Legislature(2003 - 2004)
03/17/2004 07:02 AM W&M
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 298-DISTRIBUTIONS OF APPROPS FROM PERM FUND [Contains discussion of HJR 26] Number 0440 CHAIR HAWKER announced that the final 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." [HB 298 was sponsored by House Special Committee on Ways and Means.] CHAIR HAWKER explained that HB 298 is a companion bill supporting the POMV constitutional amendment [HJR 26]. He said the last time the bill was before the committee was during the last legislative session. Number 0456 REPRESENTATIVE WEYHRAUCH moved to adopt the proposed committee substitute (CS) for HB 298, Version 23-LS1075\S, Cook, 3/15/04, as the working document. There being no objection, Version S was before the committee. CHAIR HAWKER explained the changes in Version S by referring to the sectional analysis. He explained: [The proposed CS] looks at existing statute, places where it refers to things like the Earnings Reserve Account or using income as a basis for the money available from the permanent fund, and modifies and adapts that language to the POMV concepts of having the value of the fund be the basis for the amount available for general appropriation each year. Number 0607 CHAIR HAWKER continued to explain that in Section 1 the Alaska jury list is currently defined as coming from the list of people who apply for "a distribution of Alaska Income," which is an archaic term. The actual list is from the permanent fund dividend (PFD) files, and Section 1 cleans up the language, he said. CHAIR HAWKER explained that Section 2 defines the statutory duties of the Joint Committee on Legislative Budget and Audit (LB&A). One of the previous duties was to provide investment policy guidance for the "income" from the permanent fund, which had been previously segregated into an earnings reserve account. Now LB&A provides investment policy guidance for the permanent fund, and the income account has been merged into the permanent fund itself, he said. REPRESENTATIVE GRUENBERG announced that he is "flagging for the committee" Section 2 because he is going to offer an amendment to Section 10, which says this Act only takes effect if the [POMV] amendment to the constitution passes. He said it seems to him that there are sections in the proposed CS that are not dependent upon the passage of the [POMV] amendment. He said Section 1 is not [dependent]. He asked if that would also apply to Section 2. He wondered if they were standalone sections that could be passed even if the [POMV] amendment does not pass. Number 0810 CHAIR HAWKER concurred that they could stand alone on their own merits. REPRESENTATIVE GRUENBERG asked if there are any more standalone sections. CHAIR HAWKER suggested walking through the sections and keeping that idea in mind. He said it is an excellent observation. CHAIR HAWKER explained that Section 3, subsection (a) is the most operative section in the bill as it relates to the POMV method. He voiced a concern raised by many as POMV was discussed. People had asked what would happen if the state goes into a period of protracted declining markets and the 5 percent that would be made available under the POMV method actually exceeds the real rate of return for some long period of time. He noted that [Section 3(a)] addresses this issue in statute and creates the statutory limit that "if the average 10-year real rate of return falls below 5 percent, the amount that is appropriated from the fund, which the constitutional amendment states may be up to 5 percent, is limited to the real rate of return that is less than 5 percent." He called it a sidebar in statute that grants relief. Number 0956 REPRESENTATIVE OGG remarked that he was pleased to see [Section 3, subsection (a)] in [the proposed CS to HB 298]. He asked, in the worst-case scenario, what percentage, under this limitation factor, would be removed from the principal of the permanent fund. CHAIR HAWKER called on Bob Bartholomew to come forward to testify and help answer questions. Number 1050 BOB BARTHOLOMEW, Chief Operating Officer, Alaska Permanent Fund Corporation, Department of Revenue replied: What [Section 3, subsection (a)] was intended to do was try to look at when the real rate of return, which is the return after we retain enough income to offset the effects of inflation, if we don't meet what would become the constitutional spending limit of 5 percent, if over a 10-year period we started to have a real rate of return, this, for example, was 4 percent, that the spending for that year would drop. The spending limit would drop from 5 percent of the market value of the fund to 4 percent. CHAIR HAWKER remarked, "To the amount we could appropriate." MR. BARTHOLOMEW continued: To the amount that could be appropriated out of the permanent fund. And, so, when we talk about what's the worst-case scenario and how would that affect eating into the corpus of the principal of the fund, we would just have to make some estimates to say, you know, right now there is approximately -- the permanent fund is in three components. There's the accounting record we make of the historical principal contributions into the fund and special appropriations by the legislature and inflation proofing. Today, that's about $23 billion. Then, there's two other components, currently, of the permanent fund. There's what's called the unrealized earnings account that has about $3.5 billion in it; then there's the realized earnings, and that has about $1 billion in it. So, there's three components, and the first two, which is the $23 billion, the accounting principal number and the unrealized gains, which by the attorney general's opinion is a part of principal -- those two are $26.5 billion. Then, we said we have $1 billion in the realized earnings reserve. Number 1300 When you look at things today, you would have $1 billion available for appropriation - it's in the realized earnings account - and then that $3.5 billion can go, if they sell investments, ... into earnings. When you do an assessment of "when would you be eating into the fund," some people use the $23-billion figure and say you've got to spend down to $23 billion before you're eating into the corpus. That means we'd have $4.5 billion available today. So, when you say, "Give me an example," you would have to spend in excess of your real income, $4.5 [billion], before you would eat into the corpus - what was considered originally under the constitution as far as the original deposits of oil and what they've earned. I think the intent of this section is to not allow you to eat into that, so the intent is, over a 10-year period, if we've made enough income, we would only spend what we've made. So, I think the intent here is not to eat into the corpus. I could create a scenario that says, in the short term, you might eat into it, but I think, for most practical purposes, this would be the guardrails that that prevented. So, I think for a high percentage of the options or the probabilities of what would be the income of the permanent fund moving forward, you really wouldn't be eating into the corpus of the fund. I don't want to give a specific number, but it is possible, in the short term, if the markets went down fast enough, that you might spend into that original corpus, or that original $23 billion. I do think that, with this provision in here, the likelihood of that happening is greatly reduced. I think the worst-case scenario would be fairly small, but it could happen. Number 1522 REPRESENTATIVE OGG said a lot of folks talk about a market that keeps going down, and that is the great fear. He said he's been in meetings where "you run the averages, we should be okay, and you can take care of those little blips." He said it was his understanding that [Section 3, subsection (a)] is in place so that when there is a long-term slide, money stops being drawn off of the principal. He reminded, "If you're in the short term, you draw into the principal and, of course, you bounce back up." He asked how it figures in during a long period of time, if it was in place all the time, or if the state has to wait for the full 10 years of decline. Number 1620 MR. BARTHOLOMEW pointed out that it would be in place immediately and a 10-year average would be used. He pulled out a slide as an example to show that if next year there is a down market and the permanent fund loses income for the entire year, which has happened twice in the history of the fund, that loss would be figured in, but it would go to a 10-year average, he explained. The history of the financial market is extremely volatile from year to year, but over the longterm, it is fairly stable, he suggested. He referred to a rolling 10-year real- return graph to show a red, stable line at 5 percent, the target at which the constitution will set the spending limit. CHAIR HAWKER interjected, "Real return." MR. BARTHOLOMEW continued, "That's the income after we've accounted for inflation and retained that in the fund." He explained that the last bullet [on the graph] shows where the rolling 10-year period was on June 30, 2003, about 5.3 percent. He said, next year, if that percent moved a whole percent in one year, down to 4.3 percent, the spending limit would immediately drop. There would be a 4.3 percent spending limit under this provision. MR. BARTHOLOMEW explained that what happened for the 12-month spending period ending December 31  is the 10-year average was raised by 1 percent to over 6 percent. "That means there is currently a 5 percent spending limit, so the permanent fund is retaining more than it earned, so that in the future years when it goes down, there could be a pretty good down year before it would take us below the 5 percent," he explained. He noted that the effect is immediate, but not dramatic. Each 1 percent is about $250 million, he concluded. REPRESENTATIVE OGG thanked Mr. Bartholomew for the clarification. Number 1947 REPRESENTATIVE ROKEBERG asked why five of the six years immediately preceding the fiscal year are used. MR. BARTHOLOMEW replied that there are two measurements in [Section 3]. The measurement just mentioned is "when should you spend less than 5 percent, so that's the trigger for that 10- year average of income. He added, "There's a second provision in here which tells you how to calculate the market value that you're going to base your 5 percent against." That is a 5-year average of the total market value of the fund, and the individual volatility of one year doesn't affect it as much when a 5-year average is used, he explained. The clause states to go back six years and then come forward for five years, computing the average. The reason for the "look back" provision is so the legislature will know what is available when they convene in January. Under the current rules where a 5-year average is used, the June 30 date, which hasn't been reached yet, is included, so when the legislature passes the budget, they are basing it on an estimate of how much income is available, he said. This method eliminates projections, he concluded. CHAIR HAWKER added that the language is identical to, and conforms to, the POMV proposed constitutional amendment. REPRESENTATIVE ROKEBERG requested spreadsheets and calculations regarding this provision, and suggested that they be part of the bill packet. He voiced a concern about the "rate of inflation" definition. He asked which definition is being used. Number 2250 MR. BARTHOLOMEW replied that the definition of inflation that is used by the permanent fund is defined in statute and will have to be added to the definitions section of the bill. He noted that Section 9 [of the proposed CS] where AS 37.13.145 is being repealed is where the current definition of inflation proofing resides and will need to be added back in. He said the finance director of DOR has been asked to write up a definition for the national Consumer Price Index (CPI). Since this is an Alaska fund, people have asked why a national CPI is being used. He responded that how the permanent fund is invested is greatly affected by the investments across the United States as well as across the world. He emphasized that using a national CPI is an important piece that DOR recommends adding into the definitions section. Number 2424 REPRESENTATIVE ROKEBERG said he understands that the attorney general's opinion and/or position now is that the unrealized portion of the permanent fund is available for appropriation. He asked if that is correct. MR. BARTHOLOMEW replied that it is just the opposite. The opinion of about a year ago regarding the original intent in the definitions of the word "principal" and "what is available for appropriation" stated that it was really driven by the realized income, he explained. He continued: When we have unrealized gains -- I'll just give you an example: if you own a share of stock in IBM, you bought it for $50, it's gone up to $100, and you haven't sold it yet, you have $50 of unrealized income. Prior to the attorney general's opinion, that money was available for appropriation. And when they did their research, they felt that the original intent when the [provision of the] constitution was adopted by the citizens in 1976 [was] that the definition of income was what we call realized, and that it wouldn't be available for appropriation until you sold that. So, their definition would be, unrealized income is not available for appropriation. But one of the reasons we recommend changing from the current system to a value-based system is the only difference between that being available and not available is whether the manager that we've hired sells that stock. So, if he sold it tomorrow, it's available. That number of what's available can really vary, and modern accounting principles have said to get away from that concept of realized and look at the total value of the fund every year, including those unrealized gains, and then make a determination of what you want to make available for appropriation. Unrealized gains or losses are not available for appropriation. CHAIR HAWKER emphasized that this legislation is effective if, and only if, the POMV endowment method is adopted, and it does not address how the fund currently operates. Number 2650 REPRESENTATIVE ROKEBERG asked if Chair Hawker is indicating that the market-value determination would make moot the definition of realized and unrealized [gains] when making the calculation. MR. BARTHOLOMEW answered, "That is correct. We would now look at everything based on the total value of the fund." There wouldn't be a separate pool for principal, unrealized gains, and realized gains, he explained. Now, all of that money is invested the same way, and generally accepted accounting principles (GAAP) account for it all the same way, he said. "We would be getting rid of a 25-year-old archaic statute, in going to the modern endowment accounting," he added. REPRESENTATIVE ROKEBERG remarked that the definition of "available for appropriation" still has to be dealt with. MR. BARTHOLOMEW replied that would be Section 3, titled "Appropriations from the fund." This is the section that says 5 percent is going to be spent of the 5-year average of the fund, unless the realized income for that period was not 5 percent, he noted. Number 2814 CHAIR HAWKER clarified that the constitutional amendment, which is a separate piece of legislation [HJR 26] that was passed out of the House Special Committee on Ways and Means months ago, now sitting in the House Finance Committee, potentially on its way to the House Rules Standing Committee, is the vehicle that defines the 5 percent appropriation authority. That legislation would be a constitutional authority which states that up to 5 percent may be appropriated annually. [The proposed CS] before the committee creates a statutory sidebar, a parameter that allows for times where the state may choose not to appropriate 5 percent, he said. He emphasized that the bill does not define or make the provision for the 5 percent appropriation. Number 2900 REPRESENTATIVE ROKEBERG said he understands that information but is trying to get at the definition of "available for appropriation". MR. BARTHOLOMEW pointed to the first sentence in [Section 3, subsection (a)] where it specifically says the amount available for appropriation is determined under the constitution, and said that is going to be the 5 percent limit, or up to 5 percent of the value of the fund. The guardrails are where it says there is an exception to the 5 percent spending limit if a 5 percent real rate of return has not been earned. REPRESENTATIVE ROKEBERG asked if the realized gains and unrealized gains were included when calculating the rate of return. Number 3020 MR. BARTHOLOMEW replied, "No, going forward we would no longer look at it as realized versus unrealized. We would look at, under GAAP, what was the total income of the fund. So, it would be both the cash flow income as well as the appreciation of the assets...." REPRESENTATIVE ROKEBERG asked, "Why are we going to GAAP rather than GASB [Governmental Accounting Standards Board] here, because the permanent fund acts more or less as a private financial institution?" MR. BARTHOLOMEW replied that all professional accounting organizations come under GAAP, of which GASB is a subset, and the official rules that determine investment accounting come under GAAP. CHAIR HAWKER replied that the capstone definition is GAAP and GASB is a subset within it. REPRESENTATIVE ROKEBERG said it has gotten the permanent fund corporation in trouble before, which is why he was making it clear. CHAIR HAWKER said, "That is why we are trying to give them the most sheltering umbrella in our definitions." Number 3159 REPRESENTATIVE WEYHRAUCH remarked that this is a very important bill. He referred to it as up-front pricing because it shows the people what the legislature plans to do if POMV passes. He emphasized that the bill needs to move forward even if the constitutional amendment stalls, because it could be debated on its own merits. He said it is tied to the POMV debate, but it serves as an educational process, as well. He suggested adopting portions of the bill even if the constitutional amendment is not adopted. He said the bill needs to be amended in Section 10 so that Sections 3, 4, 7, and 8 only take effect if the constitutional amendment passes. The other sections should be adopted notwithstanding, he said. CHAIR HAWKER noted that Representative Gruenberg has expressed those same concerns and has been working on a list of [the sections] for a specific amendment. Number 3327 REPRESENTATIVE GRUENBERG addressed Representative Samuels and Mr. Bartholomew and asked, if the constitutional amendment does not pass, whether they would still like LB&A to advise concerning the investment policy for the entire fund. He added he thought it was a good idea. Number 3409 MR. BARTHOLOMEW replied that he thought the [Alaska Permanent Fund Corporation] has always felt it was important to have a good working relationship with the legislature, and LB&A provides the process for that relationship, so he said he supports maintaining it. REPRESENTATIVE GRUENBERG responded, "Not just the income, but everything." MR. BARTHOLOMEW replied, "That is correct." REPRESENTATIVE SAMUELS concurred and said it is a good mechanism for the [Alaska Permanent Fund Corporation] to get its information to the legislative body. Number 3433 REPRESENTATIVE GRUENBERG said he supports a lot of the concept of POMV, but is not sure he wants it in the constitution. He suggested proposing a statute to achieve the same ends. He wondered if this legislation might be such a statute. He asked Mr. Bartholomew whether provisions in [the proposed CS] could be effected to achieve some of those ends, if they are adopted even if the constitutional amendment does not pass. He asked Representative Hawker if he should propose a conceptual amendment or work on a written amendment to be taken up at a later date. Number 3635 CHAIR HAWKER replied that it would be more appropriately introduced as a standalone bill. He explained that [HB 298] is a companion piece specifically for the proposed constitutional amendment [HJR 26]. REPRESENTATIVE GRUENBERG suggested that [HB 298] could serve that purpose and have sections that achieve a standalone provision. CHAIR HAWKER said his personal preference would be not to alter [HB 298] to that extent. REPRESENTATIVE GRUENBERG asked Mr. Bartholomew, aside from Sections 1 and 2, if there were any other sections that could go into effect even if the constitutional amendment does not pass. MR. BARTHOLOMEW answered, "Section 5 would be a section that would work unrelated to POMV." REPRESENTATIVE GRUENBERG asked Mr. Bartholomew to explain what Section 5 does. MR. BARTHOLOMEW explained: Section 5 currently has language that assumes ... that we basically expense our entire operating budget the first day of the fiscal year, and then we get to the end of the year, and whatever we really didn't spend, we add that back to income. How that really works is, at the end of each month we expense our actual expenditures. It makes it clear that the source of revenue for the budget will be the investments, and it deletes the sections of the statutes that talk about adding unused budget back to income. Number 3877 REPRESENTATIVE GRUENBERG referred to the section as a housekeeping section and asked if there were any other [sections that could go into effect on their own]. MR. BARTHOLOMEW replied that Sections 7 and 8 seem to relate to the Permanent Fund Dividend Division and said he was not familiar with those sections of the statute. He said they seemed to be related to POMV so he assumed they would not be necessary. CHAIR HAWKER concurred. REPRESENTATIVE GRUENBERG asked for clarification whether Sections 7 and 8 could be conditional. MR. BARTHOLOMEW replied that they should be conditional [upon the passage of the constitutional amendment]. Number 4010 REPRESENTATIVE GRUENBERG asked if the only [sections] that would not be conditional are 1, 2, and 5. CHAIR HAWKER said yes. REPRESENTATIVE GRUENBERG asked about Section 11. He said he thinks there would need to be a conforming amendment to Section 11. CHAIR HAWKER concurred and said: We've got this dual condition here, in Sections 10 and 11, at the moment. The entire Act is conditioned, which is Section 10, upon the passage, and emphasize, and a POMV method approved by voters and taking effect, which is really the ultimate condition here. Section 11 is that if those conditions precedent are met, the actual date on which this Act shall take effect is January 1, 2005. There would be some conforming language that would, in the condition precedent, excepting that Sections 1, 2, and 5, and also in Section 11, indicating that Sections 1, 2, and 5 would take effect immediately. REPRESENTATIVE GRUENBERG said he would offer that as an amendment later when amendments are taken up. Number 4142 REPRESENTATIVE ROKEBERG opined that the committee is wasting its time right now, because this bill is contingent on the POMV's passing. REPRESENTATIVE OGG returned to Section 3 and noted that the permanent fund is different from most funds because 25 percent of revenues from mineral sales, royalties, and leases are included. He asked Mr. Bartholomew how that impacted the 5 percent figure and the 10-year average. Number 4313 MR. BARTHOLOMEW related that the way it is written now, it completely excludes the effect of the ongoing oil deposits coming into the fund. He explained: We're measuring the investment real rate of return over 10 years and trying to achieve that 5 percent. During that 10-year period we've continued to receive oil deposits. Historically, that's probably about a 1 percent average. It's declining currently; well, it was declining because production was declining. Prices are high, so it's staying up near what we've been getting over the last 5-8 years. It's approximately between $200 and $400 million a year that we've been getting from ongoing oil revenues coming into the permanent fund. Really, what you have is the fund is also growing by the ongoing revenue deposits, and that is not being factored in to what's available for appropriation. That money comes in and earns income, so down the line there is a benefit, but, in the short term, the fund has actually probably grown. Currently, we're at about a 6 percent real rate of return for the last 10 years. Including oil, it's really grown by 7 percent, but currently that's not brought into the equation. Number 4435 REPRESENTATIVE OGG requested clarification of [Section 3, subsection (b)]. CHAIR HAWKER related that [Section 3, subsection (b)] does provide statute consistent with the current statutory provision that splits the earnings available from the permanent fund, 50 percent to the dividend fund, and 50 percent to the general fund. CHAIR HAWKER continued to explain [the proposed CS]. He said the balance of the bill relates to "housekeeping" matters such as the market-value provision in Section 4, which provides a statutory mandate in accordance with GAAP. REPRESENTATIVE GRUENBERG asked if that provision could be effective regardless of the constitutional amendment [passing]. He opined it had value independent of the amendment. Number 4610 MR. BARTHOLOMEW related that, currently, when the monthly financial statements are done, GAAP is followed to determine market value. CHAIR HAWKER interjected that the first sentence [of Section 4] refers to Article IX, Section 15(b), of the [Constitution of the State of Alaska]. This section does not currently exist, and would not exist until the POMV amendment is passed, he pointed out. TAPE 04-14, SIDE B Number 4630 REPRESENTATIVE GRUENBERG suggested excising the first phrase [in Section 4] and beginning with line 22, "the corporation shall determine". He asked [Mr. Bartholomew] if that is current practice. MR. BARTHOLOMEW replied that it is a requirement under GAAP and so it is calculated, but not used in any of the statutory formulas to determine what is available for appropriation. He said, "It is what we do." Number 4600 REPRESENTATIVE GRUENBERG asked if there would be any value in having that language in the law, independent of the amendment. CHAIR HAWKER relayed that the current statute, which would be deleted in this bill, provides that the fund shall be computed annually on the last day of the fiscal year, in accordance with GAAP, excluding any unrealized gains or losses. He emphasized that there could be conflicting statutes if the new section was added without deleting the old one. He mentioned that AS 37.13.140, the income section which is no longer relevant under a market-value approach to distribution, would become archaic. REPRESENTATIVE GRUENBERG remarked that he thought this was one of the sections that could be kept in, regardless of the constitutional amendment. CHAIR HAWKER termed the section a housekeeping measure that could work either way. MR. BARTHOLOMEW pointed out in Section 5 that all of the operating costs for the permanent fund for the 32 staff that are employed, the investment manager fees for the external equity, and bond managers that cost between $45 million and $50 million a year would come out of the 5 percent spending limit. Number 4310 CHAIR HAWKER characterized that decision as being an honest way to show the public that the fund was not being invaded behind closed doors, in any way. All operating funds come out of the 5 percent, he said. REPRESENTATIVE GRUENBERG he asked if this dialogue is relating to the constitutional amendment. CHAIR HAWKER replied that Representative Gruenberg is correct. It is statutory clarification to make it very clear that there are "no back doors." REPRESENTATIVE GRUENBERG said, "Understood, and that's clear on the record." Number 4232 CHAIR HAWKER related that Section 6 is a housekeeping matter. He explained that the permanent fund also manages the portfolio of the Alaska Mental Health Trust Authority (AMHTA), and because the archaic section, AS 37.13.140, is being deleted, a new section is needed to take its place. He reported that Jeff Jessee [executive director of AMHTA] is in full agreement with this portion of the bill. REPRESENTATIVE GRUENBERG said he assumed that AS 37.14 is the mental health trust chapter. CHAIR HAWKER said that is correct. REPRESENTATIVE GRUENBERG asked Mr. Bartholomew if he thought there was anything in that chapter now that requires the use of GAAP, and if it could be a standalone provision. MR. BARTHOLOMEW said, "This is similar to the recent provision. Right now we're required to account for mental health the same way we account for the permanent fund. If you don't change the permanent fund, then we wouldn't want to change the way we account for mental health, so this one would want to be subject to the POMV." Number 4059 CHAIR HAWKER continued to explain the sections of the proposed CS. He said, "Section 7 is a conforming to the change from income being used and transferred to the dividend fund account, to the money appropriated from, ergo, the amount calculated under a market-value approach." Section 8 is disclosures that are currently required by statute to be included on the stub of a permanent fund check, again, with the language conforming to a market-value approach, he explained. CHAIR HAWKER noted that in Section 9, the repealors, the three current sections of statute whose operation would conflict with the POMV operation, are very important. The whole purpose of the bill is to replace those three sections, he emphasized. He said AS 37.13.140 defines income and net income of the permanent fund for the purposes of making distributions, and he pointed out that the bill changes to market value, not income. AS 37.13.145 defines the disposition of the income of the permanent fund, inflation proofing, and transfers to the dividend account, which has been superseded by Section 3 of [the proposed CS]. AS 37.13.300(c) is the mental health trust reference that becomes archaic as a result of the operation of the POMV, he concluded. Number 3905 REPRESENTATIVE SEATON asked about Section 3, subsection (b), and the graph on the rolling 10-year real return. He said he is concerned that additional money deposited into the fund is not counted as return. He posited that there could be high inflationary pressure at some point in time that would greatly influence the rate of return, and suggested that money from oil resources should be [considered], because the fund could be growing well, and yet drop below the 5 percent line. He said he doesn't think the intent [of the bill] is to look at how particular investments do, but how the fund is doing. He opined that it would be better to include the royalty deposits and any other deposits made from settlements, et cetera, into this calculation. Number 3728 MR. BARTHOLOMEW reported that he has had many discussions with other legislators on this topic. The question is, "Should we have the spending limit be not only the real rate of return of the investments, but the growth of the fund through the mineral or oil deposits?" He termed it a policy decision of looking at the total value of the fund changing, including deposits, versus just looking at the investment income. CHAIR HAWKER said, when drafting the bill, he did not want to consider the new money coming in as part of the return on the invested funds, which would allow for substantial investment losses and still appear as if money is being made. He said that idea is inconsistent with the intent of the bill, which is to give the greatest possible assurances of the continued growth of the fund. REPRESENTATIVE ROKEBERG stated that it is not inconsistent with the market value, market-to-market consideration, if the cash flow of the fund is actually staying level or growing. He said Representative Seaton does have a point. It is a policy call, he added. CHAIR HAWKER said, "The argument that the idea of the additional 25 percent being deposited each year was that it should, in fact, always be an increment rather than something that we could be using to offset investment losses in determining the amount available." He agreed it is a policy call. REPRESENTATIVE ROKEBERG added, "Particularly if you're looking at the market value of the whole total fund, rather than just the discrete elements of it." Number 3515 CHAIR HAWKER pointed out the real issue, saying: Do we wish the fund only to grow through returns in excess of a real rate of return of 5 percent, or do we want to have the incremental money coming in each year under the 25 percent constitutional provision to the part of fund growth. I think it is a good question. Do we want to prioritize the fund growth or prioritize our ability to access the money in the fund? REPRESENTATIVE ROKEBERG said the money might be needed to offset Section 3, subsection (a). CHAIR HAWKER called that section "conservative sidebars." Number 3440 REPRESENTATIVE SEATON voiced a concern that the discussion is about POMV, and then a sidebar is added to say it is not POMV, it's a percent of investment growth. He said POMV refers to the value of the fund, which includes deposited money. If that money is excluded and the sidebar is added to say the expenditures can only be related to the 10-year rolling average of the investment percentage, minus the inflation, the fund could be growing even though it appears to be below the 5 percent limiting number. He concluded that it seems to be inconsistent. CHAIR HAWKER clarified that every year when the new money is in the fund, it becomes the basis for the market value for the following year. The money that comes in during the current year is not termed "income of the fund" for purposes of return on investment until the next year when the market value is measured, he explained. Number 3259 KEVIN RITCHIE, Executive Director, Alaska Municipal League, speaking on behalf of the Alaska Council of Mayors, thanked the committee for its efforts and said a lot more information is filtering down through communities. He reported that the mayors and leaders of Alaska's communities are behind the development of a comprehensive, long-range fiscal plan. He said the committee should have received a letter from the communities encouraging the legislature down this path. He noted that three times as many groups as three months ago signed the letter and that the breadth of the groups is widening. He mentioned the following groups: AARP, Association of Developmental Disability Providers, Alaska Coal Association, League of Women Voters of Alaska, and virtually every group in Wrangell, which he surmised is a good example of a community that gets together and talks. MR. RITCHIE related that people of the state, given something to work with, will have very positive discussions to help solve problems. He suggested letting the public know what will get worse if no action is taken, and what will improve if action is taken. He referred to HB 236, the education tax the committee just moved out, and said it clearly states a way of making a moral dedication or commitment to what will get better. He encouraged the committee to continue to think about that. REPRESENTATIVE OGG thanked Mr. Ritchie for coming and asked for his comments about the 50/50 split and the idea of approaching the bill as a statutory process as opposed to a constitutional process. Number 3000 MR. RITCHIE said he thinks the 50/50 split concept is what is in most people's minds. He called it a "have your cake and eat it too" situation where the permanent fund dividend, at least for the next two years, doesn't go down, but goes up, and then stays stable in an amount that most Alaskans would think would be fairly substantial. At the same time, it provides a very substantial amount of money for doing things in communities that are very important, he noted. He related that [the Alaska Municipal League] does not have an opinion about the statutory- versus-constitutional process. REPRESENTATIVE OGG inquired if POMV is perceived as a limitation on the legislature's ability to utilize revenues of the permanent fund. MR. RITCHIE said it seems to him that it is both. It is utilizing revenues not being utilized and, at the same time, placing limits on the utilization of those revenues, which, he opined, are already there to utilize if the legislature so chooses. Number 2843 REPRESENTATIVE ROKEBERG said there has been some discussion within the committee, particularly by Representative Moses, about a community dividend program. He asked for Mr. Ritchie's opinion as to why the legislature should consider this idea in light of the lack of vote of confidence by the mayors. MR. RITCHIE replied he believes that action was in regard to solving the fiscal gap, and he suspects there are a number of legislators, as well, who wonder if the legislature is going to take action on that issue. He said it was not a broad-brushed lack of confidence, which is what got reported. He explained the intent was to stimulate action on the fiscal plan. In terms of the municipal dividend, that concept has been discussed by many people, among them former-Governor Hickel, who believe very strongly in putting authority to make decisions about communities in the hands of people in communities, he related. He said the concept of community dividends is all about taking money that belongs to all Alaskans and allowing them to make decisions on how that money will best benefit their communities. REPRESENTATIVE ROKEBERG said he assumed that the mayors in the state were having fiscal difficulties along with everyone else. Number 2637 CHAIR HAWKER agreed that the vote of no confidence was broad- brushed on the legislature and noted that that very morning the committee was meeting at 7:00 a.m., actively involved in addressing [fiscal] issues. REPRESENTATIVE WEYHRAUCH called the vote of no confidence a "lingering eye-poke" for legislators who have worked hard and long, and he stated his appreciation for the "old-timers." He said he was digressing, and he would like to move this bill. CHAIR HAWKER asked Mr. Ritchie to take a message back to the mayors and tell them that they were a bit shortsighted and "caused us some grave disappointment and, perhaps, a little loss in confidence in them, as well." REPRESENTATIVE GRUENBERG addressed his friends in the legislature and asked them to work with the mayors, saying that "we are all Alaskans, and to solve our problems, we must work together." Number 2330 MR. RITCHIE said he agrees, and the reason he is before the committee today is to say that the legislature is moving forward in the right direction and the communities are supportive of those efforts. He mentioned that communication is critical and does not always work well. He spoke about the number of small communities that have been in existence for well over a thousand years, that now are feeling a great deal of pain. He encouraged keeping communication open to work together to solve problems. Number 2234 REPRESENTATIVE KOHRING asked why those communities that have been around for a thousand years are now in such dire need of money now for services, when, as recently as a generation ago, they did fine. He said he has been [in Alaska] 41 years and remembers when Alaska was a state that had good roads, good schools, and public safety at just a fraction of the money available now. "Suddenly we have a major crisis when we're spending far more money than we did, say, 35 years ago," he remarked. MR. RITCHIE replied that he has thought a great deal about that as well and thinks it is a valid question. In the last 50 years there have been amazing changes in the quality of life throughout Alaska, especially rural Alaska, in terms of decreases in infant mortality, improvement of education, more on-site health clinics, and other basic things. He said the issue is, if those things start deteriorating now, people quite rightfully have come to expect that quality of life, and without those things, there is a great likelihood that there's going to be a exodus out of small communities. He said, "The problem is, small communities are what we think of when we think of rural Alaska and what it stands for. From a practical standpoint, most of our urban communities have as much as a third of their economy based on commerce and providing services." He said the relationship among all the communities in Alaska is a very important part of the economy. Number 1947 REPRESENTATIVE WILSON told of her experience living in a small town for seven years, and of the closing businesses and exodus of people due to fewer jobs. She described the decline of the hospital as an employer and the chain reaction due to lack of jobs, and she predicted that the town could become a ghost town. She said these are real things that are happening to communities across the state and she imagined the vote of no confidence stemmed from high levels of frustration. She emphasized that [the House Special Committee on Ways and Means] has made a difference for the last two years. She repeated that there is a lot of frustration in the "real trenches of the real world." CHAIR HAWKER spoke of viability of communities and, addressing Mr. Ritchie, said he knew the Alaska Municipal League was concerned as well. He stated the mission of [the House Special Committee on Ways and Means], which is cost management and efficiencies, and opined that the viability of individual communities would be an important subset of that discussion. Number 1712 REPRESENTATIVE OGG said he was pleased to hear that Mr. Ritchie's organization has "opened their eyes," recognizes that this legislature has been working on, [a fiscal plan], and is now applauding the legislature for their efforts. He asked Mr. Ritchie if that is what he is hearing. MR. RITCHIE replied yes. REPRESENTATIVE OGG thanked Mr. Ritchie and his organization for their reflection and support of the legislature's efforts. Number 1606 CHAIR HAWKER thanked Mr. Ritchie, and asked if there was any further public testimony. Hearing none, he closed public testimony. Number 1552 REPRESENTATIVE ROKEBERG [Started to make a motion to adopt Conceptual Amendment 1 and then withdrew it in order to consult with Mr. Bartholomew about the wording about consumer price index.] MR. BARTHOLOMEW related that currently in AS 37.13.145(c) the wording United States Consumer Price Index for all urban consumers. He supported continuing to use that measure. REPRESENTATIVE GRUENBERG suggested that statute be read into the record. He asked if Mr. Bartholomew was referring to AS 37.13.145(c)(1). MR. BARTHOLOMEW said correct. Number 1460 REPRESENTATIVE ROKEBERG moved to adopt the aforementioned Conceptual Amendment 1, but requested clarification of the wording. CHAIR HAWKER clarified that Conceptual Amendment 1 is to have the drafters include as appropriate in this bill, AS 37.13.145(c)(2), paraphrased as appropriate, using the price index that will be read into the record by Representative Gruenberg. REPRESENTATIVE GRUENBERG pointed out that that is a statute that is going to be repealed in [the proposed CS]. CHAIR HAWKER said correct. REPRESENTATIVE ROKEBERG said that is why it is a conceptual amendment and is being put back in. Number 1350 CHAIR HAWKER objected to Conceptual Amendment 1 for discussion purposes. He read, "As currently used for inflation proofing the permanent fund is calculated using the average of the monthly United States Consumer Price Index for all Urban Consumers", which he noted is called the CPI-U. REPRESENTATIVE ROKEBERG added that he has always used the term "or its equivalent" in case there has ever been a change. REPRESENTATIVE GRUENBERG asked for clarification of the amendment. He asked if Representative Hawker is suggesting that the entire statute not be repealed. CHAIR HAWKER paraphrased Conceptual Amendment 1: The amendment before us would be a conceptual amendment to have the drafters include as additional language some place as appropriate in this Act, language that would define, in relation to rate of inflation as appears on page 3, line 12, that that rate of inflation, the measure, the index for determining that rate of inflation, be the CPI-U or its equivalent and successor index. MR. BARTHOLOMEW suggested in Section 37.13.900, the definitions section for this provision of statute, adding the definition of inflation. REPRESENTATIVE ROKEBERG agreed that is where the definition should go so it would be applicable throughout the whole body of the chapter. Number 1030 CHAIR HAWKER withdrew his objection to Conceptual Amendment 1. There being no objection, Conceptual Amendment 1 was adopted. Number 1020 REPRESENTATIVE WEYHRAUCH moved to adopt Conceptual Amendment 2, to say that in the conditional-effect portion of the bill, Section 10, that only those sections that are related to POMV be included. CHAIR HAWKER objected for discussion purposes. Number 1010 REPRESENTATIVE GRUENBERG offered a friendly amendment to make the motion more detailed. REPRESENTATIVE WEYHRAUCH agreed. REPRESENTATIVE GRUENBERG expanded Conceptual Amendment 2 to say, Sections 1, 2, and 5 would not be subject to Section 10. He explained, "So, in other words, the conditional effect would be Sections 3, 4, 6, and 9 of this Act take effect only if an amendment to Article IX .... " He said that language would go on page 6, line 12, which would exempt Sections 1, 2, and 5 from the conditional effect. That is the first part of the amendment, he noted. The second part would be that there be another section added, Section 12, that would give Sections 1, 2, and 5 an immediate effective date. CHAIR HAWKER suggested that Sections 1, 2, and 5 would not be conditional under either the existing Sections 10 or 11, which would allow the drafters some latitude. REPRESENTATIVE GRUENBERG agreed. Number 0903 REPRESENTATIVE OGG objected. He said the bill was crafted to match the POMV and he does not want to go down this road because it all becomes ineffectual if the POMV constitutional amendment does not go into effect. He said he appreciated Representative Gruenberg's desire to address these kinds of issues, but suggested that perhaps there should be separate legislation which he would support. REPRESENTATIVE GRUENBERG responded that the issue he raised about Sections 1, 2, and 5 may not have been completely considered when this bill was drafted. Those sections are good changes in the law and whether or not the constitutional amendment passes, this bill does have merit, and there is no reason not to move those sections forward anyway. Number 0649 REPRESENTATIVE ROKEBERG agreed with Representative Ogg and said Sections 1 and 2 are "here by convenience," and he also supported separate legislation for those sections because adding [HB 298] as a companion bill to the constitutional amendment could cause confusion to the public with extra sections to read. He said this issue should be considered during the next hearing of the bill. CHAIR HAWKER maintained his objection. A roll call vote was taken. Representatives Weyhrauch, Kohring, Wilson, and Gruenberg voted in favor of Conceptual Amendment 2. Representatives Ogg, Rokeberg, and Hawker voted against it. Representatives Moses and Samuels were absent for the vote. Therefore, Conceptual Amendment 2 was adopted by a vote of 4-3. Number 0355 REPRESENTATIVE WEYHRAUCH moved to report CSHB 298, Version 23- LS1075\S, Cook, 3/15/04, as amended, out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE KOHRING objected. Number 0237 A roll call vote was taken. Representatives Weyhrauch, Ogg, Wilson, Rokeberg, Gruenberg, and Hawker voted in favor of CSHB 298. Representative Kohring voted against it. Representatives Moses and Samuels were absent for the vote. Therefore, CSHB 298(W&M) was reported out of the House Special Committee on Ways and Means by a vote of 6-1. CHAIR HAWKER thanked the committee and the permanent fund experts for their participation.