Legislature(1999 - 2000)
05/24/1999 01:03 PM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 1001(FIN) am
"An Act relating to income of the Alaska permanent
fund and authorizing an advisory vote on a long-term
financial plan for the state; and providing for an
effective date."
Co-Chair John Torgerson had a committee substitute for HB
1001, 1-LS1022/S, 5/24/99 drafted that was before the
members. The committee substitute read as follows:
Section 1. ADVISORY VOTE. At a special election
to be held on September 14, 1999, in substantial
compliance with the election laws of the state,
including absentee voting and the preparation,
publication, and mailing of an election pamphlet
under AS 15.58.010 - 15.58.090, the lieutenant
governor shall place before the qualified voters of
the state a question advisory to the legislature
and the governor. The election pamphlet for the
special election must comply with AS 15.58.020(6),
including the requirement that it contain
statements that advocate voter approval or
rejection of the question. Notwithstanding AS
15.60.005 and other laws relaxing to preparation of
the ballot proposition, the question shall appear
on the ballot in the following form:
QUESTION
Preamble: The people of Alaska created the Alaska
permanent fund to save a portion of Alaska's
petroleum revenue for the future. After investing
those savings, the original intent and purpose was
to then use the earnings from those investments
when Alaska's petroleum revenues declined.
Petroleum revenues have now declined substantially
and ate forecast to continue to decline. Our
reliance on declining oil production and volatile
oil prices constitutes an unsustainable budget
system. The governor and the legislature seek the
public's judgment in adopting a stable and
sustainable long-term balanced budget plan.
Balanced Budget Plan: This will preserve the
permanent fund dividend, inflation-proof the Alaska
permanent fund, support public services, and
establish a Citizens' Balanced Budget Task Force.
Please mark "yes" or "no" on this plan.
The Balanced Budget Plan will
(1) Spending Reductions: Continue state general
fund budget reductions to a combined total of
at least $60,000,000 for fiscal years 2000
and 2001. Submit a proposed constitutional
amendment to the voters that would reduce the
base amount of annual appropriations in alt
IX, sec. 16, Constitution of the Stale of
Alaska, and make other changes to establish a
meaningful appropriation limit.
(2) Permanent Fund Protection: Guarantee the
Alaska permanent fund principal is untouched.
The principal of the fund is inflation-
proofed to protect its value for all
Alaskans, including future generations.
(3) Permanent Fund Dividends: Guarantee a
dividend is paid to qualified Alaska
residents at a minimum of $1,700 in 1999 and
$1,700 in 2000 and, thereafter, approximately
$1348 and higher. Beginning in 2001, the
constitutional budget reserve and the
permanent fund earnings reserve will be
combined. In determining the market value for
the calculation of the dividend, this new
account will be joined with the principal of
the Alaska permanent fund. After accounting
for inflation- proofing, the dividend will be
based on 50 percent of the annual earnings
payment of these combined accounts.
(4) Earnings Reserve Usage for Public Purposes:
After payment of permanent fund dividends and
inflation-proofing the fund, the remaining
annual earnings payment will be prioritized
for usage for education, public safety, and
transportation.
(5) Accountability: expenditures from the
combined account will be fully disclosed on
each annual permanent fund dividend check.
(6) Balanced Budget Task Force: Establish a
Citizens' Balanced Budget Task Force to
present options to further reduce state
spending and identify appropriate future
revenue sources.
(7) Income Tax: No income tax on individuals will
be required as part of this plan.
After paying annual dividends to residents and
inflation-proofing the Alaska permanent fund,
should a portion of permanent fund investment
earnings be used to help balance the state budget?
Yes( ) No( )
Sec. 2. This Act takes effect immediately under AS
01.10.070(c).
Senator Sean Parnell moved for adoption of the committee
substitute for as a Workdraft.
Co-Chair John Torgerson explained the primary differences
between the committee substitute and CS HB 1001 (FIN) am,
the version referred to the Committee.
Co-Chair John Torgerson stated that the committee
substitute strips from the House version, the statutory
changes that would enact a plan. He stated that the only
language retained from the House version is the advisory
vote portion, beginning on page 4 line 5 of the House
version. The remainder of the bill is deleted. He noted
that the advisory vote language is identical to the
language that was amended the previous night on the Senate
Floor with the following exceptions:
Page 1 lines 6 and 7 of the committee substitute inserts
into Section 1, "and the preparation, publication and
mailing of an election pamphlet under AS 15.58.010 -
15.58.090," before, "the lieutenant governor shall place
before the qualified voters of the state a question
advisory to the legislature and the governor."
The committee substitute next inserts a new sentence into
Section 1 on Page 1 line 9. This sentence states, "The
election pamphlet for the special election must comply with
AS 15.58.020(6), including the requirement that it contain
statements that advocate voter approval or rejection of the
question."
Page 2 line 6 of the committee substitute replaces "upon"
with "on" in the preamble language. The sentence now reads,
"Our reliance on declining oil production and volatile oil
prices constitutes and unsustainable budget system."
Also in the preamble language, on Page 2 line 7 of the
committee substitute, the word, "state" is removed from in
front of the word, "legislature". The sentence now reads,
"The governor and the legislature seek the public's
judgement in adopting a stable and sustainable long-term
balanced budget plan." Co-Chair John Torgerson commented
that "state" was removed during drafting because it was
deemed unnecessary.
On page 2 line 10 of the committee substitute, "Alaska" is
inserted before "permanent fund". This sentence in the
preamble now reads, "This will preserve the permanent fund
dividend, inflation-proof the Alaska permanent fund,
support public services, and establish a Citizen's Balanced
Budget Task Force." Co-Chair John Torgerson explained that
this addition better clarifies the permanent fund.
On page 2 line 13 of the committee substitute, in the first
descriptive paragraph of the balanced budget plan, the
word, "to" replaces the word, "for". The sentence reads,
"Continue state general fund budget reductions to a
combined total of at least $60,000,000 for fiscal years
2000 and 2001.
On page 2 line 28 of the committee substitute, in the third
descriptive paragraph, "Alaska" is again added before,
"permanent fund". The sentence now reads, "In determining
the market value for the calculation of the dividend, this
new account will be joined with the principal of the Alaska
permanent fund."
On page 3 line 9 of the committee substitute, in the
seventh descriptive paragraph, the word "personal" is
deleted and the word, "individuals" is added. The sentence
now reads, "No income tax in individuals will be required
as part of this plan."
On page 3 line 11 of the committee substitute, "Alaska" is
once again added in front of, "permanent fund". This
sentence reads, "After paying annual dividends to residents
and inflation-proofing the Alaska permanent fund, should a
portion of permanent fund investment earnings be used to
help balance the state budget?"
Senator Randy Phillips noted that throughout the committee
substitute, the words "permanent fund" are not capitalized.
He questioned whether they should be capitalized. Co-Chair
John Torgerson was unsure and said he would ask the
Division of Legal and Research Services to advise. Senator
Randy Phillips stated that he wanted it capitalized.
Co-Chair John Torgerson offered to take a half-hour recess
to allow members to review the committee substitute.
Senator Sean Parnell commented that the Committee had voted
on this language in the form of past legislation.
Senator Dave Donley wanted discussion. He commented that
this particular plan had been developed, and he understood
the public policy arguments for doing so. He assessed that
this plan proposes to base dividends on the value of the
corpus of the permanent fund for the first time rather than
on earnings. One of the advantages of calculating the
dividend on a fixed percentage of the corpus, in his
opinion, is that the dividend amounts can be predicted.
However, he believed there were disadvantages to this
calculation method, which had not been discussed in the
Committee. He remarked that the disadvantage is that this
method removes the linkage between the investment policy of
the fund and the payment of dividends. He commented, "As it
is now, the better the investment the better the return,
the higher the dividends." He warned that to change to a
fixed percentage of the corpus, most of the linkage is
removed.
Co-Chair John Torgerson interrupted saying the dividend
calculation is based on the total market value on not only
the principal, but also on the earnings reserve.
Senator Dave Donley conceded, but noted that most of the
linkage is still removed from the investment policy and the
payment of the dividend.
Co-Chair John Torgerson rebutted, saying that as the fund
increases, even though the percent is fixed, the "pot gets
bigger."
Senator Dave Donley said that would be miniscule compared
to the existing correlation. He was careful to say that not
all of the linkage would be removed, but felt that about
95-percent would be removed.
Senator Dave Donley was interested in having a general
discussion in the Committee on the pros and cons of
switching to a value of the corpus method of dividend
calculation. He referenced the strong political incentive
in insuring the highest dividend return under the current
system. At the same time, he noted the restraint exercised
in limiting the types and encouraging the diversity of
investments for the fund to preserve the corpus and to
protect the income stream. However, he cautioned that much
of the political incentive would be jeopardized by changing
to a calculation of the dividend based on a fixed
percentage of the total. He wanted to know how the other
members felt about the loss of linkage.
Senator Gary Wilken noted that when the process began
earlier in the session, he was one who felt the dividend
calculation should be linked to earnings. He spoke of the
positive market over the past decade and how he would like
that to continue. However, reality has led him to become
comfortable with the market value approach. One reason he
cited is learning that other large capital accumulations
similar to the Alaska permanent fund have already converted
to some type of market-value approach. He took the lead of
those before him and supported the market value approach.
Senator Loren Leman said one of the things he found
attractive about calculating dividends from a percentage of
the entire fund is that it removes one of the obstacles
from the fund managers regarding realized earnings when a
stock is sold off. He pointed out that when assets are
sold, the dividends are driven up artificially. This
removes that obstacle and makes it easier for fund managers
to "do the right thing management-wise" and give managers
better flexibility to make decisions based on the best
interest of the permanent fund, in his opinion. He
partially agreed with Senator Dave Donley that the
calculation changes reduces some of the linkage to the
earnings, but felt that it did not remove all of the
linkage and the corpus-plus-earnings will remain. He
believed people would still find the proposed calculation
method necessary to protect the entire fund. He hoped
people would still feel the fund is a valuable asset to
protect for the future. He studied the change in
calculation and determined it is a reasonable thing to do.
Senator Sean Parnell did not think there would be a loss of
linkage in going to the market value approach because the
dividend is still linked to the market value of the total
fund. Therefore, he concluded that as the total fund
increases due to good management decisions, the dividend
would also increase. He noted the Committee had also heard
from Callan and Associates and the managers of the
permanent fund, who testified that basing dividends on
realized earnings is a more risky investment to both the
dividend and the permanent fund itself. He reminded the
members that they had held numerous discussions on this
point. He stressed that the Alaska permanent fund is one of
the few remaining funds that continue to calculate
dividends on realized earnings rather than on the market
value of the fund. The current calculation is an obsolete
investment method and invites more risk, in his opinion and
according to the expert's advice. He cautioned that this
extra risk should not be taken with the permanent fund or
the dividend.
Senator Gary Wilken agreed that people do plan on the
dividends as part of their income and that the need for the
higher amounts could be argued. However, he noted that the
fund had some years of flat earnings in which the dividends
were smaller. He realized that the current "five-year
averaging" system would prevent drops in dividends caused
by one bad year, but warned that if the market were poor
for three or four years, the dividends would shrink. He
felt that for Alaskan's who are planning on the money, the
market value approach equals out the highs and the lows.
Senator Dave Donley appreciated the discussion. He felt
there were good points either way. However he stressed
there are differences between private sector policy and
public sector policy and he believed the private sector
policy is superior. In the private sector, he explained,
there is not the temptation or the need to spend some of
the money on other things. He felt this was the reason the
original dividends were related directly to the earnings of
the fund rather that the spending desires of the large
special interests who wished to tap the fund.
Senator Pete Kelly added to Senator Gary Wilken's last
comments saying that in certain unfavorable market
conditions, the dividend would not only shrink, but would
actually disappear. However, he believed that the market
value system ensures the ability to ride out tough markets
for much longer periods of time than under the current
system. .
Senator Gary Wilken didn't think any changes to the method
of calculating the dividend would change the mandate of the
permanent fund. The board would still operate under the
same mandate of maximum return with preservation of capital
being the number one priority. Therefore, it seemed to him
that the fund would continue to be managed with the same
goal.
Co-Chair John Torgerson clarified that the permanent fund
managers follow the "Prudent Investor's Rule."
Senator Dave Donley agreed it is correct that the change
would not affect the investment policy. However, he
thought that it would remove the immediate impact of shifts
in investment policy from the dividend and would therefore
distance the policy from the public's direct linkage to
that policy. He stated that currently, a change in policy
would result in a direct impact on the dividend.
Senator Al Adams pointed out that in analyzing a market
value approach, the Committee has only relied on the
Commissioner of the Department of Revenue's assessment
using only an 8.13 percent rate of return could be used.
Senator Al Adams asked how many corporations actually
realized that high of a rate of return and he disagreed
that the average rate of return for the permanent fund
would be that high. He surmised the Administration had bent
to political pressure to allow the use of the highest rate
of return. He then criticized the use of the 2.25 percent
formula used for inflation proofing the permanent fund and
the intent to give 5.88 percent to the general fund. He
thought the Committee was wrong in assuming that high rate
of return would result in averaged higher dividends. He
speculated that the dividends would not be as high as
predicted. He warned that using this formula was playing a
dangerous game.
Co-Chair John Torgerson suggested that would be an
interesting discussion to have with the permanent fund
managers, Callan and Associates and the other experts
advising the legislature on this matter. He countered that
the figures the Committee is using came from outside
experts; the Committee did not come up with the theory
itself.
Senator Gary Wilken restated Co-Chair John Torgerson's
argument saying that today the 30-year long-bond earning is
5.87 percent. Therefore, he suggested that the permanent
fund could invest solely in long-bonds and only need to
earn 2.26 percent more to reach the projected 8.13 percent
used to calculate the earnings under this plan. He
summarized that 8.13 in the historic market is not an
unreasonable rate of return.
Co-Chair John Torgerson thought Senator Al Adams's was
referring to the average over time.
Senator Al Adams only wanted the Permanent Fund Division
experts to address the matter before the Committee and
either dispute or agree with the statements made by the
Commissioner of the Department of Revenue. He felt the
Commissioner bent to political pressure.
Senator Al Adams then referred to his proposed amendment.
Amendment #1: This amendment changes the ballot language of
the advisory vote to read as follows:
QUESTION
Preamble: The people of Alaska created the Alaska
Permanent Fund to save a portion of Alaska's
petroleum revenue for the future. After investing
those savings, the original intent and purpose was
to then use the earnings from those investments
when Alaska's petroleum revenues declined.
Petroleum revenues have now declined substantially
and are forecast to continue to decline. Our
reliance upon declining oil production and volatile
oil prices constitutes an unsustainable state
budget system. The governor and state legislature
seek the public's judgement in adopting a stable
and sustainable long-term balanced budget plan.
Balanced Budget Plan: This will preserve the
Permanent Fund dividend, inflation-proof the
Permanent Fund, support public services, and
establish a Citizen's Balanced Budget Task Force.
Please mark "yes or "no" on this plan.
The Balanced Budget Plan will:
1. Spending Reductions: Continue state general
fund budget reductions for fiscal years 2000
and 2001 and establish a Citizen's Balanced
Budget Task Force to identify options to
further reduce state spending and explore
future revenue sources.
2. Permanent Fund Protection: Guarantee the
Alaska Permanent Fund principal is untouched.
The principal of the Fund is inflation-proofed
to protect its value for all Alaskans,
including future generations.
3. Permanent Fund Dividends: Guarantee a dividend
is paid to qualified Alaska residents at a
minimum of $1,700 in 1999 and $1,700 in 2000
and thereafter, approximately $1,348 and
higher. Beginning in 2001, the Constitutional
Budget Reserve and the Permanent Fund Earnings
Reserve will be combined, which requires a
three-quarter vote of the House and Senate. In
determining the market value for the
calculation of the dividend, this new account
will be joined with the principal of the
Permanent Fund. After accounting for
inflation-proofing, the dividend will be based
on 50% of the annual earnings payment of these
combined accounts.
4. Earnings Reserve Usage for Public Purposes:
After payment of Permanent Fund dividends and
inflation-proofing the Fund, the remaining
annual earnings payment will be used for
essential public services.
5. Accountability: Expenditures from the combined
account will be fully disclosed on each annual
Permanent Fund Dividend check.
6. Income Tax: No personal income tax is required
as part of this plan.
Question: After paying annual dividends to
residents and inflation-proofing the Permanent
Fund, should a portion of Permanent Fund Investment
Earnings be used to help balance the state budget?
Yes( ) No( )
Senator Al Adams moved for adoption. Co-Chair John
Torgerson objected. Senator Al Adams spoke to the amendment
detailing the changes it makes.
The amendment deletes the provision in the first
descriptive paragraph, stating that the general fund budget
will be reduced by the set amount of $60 million for fiscal
years 2000 and 2001.
The amendment also deletes the provision in the first
descriptive paragraph, calling for a proposed
constitutional amendment to reduce the base amount of
annual appropriations. Senator Al Adams referred to
legislation, SJR 24, being considered in the Senate
Judiciary Committee that proposes a similar constitutional
spending limit. He speculated that the other body of the
legislature would not pass a constitutional amendment in
this manner. Therefore, he questioned why the provision is
included in this bill.
The amendment also restates in the first descriptive
paragraph, the provision calling for the establishment of a
Citizen's Balanced Budget Task Force. Senator Al Adams
pointed out that the task force is stipulated in the
preamble language of the ballot, and is now added in the
description as well.
The second descriptive paragraph of the advisory vote
ballot language is unchanged by this amendment.
The amendment inserts language in the third descriptive
paragraph following, "Beginning in 2001, the Constitutional
Budget Reserve and the Permanent Fund Earnings Reserve will
be combined." The new language adds, ", which requires a
three-quarter vote of the House and Senate."
The amendment changes part of the last sentence in the
forth descriptive paragraph, which dictates that the
remaining annual earnings payment "will be prioritized for
usage for education, public safety and transportation." New
language is inserted to read, ".will be used for essential
public services." Senator Al Adams's testified that
Alaskans in his district depend heavily on services in
addition to just education, public safety and
transportation.
The fifth descriptive paragraph of the advisory vote ballot
language is unchanged by this amendment.
The amendment deletes the sixth descriptive paragraph.
Senator Al Adams noted that the main difference in this
amendment is the absence of a constitutional spending
limit. However, he questioned the results shown in the
public opinion polls, suggesting that polls can be written
to garner particular results. He thought the people would
recognize that a constitutional spending limit is not
needed. He also recognized that the other body would not
pass a constitutional amendment on this plan.
Co-Chair John Torgerson stressed that this advisory vote
does not institute a constitutional amendment for either
voters or the other body. Senator Al Adams agreed but
noted that any time a proposal is submitted in an advisory
vote, people expect that action to be taken. He did not
think a constitutional amendment should be adopted and that
spending limits could be instituted by the legislature
itself without the language in the advisory vote.
Co-Chair John Torgerson stated it is his intent to work
toward the goal of adopting a constitutional spending
limit. Therefore, he was comfortable with the language on
the ballot.
Senator Randy Phillips pointed out that, assuming this bill
passes the legislature, the governor approves an advisory
vote and the voters adopt the options, the legislature
could always return and draft a constitutional amendment.
However, he qualified that the voters would still have to
approve that amendment. Because constitutional amendments
are allowed on the ballot only during general elections, he
stressed that an amendment could not be adopted this year.
He commented on the spending reductions, saying he felt
that the public should be advised of the amount of
reductions to the general fund operating budget.
Senator Sean Parnell noted that when the idea of tapping
the permanent fund account was first mentioned, the
feedback he received was that the public wanted some
assurance that the spending would be limited. He believed
that the only way to ensure the limitations is through a
constitutional amendment. Without language promising a
constitutional amendment included in the advisory vote, in
his opinion, the voters would have very little confidence
or reason to believe that there are limitations on spending
from funds coming from earnings of the permanent fund.
Senator Al Adams argued that if that was the case, there
should be a separate question on the ballot to address the
spending limitations. Most voters would only see the
dividend reductions, he surmised.
The amendment FAILED to be adopted by a vote of 1-8.
Senator Al Adams voted in favor.
Senator Al Adams objected to the adoption of the committee
substitute as a Workdraft. By a vote of 8-1, CS HB 1001 was
ADOPTED. Senator Al Adams cast the nay vote.
Senator Randy Phillips restated his desire to have "Alaska
Permanent Fund" capitalized. Co-Chair John Torgerson agreed
to direct the bill drafters to incorporate this request.
The bill was reported out of Committee by a vote of 8-1.
Senator Al Adams voted in opposition.
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