [There  are]  four appendages  to  that  udder, and  it                                                                    
     looks like we  have two of them in use  right now.  You                                                                    
     have a  reserve fund  and another  fund there,  and now                                                                    
     we're lookin'  for more ways  of milking that  one cow,                                                                    
     which is  [the] oil industry, basically,  that provides                                                                    
     that udder on that cow that we're milking.                                                                                 
                                                                                                                                
     The thing  that we haven't  done, is we forgot  that if                                                                    
     we're going  to have  anything except  that one  cow to                                                                    
     milk,  we  should  have been  protecting  the  heifers,                                                                    
     'cause ...  cows reproduce, see.   Well,  our permanent                                                                    
     fund  should have  been reproducing  like the  cow, and                                                                    
     probably  some  of  that investments  left  in  Alaska,                                                                    
     here, would  have given us  another heifer or  two, and                                                                    
     we'd have had more than one cow to milk.                                                                                   
                                                                                                                                
     The  oil  industry  cannot survive  without  industrial                                                                    
     minerals.     We  have  local  sources   of  industrial                                                                    
     minerals  that   should  be  in  production   up  here,                                                                    
     supplying the oil  industry.  We also  have people that                                                                    
     are  knowledgeable, like  myself,  that  know that  ...                                                                    
     they  don't always  have  to  be petrochemical  plants;                                                                    
     there can  [be] chemical plants utilizing  our dead and                                                                    
     dying forests. ...                                                                                                         
                                                                                                                                
     We can't change  the past, but let's see if  we can get                                                                    
     some  of these  smaller --  like the  heifers that  I'm                                                                    
     referring to.   Let's help 'em  grow up so we  can milk                                                                    
     them, too,  you see.   And  then we'll  be able  to ...                                                                    
     maintain some of this social  structure that we have in                                                                    
     our state.                                                                                                                 
                                                                                                                                
TAPE 02-17, SIDE A                                                                                                              
Number 0001                                                                                                                     
                                                                                                                                
MR. SMITH continued:                                                                                                            
                                                                                                                                
     In all  these 50-some years  now, I don't  believe that                                                                    
     except   on  rare   occasions  that   I've  heard   our                                                                    
     representatives, like yourselves,  down there, sit down                                                                    
     and  discuss  something ...  positive  that  we can  do                                                                    
     other than just  milking the one existing cow.   So ...                                                                    
     this is  an opportunity for us.   We're going to  get a                                                                    
     new administration....   It  is time  that we  focus on                                                                    
     some of  these smaller-scale programs or  utilizing our                                                                    
     resources.  If  they do nothing else with  them ..., we                                                                    
     could   at   least    support   the   existing   larger                                                                    
     corporations within our state.                                                                                             
                                                                                                                                
     I hope I haven't offended  anybody or misled you, but I                                                                    
     think that  this --  and I  reviewed and  listened here                                                                    
     during this discussion of the  bill that I've been able                                                                    
     to understand  here.  In  my understanding, I  would be                                                                    
     more  in  support of  HB  304.    I believe  it's  more                                                                    
     definitive.    I  believe  it  gives  ...  [a]  simpler                                                                    
     understanding and  less complicated bookkeeping,  and a                                                                    
     number  of   reasons  why  I  would've   supported  it.                                                                    
     (Indisc.)                                                                                                                  
                                                                                                                                
     I will not support  anything that expands government at                                                                    
     the present  time because I  think we've got  all kinds                                                                    
     of  government  that we  don't  need  in the  State  of                                                                    
     Alaska  right now.   Certainly,  I  understand that  we                                                                    
     have to  pay our bills.   Now, one  of the things  I do                                                                    
     when I pay my bills --  I [had a] fiscal crisis; I sold                                                                    
     off  some of  my  land.   And  I  think  that that's  a                                                                    
     possibility again,  if we could start  selling off some                                                                    
     state lands and allowing  developments to take place on                                                                    
     them.   There's  a number  of other  sources of  income                                                                    
     that haven't been  tapped.  Anyway, thank  you for your                                                                    
     time.  Thank you for hearing me.                                                                                           
                                                                                                                                
Number 0313                                                                                                                     
                                                                                                                                
REPRESENTATIVE  HUDSON thanked  Mr. Smith  for keeping  positive.                                                               
He informed  Mr. Smith that  there has  been review in  regard to                                                               
ways in which to harvest, to  a greater extent, the timber killed                                                               
by [spruce  bark] beetles.   There is also review  of value-added                                                               
use of  timber and oil.   However,  such tasks are  difficult and                                                               
expensive.                                                                                                                      
                                                                                                                                
MR. SMITH pointed  out that as of January 31,  2001, the State of                                                               
Alaska,  per  the  written   request  of  Alaska's  congressional                                                               
delegation,  sued the  U.S. Forest  Service  in federal  district                                                               
court.   In regard  to that litigation,  Mr. Smith  expressed the                                                               
need to "stop the people that have been killing the heifers."                                                                   
                                                                                                                                
Number 0498                                                                                                                     
                                                                                                                                
JOE  SONNEMAN came  forward to  testify.   He recalled  a comment                                                               
that taking  50 percent of the  dividend is a flat  tax, which is                                                               
true.   However, he disagreed that  [HB 398] would have  an equal                                                               
impact  on  everyone.    When  an  equal  amount  is  taken  from                                                               
everyone, those  at the lower  end of the economic  spectrum feel                                                               
it  more because  it  is  a larger  percentage  of their  smaller                                                               
incomes.   Therefore, reduction of the  [permanent fund] dividend                                                               
has  an unfortunate  effect  on  those with  lower  income.   The                                                               
permanent fund is  good because it's an inverted head  tax - that                                                               
is, it  gives an equal  amount to  everyone and thus  helps those                                                               
with  lower incomes  more, because  it's a  larger percentage  of                                                               
their smaller incomes.  Therefore,  Mr. Sonneman felt that is why                                                               
83  percent or  so voted  [in the  aforementioned advisory  vote]                                                               
against  using some  of the  permanent fund  to fund  government.                                                               
"Logically  speaking, when  you say  'no' to  some, it  means you                                                               
don't want any of it used," he remarked.                                                                                        
                                                                                                                                
MR. SONNEMAN  remarked that although  the original intent  of the                                                               
permanent  fund was  to fund  government  when oil  ran out,  the                                                               
original  intent  was  changed  when  the  dividend  program  was                                                               
enacted.   Therefore,  he didn't  believe the  comments regarding                                                               
the original intent of the dividend apply.                                                                                      
                                                                                                                                
MR. SONNEMAN  recalled the sponsor's  discussion saying  that the                                                               
real problem is  excess spending over income,  which Mr. Sonneman                                                               
believes to  be true.   He suggested addressing that  by reducing                                                               
spending and increasing  income, not by trying to  break into the                                                               
permanent  fund.   Mr. Sonneman  informed the  committee that  in                                                               
1969, when  oil was  discovered on the  North Slope,  the state's                                                               
annual budget was  $150 million.  He noted that  he has read that                                                               
the current  budget proposals  are over  $7 billion.   Therefore,                                                               
there is  an unsustainable level of  spending.  That part  of the                                                               
problem  needs to  be addressed,  rather than  breaking into  the                                                               
permanent fund.                                                                                                                 
                                                                                                                                
MR. SONNEMAN agreed with an  earlier comment that economic growth                                                               
should be  part of the  solution.  However,  he noted that  he is                                                               
less  confident in  the comment  expressing the  need to  work on                                                               
basic  extractive industries  and transportation.   Mr.  Sonneman                                                               
noted that  he has a  Ph.D. in  Government Finance.   He informed                                                               
the  committee that  for years,  economic studies  have said  the                                                               
terms of  trade favor  the producers  of manufactured  goods over                                                               
those  of  raw materials.    In  other  words, those  buying  raw                                                               
materials from Alaska  and turning them into  something make more                                                               
money than Alaskans do by  selling the raw materials.  Therefore,                                                               
Alaska  should encourage  its  manufacturing  industries and  the                                                               
processing of ideas, such as with Microsoft.                                                                                    
                                                                                                                                
Number 0945                                                                                                                     
                                                                                                                                
MR. SONNEMAN  cited a recent  economic study that refers  to "The                                                               
Curse of Resources," which [reports]  that most places with large                                                               
amounts of  natural resources haven't  fared well.   Mr. Sonneman                                                               
reiterated  the   need  to  encourage   [Alaska's]  manufacturing                                                               
industries as well  as taxing them.  In  conclusion, Mr. Sonneman                                                               
noted his opposition to both bills [HB 304 and HB 398].                                                                         
                                                                                                                                
CHAIR COGHILL suggested that $1 billion  of the budget is the PF)                                                               
payout.  Therefore, $1 billion could  be taken off the top of the                                                               
$7  billion  in  budget  proposals,   and  then  there  could  be                                                               
discussion of overspending.                                                                                                     
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  clarified  that $1.2  billion  of  the                                                               
budget is the  PFD payout.  There is also  about $500-600 million                                                               
in  inflation-proofing,  and  a  substantial  amount  comes  from                                                               
federal  funds.   Representative  Berkowitz  estimated that  $150                                                               
million in the year 1960 would equal $2.4 billion in 2000.                                                                      
                                                                                                                                
Number 1215                                                                                                                     
                                                                                                                                
REPRESENTATIVE  JAMES agreed  with Mr.  Sonneman.   She said  she                                                               
understood  that  money  is  made at  the  point  of  value-added                                                               
manufacturing and  processing because  that is where  people work                                                               
and create something.   However, Alaska has the  problem of being                                                               
disconnected.   This  disconnection requires  that the  materials                                                               
and supplies  be imported in  order to export the  final product.                                                               
The cost of transportation is prohibitive.                                                                                      
                                                                                                                                
REPRESENTATIVE STEVENS  asked what Mr. Sonneman  would suggest to                                                               
reduce spending.                                                                                                                
                                                                                                                                
MR.  SONNEMAN  answered  that  he didn't  know,  but  offered  to                                                               
provide an  answer later.  He  recalled the comment that  part of                                                               
the perceived  need is to keep  the CBR.   If the CBR is  used to                                                               
grow more "heifers" and those  other growth industries are taxed,                                                               
that's a better  solution than keeping a pot of  money and taking                                                               
the dividend from the people who would be hurt the most by that.                                                                
                                                                                                                                
Number 1450                                                                                                                     
                                                                                                                                
JIM  KELLY, Director  of  Communications,  Alaska Permanent  Fund                                                               
Corporation,  Department  of Revenue,  began  by  referring to  a                                                               
document  entitled  "Big  Picture"  that  he'd  provided  to  the                                                               
committee.    He   said  all  of  the   legislation  before  [the                                                               
committee] works in terms of the  big picture.  Looking back over                                                               
the first 25 years of the  permanent fund, the permanent fund has                                                               
produced  a little  less than  half the  money oil  has produced.                                                               
The fund began  with oil money that was then  invested in stocks,                                                               
bonds, and  real estate, after  which it produced $25  billion in                                                               
income.   This  occurred during  a time  when state  oil revenues                                                               
reached $55 billion.                                                                                                            
                                                                                                                                
MR.  KELLY agreed  with  earlier  comments regarding  recognizing                                                               
those  who have  saved  the money  and placed  the  state in  its                                                               
current position of having $25 billion.   If the decision to have                                                               
the permanent fund hadn't been  made, today's discussion would've                                                               
been completely  different.   Mr. Kelly  emphasized, "I  say that                                                               
because  I want  you to  know that  the decisions  that you  make                                                               
today are going to be looked at  the same way 25 years from now."                                                               
He predicted  that 25 years  from now,  people will say  that oil                                                               
produced  about  $20  billion  worth of  benefit  to  the  state,                                                               
whereas the  income of  the permanent fund  will total  about $75                                                               
billion.   He noted that  a significant amount of  [the permanent                                                               
fund]  will have  to be  reinvested in  order to  accomplish [$75                                                               
billion  worth] of  income.   Appropriable income  after covering                                                               
inflation will  be more  than twice  as much  as can  be expected                                                               
from oil.                                                                                                                       
                                                                                                                                
MR. KELLY  summarized that  the decisions  made today  matter for                                                               
the future.   Furthermore, the  decisions made regarding  the use                                                               
of the permanent fund earnings,  because it's the state's largest                                                               
expected  source of  revenue, are  the most  important decisions.                                                               
Therefore,  the decisions  need  to take  into consideration  the                                                               
protection of that income stream.                                                                                               
                                                                                                                                
Number 2000                                                                                                                     
                                                                                                                                
MR.  KELLY  turned   to  a  document  entitled   "SJR  13/HJR  15                                                               
Projections" that  he'd provided to  the committee.  On  the back                                                               
of  this document,  the top  spreadsheet refers  to the  total 5-                                                               
percent  payout,   which  the   [corporation]  believes   is  the                                                               
sustainable  income  the  state  can  expect  to  earn  from  the                                                               
permanent  fund going  forward.   This  distribution in  residual                                                               
income  is based  on maintaining  the status  quo.   He explained                                                               
that  in  reference  to  HB  35,  the  middle  line  of  the  top                                                               
[spreadsheet]  would  be divided  in  half:    half would  go  to                                                               
government  and the  other half  would to  dividends.   Mr. Kelly                                                               
characterized that  [5-percent payout] as the  best-case scenario                                                               
because if  the permanent fund  income is the greatest  source of                                                               
wealth  in the  future,  that is  probably way  to  get the  most                                                               
wealth out of the permanent fund.                                                                                               
                                                                                                                                
MR. KELLY  then turned  to a document  entitled "State  of Alaska                                                               
Sources of Revenue," which many  have described as the do-nothing                                                               
case.  Mr. Kelly viewed this  as the worst decision.  He directed                                                               
attention to  the columns  for fiscal  years 2008  and 2009.   He                                                               
informed   the  committee   that   earlier  in   the  year   [the                                                               
corporation] was asked  what would happen if the CBR  ran out and                                                               
the ERA  were treated in  the same fashion  [as the CBR]  and was                                                               
thrown at the fiscal  gap.  The result would be  that five to six                                                               
years  from now,  the ERA  would be  exhausted.   Therefore, [the                                                               
state] would be dependent upon what is earned in that year.                                                                     
                                                                                                                                
MR. KELLY  pointed out that  some years,  no money is  earned [by                                                               
the permanent fund], which occurred this  year and last.  In such                                                               
a situation five  or six years from now, the  fiscal gap wouldn't                                                               
be solved and  the ability to protect the  permanent fund against                                                               
inflation  - and  to  provide dividends  - would  be  lost.   The                                                               
picture  would be  bleak.   Therefore,  the desire  is to  arrive                                                               
somewhere between the worst and best scenarios.                                                                                 
                                                                                                                                
MR.  KELLY concluded  by stressing  that  although the  permanent                                                               
fund is  large, it  isn't large  enough to  be everything  to all                                                               
people.  It isn't large  enough to allow full inflation-proofing,                                                               
pay  dividends according  to current  statutes, and  pay for  the                                                               
state fiscal gap.   The permanent fund can do  two of those three                                                               
things  fairly well.    Mr. Kelly  emphasized  the importance  of                                                               
inflation-proofing because  it will generate  the money  that can                                                               
be used for the other two parts.                                                                                                
                                                                                                                                
Number 2210                                                                                                                     
                                                                                                                                
REPRESENTATIVE JAMES remarked, "I  agree and have said repeatedly                                                               
that we  can maintain a healthy  dividend over the long  term and                                                               
utilize some of  the earnings of the permanent fund  to help fill                                                               
the gap, but we can't if we wait.   If we do it this year, we can                                                               
do that, and we can guarantee that over the long term."                                                                         
                                                                                                                                
REPRESENTATIVE  HUDSON  noted  that   Mr.  Kelly  and  the  chief                                                               
executive officer of the Alaska  Permanent Fund [Corporation] had                                                               
attended  all meetings  throughout  the previous  summer [of  the                                                               
fiscal policy caucus].                                                                                                          
                                                                                                                                
CHAIR COGHILL  noted his appreciation  of the town  meetings held                                                               
by the fiscal policy caucus.                                                                                                    
                                                                                                                                
Number 2430                                                                                                                     
                                                                                                                                
LARRY PERSILY,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department of  Revenue, came forward to  comment on HB 398.   Mr.                                                               
Persily recalled  earlier discussion  regarding new  revenues and                                                               
building  the   economy,  which  is   one  thing  HB   398  would                                                               
accomplish.   As the  economy grows and  there are  new revenues,                                                               
there  would be  a  direct  effect on  the  dividend because  the                                                               
dividend payout  would be linked  to how  much is needed  to fill                                                               
the fiscal  gap.  As the  budget gap closed, more  funds would be                                                               
available  for the  dividend because  less would  be required  to                                                               
replenish the  CBR under HB 398.   Mr. Persily said  HB 398 could                                                               
be used  to link  oil prices  to state  spending to  the economy.                                                               
That could  be merged with the  percentage of market value.   For                                                               
example,  5  percent would  be  available  for distribution  each                                                               
year, what  was necessary to refill  the CBR would be  taken as a                                                               
line of credit, and the remainder would be used for dividends.                                                                  
                                                                                                                                
CHAIR COGHILL  asked if the  trigger mechanism in  the governor's                                                               
bill [HB 413] was based on  the tax-rate formula using the CBR as                                                               
part of the formula.                                                                                                            
                                                                                                                                
MR. PERSILY  explained that  the governor's  income tax  bill had                                                               
the following two triggers:  it  would cut the income tax rate in                                                               
half  at  $2  billion,  and  cut  it  again  at  $2.5  [billion].                                                               
However, HB  398 says  only $1.5 [billion]  is necessary  for the                                                               
CBR regardless of  the economy, revenue generated  from taxes, or                                                               
the state budget.                                                                                                               
                                                                                                                                
MR. PERSILY referred  to a chart that shows a  band at $1 billion                                                               
and  at  $2  billion  with   the  understanding  that  even  with                                                               
additional  new revenues,  one would  probably not  want to  drop                                                               
below $1  billion on  the CBR.   Although  a certain  amount each                                                               
year would be needed, he  said the public doesn't want government                                                               
to accumulate more savings that it needs.                                                                                       
                                                                                                                                
Number 2749                                                                                                                     
                                                                                                                                
REPRESENTATIVE JAMES expressed concern  with the requirement that                                                               
the CBR be refilled every year  at June 30 with whatever money is                                                               
available.   She said  it seems  the CBR should  be filled  up or                                                               
there should be  a different mechanism.  She  emphasized the need                                                               
to  have  extra  money.    She  noted  her  caution  regarding  a                                                               
constitutional  amendment   that  would   place  Alaska   in  the                                                               
situation that  Representative Hudson's bill does.   She remarked                                                               
that she  doesn't have a  problem with  [following Representative                                                               
Hudson's bill]  for a while,  and if  it works out,  that's fine,                                                               
and then  there could  be a  constitutional amendment.   However,                                                               
she said she wasn't willing "to  go there first" and find out how                                                               
it works  because she didn't want  the state to find  itself in a                                                               
disastrous situation in which the  only option would be to borrow                                                               
money.                                                                                                                          
                                                                                                                                
MR. PERSILY pointed out that  a constitutional amendment wouldn't                                                               
have to be done.   A percentage-of-market-value payout in statute                                                               
could be used  as Representative Hudson uses  in his legislation.                                                               
Mr. Persily related  his belief that there  would probably always                                                               
be  a need  for something  like the  CBR, a  line of  credit, [or                                                               
other] cash flow.   Currently, 80 percent of  the state's revenue                                                               
comes from oil; even by the end  of the decade, oil will remain a                                                               
significant source of the state's  revenue.  However, that source                                                               
of revenue fluctuates  such that there is the need  for a line of                                                               
credit,  cash  flow to  pay  for  government services  until  tax                                                               
revenues come in later in the year.                                                                                             
                                                                                                                                
Number 2956                                                                                                                     
                                                                                                                                
CHAIR  COGHILL  posed a  situation  in  which  HB 398  is  passed                                                               
[along] with  a tax bill  such as  that proposed by  the governor                                                               
[HB 413].  He surmised that  there would probably be an increased                                                               
take  of the  dividend before  moving  to a  reduction of  taxes,                                                               
because at $1.5  billion [the state] would  take dividends before                                                               
any changes  were made  to the tax  structure.   Therefore, there                                                               
would be tremendous  pressure to increase that  to $2.5 [billion]                                                               
in order to avoid [impacting] the dividends.                                                                                    
                                                                                                                                
MR. PERSILY  specified that one  assumption under HB 398  is that                                                               
for  it  to  work,  some  additional  revenue  sources  would  be                                                               
necessary and  some broad-based taxes would  be necessary because                                                               
the  entire  [fiscal]  gap  couldn't  be  filled  even  with  the                                                               
permanent fund  earnings [under] the percentage  of market value.                                                               
The incentives  under HB 398 are  tied to state spending  and the                                                               
state's accounted  price of  oil, but would  really only  work if                                                               
additional revenue measures are passed.                                                                                         
                                                                                                                                
CHAIR COGHILL  said that is his  point.  He noted  that a segment                                                               
of his district  feels there should be a tax  before touching the                                                               
permanent fund; however, [HB 398] proposes the inverse.                                                                         
                                                                                                                                
MR. PERSILY said  if some form of HB 398  were adopted along with                                                               
an income  tax, HB 398  probably wouldn't become  effective until                                                               
fiscal  year  2004,  depending  upon  the  amount  of  additional                                                               
revenue raised.                                                                                                                 
                                                                                                                                
Number 3215                                                                                                                     
                                                                                                                                
REPRESENTATIVE  JAMES related  her understanding  that when  that                                                               
point is reached, the dividend  will be used [immediately] rather                                                               
than using the excess earnings of the fund.                                                                                     
                                                                                                                                
MR.  PERSILY agreed  that would  be  the case  under the  current                                                               
language  [of HB  398].    However, if  HB  398  were amended  to                                                               
include the percentage of market  value, then it wouldn't take as                                                               
much from the dividend [distribution]  because the full 5 percent                                                               
would be utilized rather than  dividends, which equate to about 4                                                               
percent of the permanent fund earnings.                                                                                         
                                                                                                                                
REPRESENTATIVE BERKOWITZ requested that  Mr. Persily contrast the                                                               
alternative of doing nothing with  following HB 398 or generating                                                               
income off the CBR.                                                                                                             
                                                                                                                                
CHAIR COGHILL recalled that Mr.  Kelly had already spoken to that                                                               
when [he said] the decline would be severe and rapid.                                                                           
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked, then, whether [HB  398] would be                                                               
preferable of the "two bad choices."                                                                                            
                                                                                                                                
MR. PERSILY answered that the  Department of Revenue believes [HB
398] is  preferable.  Furthermore,  by keeping money in  the CBR,                                                               
interest is  earned that is  available for public  services, thus                                                               
reducing the need to take permanent fund earnings.                                                                              
                                                                                                                                
Number 3400                                                                                                                     
                                                                                                                                
REPRESENTATIVE COGHILL  announced that  he would  like to  end up                                                               
with  one bill  that would  be the  House State  Affairs Standing                                                               
Committee  committee  substitute.    He said  he  is  using  this                                                               
discussion  as  momentum   to  "push"  the  other   side  of  the                                                               
discussion  in regard  to  government growth  and  programs.   He                                                               
highlighted  that at  least $200  million  has to  come from  the                                                               
government  in some  fashion.    Representative Coghill  remarked                                                               
that part  of the issue  is in  regard to whether  government can                                                               
take the responsibility  of an economy that  should be generating                                                               
the  money.   Furthermore,  the permanent  fund  has created  the                                                               
expectation  that  government can  give  something  that [is]  an                                                               
economic  generator; at  the same  time, it  discourages economic                                                               
generation.  [HB 398 was held over.]                                                                                            
                                                                                                                                

Document Name Date/Time Subjects