Legislature(2003 - 2004)

05/08/2003 07:08 AM W&M

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 298-DISTRIBUTIONS OF APPROPS FROM PERM FUND                                                                                
Number 0132                                                                                                                     
                                                                                                                                
CO-CHAIR  WHITAKER announced  that  the first  order of  business                                                               
would  be   HOUSE  BILL  NO.   298,  "An  Act  relating   to  the                                                               
distribution  of appropriations  from the  Alaska permanent  fund                                                               
under art.  IX, sec. 15(b),  Constitution of the State of Alaska,                                                               
and making conforming amendments;  and providing for an effective                                                               
date."                                                                                                                          
                                                                                                                                
CO-CHAIR HAWKER moved  to adopt committee substitute  (CS) for HB
298, Version 23-LS1075\D,  as the working document.   There being                                                               
no objection, Version D was before the committee.                                                                               
                                                                                                                                
Number 0254                                                                                                                     
                                                                                                                                
ROBERT  BARTHOLOMEW, Chief  Operating  Officer, Alaska  Permanent                                                               
Fund  Corporation, Department  of Revenue,  testified on  HB 298.                                                               
Mr.  Bartholomew told  the committee  in  reviewing the  original                                                               
version  of  HB 298  there  were  several changes  that  affected                                                               
statutes  that cover  the Alaska  Permanent Fund  Corporation and                                                               
the  distribution  of funds  out  of  the  permanent fund.    The                                                               
changes in the CS begin in Section  3, page 3.  He explained that                                                               
there were two concerns that need to be addressed.                                                                              
                                                                                                                                
Number 0353                                                                                                                     
                                                                                                                                
CO-CHAIR WHITAKER  interrupted Mr.  Bartholomew and asked  him to                                                               
give the committee  a brief explanation of the purpose  of HB 298                                                               
before delving into the changes incorporated in the CS.                                                                         
                                                                                                                                
Number 0404                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW  explained that the committee  has already passed                                                               
out HJR 26, which is  a constitutional amendment that changes how                                                               
the  [Alaska  Permanent  Fund Corporation]  determines  how  much                                                               
[money] should  be available from  the permanent fund and  how to                                                               
accomplish  inflation-proofing  [the   fund].    Mr.  Bartholomew                                                               
pointed out  that some  of the  provisions in  the constitutional                                                               
amendment affect  the existing statutes that  cover prior methods                                                               
that were  used for the  permanent fund.  The  legislation amends                                                               
the  statutes  to  ensure  that   [the  statutes]  will  work  in                                                               
accordance with the  payout of market value [POMV]  concept.  The                                                               
statutes have been reviewed to see  what needed to be updated, he                                                               
said.   He told the  members that the  sections he will  speak to                                                               
[in  the CS]  are those  that specifically  address how  money is                                                               
appropriated  out of  the  permanent fund.   He  said  he is  not                                                               
familiar with [all] the changes that  were made in Sections 1 and                                                               
2.                                                                                                                              
                                                                                                                                
                                                                                                                                
REPRESENTATIVE WEYHRAUCH  asked if there is  a sectional analysis                                                               
on this bill.                                                                                                                   
                                                                                                                                
CO-CHAIR WHITAKER replied that there is not.                                                                                    
                                                                                                                                
Number 0558                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW explained  that in Section 1 there  is a language                                                               
change  in which  the reference  to the  "distribution of  Alaska                                                               
permanent fund income" to [the permanent fund dividend].                                                                        
                                                                                                                                
MR.  BARTHOLOMEW went  on  to say  that Section  2  has the  same                                                               
change  where  the   word  "income"  is  removed   and  the  word                                                               
"appropriations" is added.  These  changes to both Sections 1 and                                                               
2 make the  statutes work with the  constitutional amendment that                                                               
has been  proposed [in HJR 26].   Mr. Bartholomew pointed  out to                                                               
the committee  that the effective date  of HB 298 is  tied to the                                                               
successful  passage  of  the   constitutional  amendment  by  the                                                               
public.                                                                                                                         
                                                                                                                                
CO-CHAIR WHITAKER  summarized that  Sections 1  and 2  are really                                                               
housekeeping changes.                                                                                                           
                                                                                                                                
Number 0716                                                                                                                     
                                                                                                                                
LARRY PERSILY,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department  of  Revenue,  testified  on  HB 298.    He  told  the                                                               
committee that Section 1 really  only deals with language related                                                               
to jury  duty lists, and  assures that  it conforms with  the new                                                               
definition of  paying the  permanent fund  dividend based  on the                                                               
new law.   Section 2 deals  with the new definition  of permanent                                                               
fund  appropriations  as  it  applies to  the  authority  of  the                                                               
Legislative Budget and  Audit Committee.  He  commented that both                                                               
Sections 1 and 2 are merely technical measures.                                                                                 
                                                                                                                                
CO-CHAIR  WHITAKER  noted  for  the  record  that  Representative                                                               
Gruenberg had joined the committee.                                                                                             
                                                                                                                                
Number 0801                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GRUENBERG pointed  out that  he does  not believe                                                               
the changes  to Sections 1  and 2 need  to be conditional  on the                                                               
passage  of  the constitutional  amendment  since  they are  only                                                               
housekeeping changes.                                                                                                           
                                                                                                                                
CO-CHAIR HAWKER  asked whether these are  housekeeping matters as                                                               
a result  of the  passage of  HJR 26, or  would these  changes be                                                               
necessary anyway.                                                                                                               
                                                                                                                                
Number 0844                                                                                                                     
                                                                                                                                
REPRESENTATIVE GRUENBERG  replied that he believes  these changes                                                               
are   still  appropriate   [whether  HJR   26  passes   or  not].                                                               
Furthermore, the  language is more understandable  to the average                                                               
Alaskan and the jury clerk.                                                                                                     
                                                                                                                                
Number 0906                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW explained  that Section 3 is a  new section added                                                               
to describe how appropriations are  made from the permanent fund.                                                               
He  pointed out  to  the committee  that later  in  the bill  the                                                               
existing  provisions  are  repealed.    Section  3  will  be  the                                                               
language  that  the  legislature  would  look  at  in  describing                                                               
appropriations from the  fund.  Mr. Bartholomew  told the members                                                               
that  as written  in the  bill, no  more than  60 percent  of the                                                               
total amount available  under the 5 percent  spending limit would                                                               
go to the general fund and not  more than 40 percent of the total                                                               
amount  available  for appropriation  would  go  to the  dividend                                                               
fund.                                                                                                                           
                                                                                                                                
Number 1000                                                                                                                     
                                                                                                                                
CO-CHAIR WHITAKER commented that this is the meat of bill.                                                                      
                                                                                                                                
MR.  BARTHOLOMEW  pointed out  that  the  difference between  the                                                               
original bill and  the CS is the [clarifying  language] that this                                                               
legislation is about an individual  specific fiscal year and that                                                               
it is  not necessary  to spend  the entire  amount, but  that not                                                               
more than  60 percent [for  general fund appropriation]  and [not                                                               
more  than  40  percent  for   dividends]  will  be  spent.    He                                                               
summarized that  the appropriations  could be anything  from zero                                                               
up to those amounts.                                                                                                            
                                                                                                                                
MR. BARTHOLOMEW told the members that  Section 4 is a new section                                                               
being  added  at the  request  of  the permanent  fund's  [legal]                                                               
counsel.  This language clarifies  what method the permanent fund                                                               
is going  to use in determining  that year-end market value.   He                                                               
added that there  has been discussion about how  it is determined                                                               
and this language  would clarify that the permanent  fund will be                                                               
computed by  market value in  accordance with  generally accepted                                                               
accounting principles (GAAP)  after the costs to  manage the fund                                                               
have been taken  out.  He reiterated his comments  by saying that                                                               
the  year-end  market  value  is determined  after  the  cost  of                                                               
managing  the   fund  is  taken   out  and  before  any   of  the                                                               
distributions  covered in  Section 3  occur.   Clarifying all  of                                                               
this is the purpose of Section 4, he added.                                                                                     
                                                                                                                                
Number 1118                                                                                                                     
                                                                                                                                
CO-CHAIR HAWKER asked  if Section 4 would result in  using a mark                                                               
to market valuation.                                                                                                            
                                                                                                                                
Number 1135                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW  responded that  is correct.   He  explained that                                                               
the current  requirement of  using generally  accepted accounting                                                               
principles means  that at the  end of each month,  when financial                                                               
statements are  done, all investments  of the permanent  fund are                                                               
recorded at  their market value.   So the mark to  market [value]                                                               
includes all  those investments as  the market goes up  and down.                                                               
These  changes  are  tracked, reported,  and  recorded  at  their                                                               
market value on June 30.                                                                                                        
                                                                                                                                
Number 1213                                                                                                                     
                                                                                                                                
REPRESENTATIVE SEATON asked  if it would be better  to state that                                                               
all  expenses  that are  incurred  by  the [permanent]  fund  are                                                               
deducted from  the fund  before the  market value  is determined.                                                               
He said he  would not want to see this  legislation challenged or                                                               
in a position  in which it is necessary  to [continually] explain                                                               
it.                                                                                                                             
                                                                                                                                
MR. BARTHOLOMEW agreed with Representative  Seaton that is a good                                                               
point.  He referred to Section  5 which outlines how this process                                                               
works and  pointed out that the  cost to manage the  fund and the                                                               
operating budget for the Alaska  Permanent Fund Corporation comes                                                               
out  of revenue  that is  generated [by  investments].   In other                                                               
words, it comes off the top.   He explained that is what is being                                                               
maintained in  Section 5  of HB  298.   Mr. Bartholomew  told the                                                               
members that  when this  law was  written many  years ago  it was                                                               
done so  that if there  is no net  income, and for  example, like                                                               
last year  when the fund incurred  a net loss, there  would still                                                               
be funds  to pay the  expenses of managing  the fund.   The costs                                                               
[of running the fund] are coming out of revenue, he said.                                                                       
                                                                                                                                
MR. BARTHOLOMEW  went on to say  that Section 4 requires  that at                                                               
the end of a year a determination  is made as to the net value in                                                               
accordance with  GAAP, which includes  several key  concepts such                                                               
as marking  all investments to  market and deducting the  cost to                                                               
manage and  run the [permanent] fund.   That is how  the value is                                                               
determined.   Mr. Bartholomew  summarized that  Sections 4  and 5                                                               
read  together specifies  that  the  intent is  for  the cost  of                                                               
managing and investing the fund to  come out of revenues, and not                                                               
out of the 5 percent that is based  on value.  He agreed with Co-                                                               
Chair  Whitaker that  these  sections of  the  bill maintain  the                                                               
status quo.                                                                                                                     
                                                                                                                                
Number 1525                                                                                                                     
                                                                                                                                
MR.  PERSILY clarified  that the  money that  Mr. Bartholomew  is                                                               
talking about to  manage the fund is subject  to appropriation as                                                               
approved by  the legislature every year.   It is not  a matter of                                                               
the Alaska  Permanent Fund Corporation  just taking the  funds as                                                               
it wants; it is part of the budget appropriation process.                                                                       
                                                                                                                                
Number 1546                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GRUENBERG told  the  committee that  he has  seen                                                               
private  corporation change  the bottom  line due  to changes  in                                                               
accounting principles.   When this  happens it can  really change                                                               
the earnings  for that particular  year.   He said he  knows that                                                               
companies  always  notify  stockholders when  that  happens,  and                                                               
since  he  is not  an  accountant  he  accepts  that is  the  way                                                               
corporations do business.   Representative Gruenberg recalled Mr.                                                               
Bartholomew's testimony  in other  meetings where he  referred to                                                               
the way managers of the  fund can manipulate earnings which would                                                               
have a  considerable impact on the  earnings of the fund  and the                                                               
dividend for that year.  He noted  that this is the first time he                                                               
has  seen the  use of  the term  GAAP in  any state  statute, and                                                               
asked if there is any statute  that generally requires the use of                                                               
the term GAAP.                                                                                                                  
                                                                                                                                
Number 1731                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW responded  that for the last 20  years the Alaska                                                               
Permanent  Fund  Corporation  has  been required  by  statute  to                                                               
follow GAAP  with one  exception.  That  exception was  to ignore                                                               
unrealized gains and  losses which is called the  mark to market,                                                               
he  said.   He explained  that the  permanent fund  has not  been                                                               
required  to follow  GAAP for  purposes of  determining how  much                                                               
money can be taken out of the  permanent fund and how much to pay                                                               
for dividends, and  that is the exception.   Mr. Bartholomew said                                                               
theoretically how  much revenue is  recorded could be  changed by                                                               
deciding to buy  or not sell certain investments.   There is also                                                               
a financial accounting statement in  accordance with GAAP with no                                                               
exceptions.   He  reiterated  that the  permanent  fund does  two                                                               
separate sets  of accounting records,  one for GAAP and  one that                                                               
is required by  statute with the one exception to  GAAP, and then                                                               
the dividend is  calculated.  He told the members  that this bill                                                               
actually simplifies  and takes away the  ability to theoretically                                                               
delay or accelerate  the taking of gains to  affect the formulas.                                                               
Mr. Bartholomew emphasized that this  has not happened except for                                                               
investment or policy reasons that were discussed.                                                                               
                                                                                                                                
Number 1909                                                                                                                     
                                                                                                                                
REPRESENTATIVE GRUENBERG  turned to AS 37.13.140,  which is being                                                               
repealed in  Section 11, page 6,  line 15.  That  statute was the                                                               
partial  implementation   of  the   GAAP  for  the   purposes  of                                                               
determining net  income only.   Representative Gruenberg  said he                                                               
applauds [the implementation  of GAAP].  He asked  Mr. Persily if                                                               
any state statute is in place that requires the use of GAAP.                                                                    
                                                                                                                                
MR. PERSILY  replied that  he is  not familiar  with any,  but he                                                               
said  he does  know that  the performance  measures which  are in                                                               
statute for  the Department  of Revenue  makes reference  to that                                                               
[in missions and measures].                                                                                                     
                                                                                                                                
Number 2023                                                                                                                     
                                                                                                                                
CO-CHAIR HAWKER  informed the  committee that GAAP  is a  term of                                                               
art  by  accounting bodies  of  the  United  States.   There  are                                                               
international accounting principles  in which government entities                                                               
are subject  to Governmental  Accounting Standards  Board (GASB).                                                               
He  explained  that  enterprise operations  operating  as  public                                                               
corporations can  adopt either business principles  or government                                                               
principles.  In the Alaska permanent  fund's case it is viewed as                                                               
an operation  that is much better  served by GAAP rather  than by                                                               
GASB.   He  noted that  both of  these are  interactive standards                                                               
which  support the  conclusion that  the permanent  fund is  more                                                               
properly under  the auspices  of business  accounting principles.                                                               
He pointed  out that in  order for state financial  statements to                                                               
be certified it  must conform to GASB principles.   He summarized                                                               
his comments by  saying that in most cases GASB  adopts GAAP, and                                                               
the Financial Accounting Standards Board  (FASB) is the basis for                                                               
GAAP.                                                                                                                           
                                                                                                                                
Number 2304                                                                                                                     
                                                                                                                                
RON  LORENSEN,  Attorney,  Simpson,  Tillinghast,  Sorensen,  and                                                               
Longenbaugh,  testified   as  outside   counsel  to   the  Alaska                                                               
Permanent  Fund Corporation  on HB  298.   He clarified  that the                                                               
Alaska   Permanent   Fund   Corporation   operates   under   GASB                                                               
principles,  not under  business  principles.   The reference  to                                                               
GAAP  is the  generic  reference to  those  principles which  are                                                               
applicable to  the fund and  those principles are  actually GASB,                                                               
rather  than FASB.   In  response  to Representative  Gruenberg's                                                               
question that the  committee should not even  be discussing GAAP,                                                               
he replied  that GAAP actually refers  to both GASB and  FASB; it                                                               
depends  on  which kind  of  an  entity  a  corporation is.    He                                                               
reiterated  that   the  lower  case  [GAAP]   generally  accepted                                                               
accounting principles  is a generic  reference to  those accepted                                                               
accounting principles  which are applicable, and  emphasized that                                                               
those  which   are  applicable  to  the   Alaska  Permanent  Fund                                                               
Corporation are  the GASB  principles.  Using  GAAP in  a generic                                                               
sense is a correct reference, he said.                                                                                          
                                                                                                                                
Number 2453                                                                                                                     
                                                                                                                                
CO-CHAIR  WHITAKER  point  out   that  the  question  is  whether                                                               
unrealized losses and gains are accounted for on June 30.                                                                       
                                                                                                                                
MR. BARTHOLOMEW replied  that is correct.  He said  that the main                                                               
change that  is being  made is that  the current  language, which                                                               
directs the  Alaska Permanent Fund  Corporation to  exclude those                                                               
unrealized  gains  and  losses when  a  determination  of  income                                                               
available  for appropriation,  will  go away  and  the fund  will                                                               
comply with  generally accepted accounting principles  that cover                                                               
accounting for  investments that  Co-Chair Hawker referred  to as                                                               
mark to market.  That is  the industry standard and what the fund                                                               
will be moving to, he said.                                                                                                     
                                                                                                                                
CO-CHAIR WHITAKER  asked Mr.  Bartholomew to  put this  change in                                                               
perspective, since this  is not just a question  of semantics and                                                               
nomenclature; it is a significant policy change.                                                                                
                                                                                                                                
Number 2554                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW replied that in  looking at the permanent fund as                                                               
June  30 approaches,  accounting  records are  kept according  to                                                               
statute,  excluding unrealized  gains and  losses.   The earnings                                                               
reserve of  the permanent fund  is in two  pieces.  There  is the                                                               
realized earnings  reserve, which currently has  $1.2 billion and                                                               
that  is where  the  bond interest,  stock  dividend, and  rental                                                               
incomes  from real  estate  [are  held].   This  is  a cash  flow                                                               
account  and is  called the  realized earnings  reserve [account]                                                               
based on realized income.                                                                                                       
                                                                                                                                
MR. BARTHOLOMEW explained that there  is a second earning reserve                                                               
[account], and according to statute  when the fund is determining                                                               
what is available,  it excludes the unrealized  gains and losses.                                                               
Those funds are kept in  a separate account because the financial                                                               
statements require that  the funds be recorded.   That account is                                                               
for volatility,  it has varied from  a positive $4 to  $5 billion                                                               
of unrealized gains to over  $1 billion in losses, which occurred                                                               
twice this  year.  That  account does  have a lot  of volatility,                                                               
but it  is important because it  shows what is going  on with the                                                               
value  of investments,  he said.   The  permanent fund  currently                                                               
accounts for them  separately and there is  confusion between the                                                               
statutes  saying to  ignore  them  and GAAP  saying  the fund  is                                                               
required to  record them  so the value  of investments  is known.                                                               
Mr.  Bartholomew  explained  that  this  bill  would  say  it  is                                                               
important to recognize both; do  not separately account for them.                                                               
There is  one fund and the  value of that fund  includes the cash                                                               
flow received  and the  gain or  loss in  investments.   When the                                                               
Alaska Permanent  Fund Corporation  determines the value  of fund                                                               
on June  30 for  determining what  is available,  it will  be the                                                               
true value  of the fund,  including unrealized gains  and losses.                                                               
He emphasized that is an important change.                                                                                      
                                                                                                                                
MR.  BARTHOLOMEW, in  response  to  Co-Chair Whitaker,  explained                                                               
that mark to market is accounting nomenclature.                                                                                 
                                                                                                                                
Number 2818                                                                                                                     
                                                                                                                                
MR. LORENSEN commented that it is  important to be clear that the                                                               
permanent fund  presently marks to  market the value of  the fund                                                               
under GASB principles.   The change is that it  will no longer be                                                               
a determination of income.   That varies from GASB principles; by                                                               
deleting [AS  37.13.140 in Section 11  on page 6, line  15 in the                                                               
bill]  there will  no  longer be  a  separate statutory  earnings                                                               
reserve  account  determination  which calls  for  applying  GAAP                                                               
while taking  out the unrealized  portion.  Income in  the future                                                               
will  be determined  according to  GAAP  OR GASB  and the  market                                                               
value will be determined according to  GASB.  There will not be a                                                               
change in  the way market  value is determined.   This [language]                                                               
clarifies, for  the purposes of a  constitutional amendment, that                                                               
is the way it is to be determined.                                                                                              
                                                                                                                                
Number 2915                                                                                                                     
                                                                                                                                
REPRESENTATIVE GRUENBERG  noted that this is  extremely important                                                               
because it is the basis for  the calculation of the dividend.  He                                                               
asked   if  these   changes  could   be  implemented   without  a                                                               
constitutional amendment.                                                                                                       
                                                                                                                                
MR.  BARTHOLOMEW responded  that changes  in accounting  could be                                                               
done  in  statute,   as  it  is  currently  defined.     How  the                                                               
determination  of what's  available from  the permanent  fund for                                                               
appropriation is  done in  statute, he  noted.   This legislation                                                               
would  amend existing  statutes.   Both  of  these are  statutory                                                               
issues, he said.   He told the  members the change is  due to the                                                               
constitutional amendment  which would implement a  spending limit                                                               
based on value.                                                                                                                 
                                                                                                                                
TAMARA COOK,  Director, Legislative Legal and  Research Services,                                                               
Legislative   Affairs   Agency,   responded   to   Representative                                                               
Gruenberg's question by saying that  she is not nearly as certain                                                               
that  the  Alaska  Permanent  Fund  Corporation  can  statutorily                                                               
achieve the  distribution that is  setout in the work  draft that                                                               
is being  considered.  She said  her uncertainty is based  on the                                                               
existing language  in the constitution.   She read  [portions of]                                                               
Section 15 of the Alaska Constitution which says:                                                                               
                                                                                                                                
     The  principle can  be used  only for  income producing                                                                    
     investments designated by law  as eligible.  All income                                                                    
     from  the  permanent fund  shall  be  deposited in  the                                                                    
     general fund unless otherwise provided by law.                                                                             
                                                                                                                                
MS. COOK told  the committee that is all that  is in the existing                                                               
provision of  the constitution with  respect to uses that  can be                                                               
made of the  permanent fund other than investment.   She said she                                                               
does not  see how an  unrealized gain  can be deposited  into the                                                               
general fund.   Consequently,  an unrealized  gain cannot  be the                                                               
kind  of  income  to  which   this  constitutional  provision  is                                                               
referring  and thus  an unrealized  loss  cannot be  the type  of                                                               
income to which the constitution  is referring.  The constitution                                                               
is talking  about funds that  can be physically deposited  in the                                                               
general fund,  and if the  legislature were silent, that  is what                                                               
would happen, she commented.                                                                                                    
                                                                                                                                
Number 3334                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GRUENBERG commented  that  it seems  to him  that                                                               
this  is not  a discussion  about  deposits to  the general  fund                                                               
rather  it's  really  about  the  basis  of  the  calculation  of                                                               
dividend.   He asked if  that requires  a deposit to  the general                                                               
fund.                                                                                                                           
                                                                                                                                
MS.  COOK replied  that it  does not.   However,  the reason  the                                                               
existing statute  enables the state  to have an  earnings reserve                                                               
account is because the sentence  [in the constitution] goes on to                                                               
say,  "unless  otherwise provided  by  law  this income  will  be                                                               
deposited in the  general fund."  [The  legislature] has provided                                                               
a  law  that the  income  will  be  deposited into  the  earnings                                                               
reserve account of the permanent fund.   If no law were in place,                                                               
these funds would  go into the general fund.   Ms. Cook explained                                                               
that in  order for  the court  to agree that  the word  income in                                                               
this  context  includes market  value  analysis,  the court  must                                                               
agree that  an unrealized gain  or loss would  automatically flow                                                               
into  the general  fund.   Ms.  Cook  noted that  she  is not  an                                                               
accountant, but  neither are the  justices of the  supreme court.                                                               
She explained that  the justices tend to look at  the language in                                                               
the same  way a common  person would.   Ms. Cook said  that those                                                               
who have witnessed fluctuations  in retirement accounts well know                                                               
there is  no income until  the income  is realized.   She pointed                                                               
out that  unrealized gains are  just not there when  moving money                                                               
from one  pot to other.   Once income  is moved into  the general                                                               
fund there  is the implication  that it is  immediately available                                                               
for  expenditure.   How can  the  legislature immediately  expend                                                               
unrealized income  in the general  fund, she asked.   The present                                                               
constitution,  at  the  very  least, creates  a  question  as  to                                                               
whether it would be possible to  go to a market value approach in                                                               
the use of money from the permanent fund.                                                                                       
                                                                                                                                
Number 3602                                                                                                                     
                                                                                                                                
REPRESENTATIVE GRUENBERG  asked if  Mr. Lorensen agrees  with Ms.                                                               
Cook.                                                                                                                           
                                                                                                                                
MR. LORENSEN  responded that  he does  agree with  Ms. Cook.   He                                                               
said the issue that Ms. Cook  just described is the subject of an                                                               
attorney  general's opinion  that is  being written.   Until  the                                                               
opinion is issued, he said he  does not know what the real answer                                                               
is.   However, he  told the  members his own  view is  similar to                                                               
that of  Ms. Cook.   He said he does  not believe a  market value                                                               
based distribution can  be implemented under the  current form of                                                               
the constitution.                                                                                                               
                                                                                                                                
Number 3648                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GRUENBERG   commented  that  this   is  important                                                               
because  there may  be  a requirement  to  have a  constitutional                                                               
amendment and  a conditional  effective date.   The other  way of                                                               
approaching this issue  is with a standard or  no effective date,                                                               
which would  mean it would  be 90  days after the  governor signs                                                               
the  bill.   Representative  Gruenberg offered  that  one way  to                                                               
approach this is to provide two effective dates.                                                                                
                                                                                                                                
MR. LORENSEN remarked that he does  not believe [this can be done                                                               
without amending the constitution.]                                                                                             
                                                                                                                                
Number 3818                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW said  he believes that HB 298 was  written on the                                                               
premise  that  HJR  26  would  pass and  then  HB  298  would  be                                                               
effective  and  if  it  did  not  pass,  then  it  would  not  be                                                               
effective.  He  explained that when changing to  the market value                                                               
approach,  instead of  an income-based  approach for  determining                                                               
what  is  available  from  the  permanent  fund,  the  5  percent                                                               
spending limit that the board of  trustees is proposing is a very                                                               
essential part  of the protection.   When  there is a  high stock                                                               
market, as  was the  case in  1998 and  1999, the  permanent fund                                                               
could  go up  by billions  of  dollars; under  market value  that                                                               
amount of  money over  principle is  available.   Mr. Bartholomew                                                               
added that in the past there  has been $5-6 billion available for                                                               
appropriation.    The fund's  [managers]  believe  that the  fund                                                               
cannot be invested  in long-term assets, such as  stocks and real                                                               
estate, if there  is a risk that large amounts  of money could be                                                               
appropriated.    That is  the  driving  force  for the  need  for                                                               
stability and predictability with regard  to what's going to come                                                               
out of the fund,  he said.  The 5 percent  spending limit is very                                                               
important  when  changing  what  comes  out of  the  fund.    Mr.                                                               
Bartholomew summarized  his comments by  saying he would  be very                                                               
hesitant  to support  anything in  HB  298 without  understanding                                                               
that this all  came from the concept of being  partnered with the                                                               
constitutional   amendment  [HJR   26].     He  emphasized   that                                                               
everything being  considered needs to  be tied to  the successful                                                               
passage of the constitutional amendment.                                                                                        
                                                                                                                                
Number 4026                                                                                                                     
                                                                                                                                
CO-CHAIR WHITAKER pointed out that  the manner in which the value                                                               
of the  fund is determined,  the mark to  market, is part  of the                                                               
discussion  and is  a significant  change.   This legislation  is                                                               
saying that at a  certain point in time this is  the value of the                                                               
fund.  This  approach is different than the option  and policy of                                                               
not recognizing the swing in  the market, or unrealized gains and                                                               
losses.   He  asked  if this  would be  considered  a big  policy                                                               
shift.                                                                                                                          
                                                                                                                                
MR. BARTHOLOMEW responded  that it is a change,  but he hesitated                                                               
to  say  it  is  a  big  shift because  it  is  really  a  timing                                                               
difference.     He  commented  that   over  time,   realized  and                                                               
unrealized [income] will equal, but  those timeframes can be very                                                               
long.                                                                                                                           
                                                                                                                                
CO-CHAIR  WHITAKER asked  if he  is correct  in assuming  that by                                                               
passing  HJR 26  and  HB  298 the  legislature  would preclude  a                                                               
[scenario  in  which  there  aren't   adequate  funds  to  pay  a                                                               
dividend].                                                                                                                      
                                                                                                                                
Number 4351                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW  replied that is correct.   The intent of  HJR 26                                                               
and HB 298  would be to ensure an annual  distribution each year.                                                               
Currently there is  the risk that the  distribution formula could                                                               
lead to a zero distribution  from the permanent fund dividend, he                                                               
said.                                                                                                                           
                                                                                                                                
CO-CHAIR  WHITAKER  stated  that  this is  a  significant  policy                                                               
change.                                                                                                                         
                                                                                                                                
Number 4431                                                                                                                     
                                                                                                                                
REPRESENTATIVE WEYHRAUCH turned attention  to an opinion prepared                                                               
by Legislative  Legal and Research  Services that  indicated that                                                               
there were  certain IRS implications  if the permanent  fund were                                                               
to  be structured  as a  guaranteed  dividend and  thus the  fund                                                               
could be subject  to taxation.  He asked if  she would comment on                                                               
this point.                                                                                                                     
                                                                                                                                
Number 4507                                                                                                                     
                                                                                                                                
MS. COOK  replied that she  believes Representative  Weyhrauch is                                                               
referring to the concern expressed  by the trustees of the Alaska                                                               
Permanent  Fund  Corporation.    The  tax-exempt  status  of  the                                                               
permanent  fund   is  determined   by  it   being  viewed   as  a                                                               
governmental fund that is of a  public nature.  The test that the                                                               
IRS  uses tends  to look  at  whether it  is a  private versus  a                                                               
governmental  benefit.   Currently, the  permanent fund  has been                                                               
used to pay dividends to individuals  in Alaska, but that is been                                                               
the  result of  a decision  that  the legislature  makes when  it                                                               
appropriates money each year.   It does satisfy a public purpose.                                                               
Ms. Cook went  on to say the question is  whether the legislature                                                               
has  eroded   the  governmental   nature  of   that  fund   if  a                                                               
constitutional provision  were setup so  that a private  right is                                                               
created  in the  fund.   She  reiterated that  she is  not a  tax                                                               
attorney and  does not know  how intense the danger  is regarding                                                               
whether the  IRS would  determine that  all or  a portion  of the                                                               
income of  the fund is  subject to taxation.   Ms. Cook  said the                                                               
heart  of the  problem  is  at what  point  does the  legislature                                                               
change the nature  of a public fund so radically  that there is a                                                               
risk that  the fund  will lose its  tax-exempt status  because of                                                               
the private benefit associated with the fund.                                                                                   
                                                                                                                                
TAPE 03-24, SIDE B                                                                                                            
                                                                                                                                
MR. BARTHOLOMEW agreed that's the issue.                                                                                        
                                                                                                                                
Number 4527                                                                                                                     
                                                                                                                                
REPRESENTATIVE WEYHRAUCH asked  for a copy of  Ms. Cook's opinion                                                               
on this matter.   He said he would like to meet  with her and the                                                               
administration to review  the analysis of Section 3(2)  to see if                                                               
it "invades" the IRS concern.                                                                                                   
                                                                                                                                
Number 4432                                                                                                                     
                                                                                                                                
REPRESENTATIVE  HEINZE  asked  if  some  visual  tools  could  be                                                               
developed  to  help legislators  explain  this  [concept] to  the                                                               
public.                                                                                                                         
                                                                                                                                
CO-CHAIR WHITAKER assured  Representative Heinze that information                                                               
would be made available.                                                                                                        
                                                                                                                                
Number 4302                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW  turned attention to  Section 6  of the CS.   The                                                               
Permanent Fund Corporation handles  investments for several other                                                               
funds, including the Alaska Mental  Health Trust Fund (AMHTF) and                                                               
the  Alaska Science  and Technology  Fund (ASTF).   This  section                                                               
brings in  sync how  the permanent fund  would do  the accounting                                                               
for the investments of the Alaska  Mental Health Trust Fund.  Mr.                                                               
Bartholomew explained  that there needs  to be a  discussion with                                                               
the  managers  and  board  of  AMHTF  in  order  to  ensure  they                                                               
understand the proposal  made in Section 6.   That discussion has                                                               
not yet taken place, he said.                                                                                                   
                                                                                                                                
MR.  BARTHOLOMEW  explained  that  Section 7  covers  the  Alaska                                                               
Science and Technology  Fund which has been the subject  of a lot                                                               
of  discussion in  the legislature  this year.   Section  7 would                                                               
change the  statutes such that ASTF  would be accounted for  in a                                                               
way that is  similar to the permanent fund.   Section 8 addresses                                                               
the Alaska International Trade and Business Fund.                                                                               
                                                                                                                                
CO-CHAIR WHITAKER noted  that these funds are  of concern because                                                               
the permanent fund manages these three funds.                                                                                   
                                                                                                                                
Number 4041                                                                                                                     
                                                                                                                                
MR.  PERSILY commented  that  Section 9  is  a technical  [change                                                               
related to  the change]  in Sections  1 and 2.   Section  9 deals                                                               
with paying the dividend each  year so instead of defining income                                                               
of the  permanent fund,  it is  defining money  appropriated from                                                               
the  permanent fund.   The  same change  is found  in Section  10                                                               
where  there  is  technical change  from  "income"  to  "amount."                                                               
These  changes  conform the  sections  with  the new  method  and                                                               
language.                                                                                                                       
                                                                                                                                
Number 3955                                                                                                                     
                                                                                                                                
CO-CHAIR  WHITAKER  inquired  as  to  the  reason  for  repealing                                                               
Section 11.                                                                                                                     
                                                                                                                                
MR. BARTHOLOMEW  responded that  in Section  11 AS  37.13.140 and                                                               
.145 are being  repealed because they are replaced  by Sections 3                                                               
and  4 in  the  existing bill.   The  third  statutory noted,  AS                                                               
37.13.300(c),  is  a  technical   amendment  complying  with  the                                                               
[Alaska  Mental Health  Trust].   He said  Section 12  covers the                                                               
conditional effect.                                                                                                             
                                                                                                                                
Number 3847                                                                                                                     
                                                                                                                                
CO-CHAIR WHITAKER  said that the  CS proposes that 60  percent of                                                               
the  amount  of  money  available  be  appropriated  to  and  for                                                               
purposes of government.                                                                                                         
                                                                                                                                
REPRESENTATIVE  WILSON  recalled  that according  to  the  graphs                                                               
shown to  the members, it was  determined that this would  be the                                                               
best way  to approach  this issue  in the long  run and  keep the                                                               
fund as  stable as possible.   She told the members  she does not                                                               
have  the graphs  in front  of her,  and asked  if someone  would                                                               
summarize the three options that were highlighted.                                                                              
                                                                                                                                
Number 3705                                                                                                                     
                                                                                                                                
CO-CHAIR  WHITAKER  provided  the  members with  a  copy  of  the                                                               
graphs.   He  explained  that by  looking at  the  graphs from  a                                                               
purely  governmental fiscal  perspective the  preferential option                                                               
is  [60 percent  for  governmental purposes  and  40 percent  for                                                               
dividends].  The 50-50 [percent  option] has less stability.  The                                                               
40-60 [percent] option with 40  percent for governmental purposes                                                               
and 60  percent for  dividend distribution leads  the state  on a                                                               
short   course   to   continued  deficient   spending   with   no                                                               
constitutional budget  reserve.   This is  a policy  and economic                                                               
call, he stated.                                                                                                                
                                                                                                                                
Number 3500                                                                                                                     
                                                                                                                                
REPRESENTATIVE  GARA  inquired as  to  Ms.  Cook's legal  opinion                                                               
regarding the  use of a  severability clause in  the constitution                                                               
that would be triggered if a  tax consequence were to come about.                                                               
For instance,  if the dividend is  constitutionally protected and                                                               
that causes a tax implication  then the severability clause could                                                               
ensure the state avoids the problem that way.                                                                                   
                                                                                                                                
MS.  COOK explained  that severability  clauses work  in statute.                                                               
However,  this  kind  of  clause  would  not  be  a  severability                                                               
provision,  rather  it  would be  an  alternative  constitutional                                                               
provision that would  take effect only if  certain conditions are                                                               
met.  Ms. Cook  said she does not see why there  could not be any                                                               
number of  alternative provisions that are  triggered, given that                                                               
each one in itself would be an amendment to the constitution.                                                                   
                                                                                                                                
Number 3300                                                                                                                     
                                                                                                                                
REPRESENTATIVE GARA  posed a hypothetical  situation in  which an                                                               
amendment to the  constitution on the dividend were  put in place                                                               
and caused  a tax implication.   If amending the  constitution in                                                               
this  way meant  this would  be a  problem for  the IRS,  would a                                                               
provision in the constitution allowing  for a three-quarters vote                                                               
of  the legislature,  as is  provided  in other  sections of  the                                                               
constitution, solve the IRS' concern.                                                                                           
                                                                                                                                
MS. COOK  responded that it  might.  She  said she does  not know                                                               
how the  IRS would respond; they  are a mysterious force.   There                                                               
may be enough legislative discretion  because the legislature can                                                               
only appropriate  money for a  public purpose.  Ms.  Cook pointed                                                               
out that the  Alaska Supreme Court has  already acknowledged that                                                               
the permanent  fund dividend appears  to serve a  public purpose.                                                               
Maybe the IRS would agree, she commented.                                                                                       
                                                                                                                                
Number 3116                                                                                                                     
                                                                                                                                
REPRESENTATIVE GARA told the members  that he does not understand                                                               
why  the  public  purpose versus  private  purpose  issue  raises                                                               
questions [with  the IRS].  He  asked if that issue  is discussed                                                               
in her [opinion].                                                                                                               
                                                                                                                                
MS. COOK said  she has not discussed that issue  because she does                                                               
not understand it and thus  she strongly urged the legislature to                                                               
obtain an independent  view from a tax attorney.   She noted that                                                               
there  have been  states  that have  set up  funds  that the  IRS                                                               
determined  created enough  of a  private benefit  to have  taxed                                                               
them.    She summarized  her  comments  by  saying there  is  the                                                               
theoretical potential to be a problem.                                                                                          
                                                                                                                                
Number 2958                                                                                                                     
                                                                                                                                
REPRESENTATIVE  OGG  commented  that the  [Constitutional  Budget                                                               
Reserve Fund]  CBRF End-of-Year Balance  chart reflects  that the                                                               
two proposals  on one  end or  the other buys  the state  about 3                                                               
years.   He asked if it  is possible to have  more flexibility in                                                               
Section  3 so  that the  legislature  could decide  in any  given                                                               
climate which option  of 60 percent to select;  either 60 percent                                                               
to the  general fund [or 60  percent to the dividend].   He asked                                                               
if that flexibility is desirable.                                                                                               
                                                                                                                                
CO-CHAIR  WHITAKER commented  that  Representative  Ogg raises  a                                                               
good point.  He asked if  the legislature has the consensus to do                                                               
that and determine the dividend on a yearly basis.                                                                              
                                                                                                                                
REPRESENTATIVE   OGG   reiterated   his  question   as   to   the                                                               
advisability of putting that kind of flexibility in the bill.                                                                   
                                                                                                                                
REPRESENTATIVE WILSON  commented that this premise  would raise a                                                               
big fight  every year.   It would also  extend the time  spent on                                                               
this issue.                                                                                                                     
                                                                                                                                
Number 2654                                                                                                                     
                                                                                                                                
CO-CHAIR WHITAKER  agreed with Representative Wilson.   This bill                                                               
will allow  the legislature to  go to  the voters and  define the                                                               
split,  rather  than  saying  every  year  the  legislature  will                                                               
decide.   There may  be a  "trust me"  factor [connected  to that                                                               
flexibility].                                                                                                                   
                                                                                                                                
REPRESENTATIVE  OGG  offered that  inserting  language  up to  60                                                               
percent allows  the legislature [to  look at the  fiscal climate]                                                               
and  decide what  percent to  appropriate for  dividends and  the                                                               
general fund.                                                                                                                   
                                                                                                                                
CO-CHAIR  WHITAKER said  Representative  Ogg's suggestion  sounds                                                               
like  he would  like to  run government  like a  business.   In a                                                               
business environment one could look  at the fiscal situation, say                                                               
it's a  difficult time,  and since the  books can't  be balanced,                                                               
not give a  dividend.  That would be purely  a business decision,                                                               
he commented.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  WILSON  said if  the  public  realizes what  that                                                               
[change] would do, she said she  believes they would want more of                                                               
a guarantee  that [a  dividend] would be  there rather  than have                                                               
that option [come and go] from year to year.                                                                                    
                                                                                                                                
Number 2349                                                                                                                     
                                                                                                                                
CO-CHAIR WHITAKER asked the members  to give some thought to this                                                               
subject.   He said he  hopes to move  the bill from  committee at                                                               
the next meeting.                                                                                                               
                                                                                                                                
[HB 298 was held over.]                                                                                                         

Document Name Date/Time Subjects