Legislature(2001 - 2002)

03/19/2002 08:05 AM STA

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

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