Legislature(2003 - 2004)

06/23/2004 10:48 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     SENATE CONCURRENT RESOLUTION NO. 101                                                                                       
     Relating  to  offsetting  the  projected  annual  general  fund                                                            
     revenue  shortfall   through  equal  appropriations   from  the                                                            
     constitutional  budget  reserve fund and  the earnings  reserve                                                            
     account.                                                                                                                   
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Green re-convened  the  meeting.  She commented  that  the                                                            
State should  be considering a variety  of methods through  which to                                                            
address its  fiscal concerns. This  legislation is such a  proposal.                                                            
                                                                                                                                
Co-Chair  Wilken,  the  bill's  sponsor,  presented  a  power  point                                                            
presentation titled "Building  the Bridge, the Power of Earnings, An                                                            
alternate Solution" [copy  on file]. An editorial titled "Stick with                                                            
Democracy" [copy on file]  from the Anchorage Daily News, dated June                                                            
14, 2004  and an email  [copy on file] from  Governor Walter  Hickel                                                            
were also provided.                                                                                                             
                                                                                                                                
Co-Chair Wilken  mentioned that Governor Frank Murkowski's  election                                                            
campaign focused  on the message of  "hope." Co-Chair Wilken  stated                                                            
that he campaigned on a  message of responsibly developing Alaska to                                                            
create  jobs  ? to  fill our  fiscal  gap  with money  derived  from                                                            
resource development.  He is concerned  that his message  might have                                                            
been forgotten, as other things have taken priority.                                                                            
                                                                                                                                
Co-Chair  Wilken  voiced  being  skeptical  that  the  public  would                                                            
approve a fiscal  plan were one presented  in the upcoming  November                                                            
general  election. His  plan would  present an  alternative plan  to                                                            
bridge the  fiscal gap that the State  would experience between  now                                                            
and the time  when new natural resource  revenues become  available.                                                            
It is difficult  to accept that there  is a fiscal problem  when the                                                            
State is experiencing  such things  as near-record high employment,                                                             
the price  of North Slope  crude oil is hovering  around $30  to $40                                                            
per barrel, there  are high bank deposit levels, and  low bankruptcy                                                            
levels. The people  of the State "are pretty content."  Therefore it                                                            
is  difficult  to  expect that  people  would  support  changing  or                                                            
understanding  the POMV proposal that  would provide revenue  to the                                                            
State  and  would alter  the  manner  in which  the  Permanent  Fund                                                            
Dividend check would be determined.                                                                                             
                                                                                                                                
Co-Chair Wilken commented  that the first chart in his presentation,                                                            
titled  "So,  where's  the  problem?"  identifies  that  the  FY  05                                                            
$7,600,000,000  Total Operating and  Capital budget is comprised  of                                                            
$3,010,000,00  in federal funding, $1,260,000,000  of Permanent Fund                                                            
money  for  inflation  proofing  and  the  Permanent  Fund  Dividend                                                            
checks,   $937,000,000   in  Statutorily   restricted   money,   and                                                            
$150,000,000  in Trust/Dedicated  money that  the Legislature  could                                                            
not alter. The chart also  denotes a projected Constitutional Budget                                                            
Reserve (CBR)  draw of $372,000,000 based upon an  average crude oil                                                            
price  of   $28  per  barrel.  The   fiscal  gap  lies  within   the                                                            
$1,960,000,000  general fund  component of  the budget. The  general                                                            
fund is currently  70 to 80-percent  funded by oil and gas  revenue.                                                            
The  goal over  the  next few  years  is to  increase  General  Fund                                                            
revenues.                                                                                                                       
                                                                                                                                
Co-Chair  Wilken  noted  that  the chart  titled  "?and  what's  the                                                            
problem?" reflects  the difference in the General  fund revenues and                                                            
the  expenditures  for  FY 1990  through  FY  2006  as well  as  the                                                            
projected  State spending  through FY 2020.  The State expends  more                                                            
than it receives in revenues.                                                                                                   
                                                                                                                                
Co-Chair  Wilken stated  that  the chart  titled,  "?but things  can                                                            
change  quickly,  for the  good and  for  the bad"  depicts  various                                                            
budget scenarios  were the price of  North Slope crude oil  to range                                                            
between  $12 and  $44 per  barrel. The  higher the  price, the  more                                                            
General Fund  revenue is received.  The FY  05 budget is based  on a                                                            
$28.30 per  barrel price forecast  and a $372,000,000 budget  fiscal                                                            
gap is  projected.  Were the  price of oil  to decrease  to $22  per                                                            
barrel, a $750,000,000  fiscal gap would result. Currently a surplus                                                            
in revenue is being generated  as the price is in the $39 per barrel                                                            
price range. However, he  warned that this price would not continue,                                                            
as things could change quickly.                                                                                                 
                                                                                                                                
Co-Chair  Wilken continued  that things have  changed, as the  chart                                                            
titled "?And they have" depicts.                                                                                                
                                                                                                                                
   • The CBR has been used to fill the fiscal gap                                                                               
   • Approximately $5,5 billion has been withdrawn.                                                                             
   • The state has deposited $5.6 billion and earned $2 billion in                                                              
     interest.                                                                                                                  
                                                                                                                                
Co-Chair Wilken  noted that the chart  titled "for example"  depicts                                                            
the CBR  balance and CBR  draws for FY 94  through FY 04.  It states                                                            
the following.                                                                                                                  
                                                                                                                                
   • CBR draw 9 out of 11 years                                                                                                 
   • Average draw $350 million                                                                                                  
   • Current balance $2.1 billion                                                                                               
                                                                                                                                
Co-Chair  Wilken noted  that were  the current per  barrel price  to                                                            
continue,  the projected FY  05 CBR draw would  not be required.  He                                                            
cautioned  however that the  CBR would erode  in the future,  as the                                                            
State "does not feed it like we used to."                                                                                       
                                                                                                                                
Co-Chair Wilken  noted that, as supported by the comments  listed on                                                            
the chart  titled "? but  Alaska is a resource  state", Alaska  is a                                                            
resource State and there are new revenue possibilities.                                                                         
                                                                                                                                
                                                                                                                                
SFC-04 1st SS #4, Side A 02:19 PM                                                                                               
                                                                                                                                
                                                                                                                                
Co-Chair  Wilken stated  that the chart  titled "?  and a bridge  is                                                            
needed, From today to Development"  depicts the FY 05 budget and the                                                            
projected  budget  shortfalls that  would  occur until  new  revenue                                                            
resources  are generated,  beginning  in the  year  2011, from  such                                                            
things as the  completion of the proposed  gas pipeline and  new oil                                                            
field developments.  How the State would address its  budget deficit                                                            
until that  time is the question to  which there are a multitude  of                                                            
answers.                                                                                                                        
                                                                                                                                
Co-Chair Wilken  stated that some  options through which  to address                                                            
the fiscal deficit are  depicted in the "Several pots of Money" fact                                                            
sheet. These would include:  reducing State spending; instituting an                                                            
income  tax, a corporate  tax, and  a sales tax;  utilizing  the CBR                                                            
increasing  user  fees  and  taxes  on such  things  as  tobacco  to                                                            
generate  other  revenues.  He stressed  that  while  these  revenue                                                            
sources  would generate  some  money, it  would not  be significant                                                             
enough  to  support  the State's  budget.  Another  source  must  be                                                            
generated  in the interim,  as these sources  and the CBR could  not                                                            
adequately support the State's annual budget deficit.                                                                           
                                                                                                                                
Co-Chair  Wilken stated that  his proposal  would involve  utilizing                                                            
$1,500,000,000  in realized earnings of the four billion  dollars in                                                            
unrealized  and   realized  earnings  that  are  available   to  the                                                            
Legislature  in  the  Permanent   Fund.  The  CBR  is  projected  to                                                            
terminate  in the year 2009  as depicted in  the chart titled,  "and                                                            
why not just the CBR?"                                                                                                          
                                                                                                                                
Co-Chair Wilken  continued that, based  on current projections,  the                                                            
CBR would  be unavailable  to assist in building  the bridge  to the                                                            
time  when new  revenue resources  come  on line.  Referring to  the                                                            
chart titled,  "but what if..." he  noted that were the Legislature                                                             
to split "the  future fiscal gaps with equal contributions  from the                                                            
Constitutional  Budget Reserve and the Earnings Reserve  Account," a                                                            
fiscal bridge  could be built that would extend the  life of the CBR                                                            
through  the year 2012.  This revenue  proposal  is depicted  in the                                                            
chart titled " ? and we build a bridge".                                                                                        
                                                                                                                                
Co-Chair  Wilken noted  that  the Permanent  Fund,  the Division  of                                                            
Legislative  Finance,  and  the  Office  of  Management  and  Budget                                                            
provided the numbers depicted in the charts.                                                                                    
                                                                                                                                
Co-Chair Wilken  stated that the answer  to the question  of whether                                                            
the Earnings  Reserve Account  could be utilized  in this manner  is                                                            
yes, as substantiated on the fact sheet titled, "but can we?"                                                                   
                                                                                                                                
     The Earnings Reserve Account, a result of wise investment of                                                               
     our Permanent Fund, has been and is still available to the                                                                 
     legislature by a majority vote of 21-11.                                                                                   
                                                                                                                                
Co-Chair  Wilken noted  that an  enormous amount  of information  is                                                            
available  on the Permanent  Fund website as  depicted in the  sheet                                                            
titled " PF financial  projections say?". This information  includes                                                            
such things  as that the Fund projects  a 7.38 percent return  and a                                                            
realized  Earnings Account  amount  of $740  million in  FY 04.  The                                                            
chart depicts  that the Legislature, if it so desired,  could access                                                            
approximately  four  billion  dollars  from the  Permanent  Fund  in                                                            
realized and unrealized funds.                                                                                                  
                                                                                                                                
Co-Chair Wilken  voiced being surprised as the number  of people who                                                            
confuse the  Earnings of  the Permanent Fund  with the Principal  of                                                            
the  Fund.  As denoted  on  the  sheet  titled "?our  Fund  and  our                                                            
Earnings", the Permanent  Fund is comprised of "two distinct pots of                                                            
money:"  the Principal  of the  Fund, valued  at  $23.5 billion,  is                                                            
protected  by  the  Constitution;  however,   the  Earnings  Reserve                                                            
Account, valued at $1.5  billion, is available to the Legislature by                                                            
a majority vote. The Principal  receives 25-percent of oil revenues,                                                            
and special  deposits could  be received  from the Earnings  Reserve                                                            
Account.  The Earnings  Reserve Account  is the  account from  which                                                            
Permanent  Fund  Dividends,  inflation  proofing  of  the  Principal                                                            
account,  and other  expenditures are  made. While  come decry  that                                                            
using the  ERA would be a  raid on the Permanent  Fund, this  is not                                                            
the case.  Those people  "should know  better."  His proposal  is to                                                            
utilize the ERA,  matched with an equal portion of  the CBR, to fund                                                            
the fiscal deficit until new resource revenues transpire.                                                                       
                                                                                                                                
Co-Chair  Wilken read the  information on the  sheet titled  " ? the                                                            
Earnings Reserve the crown jewel of Alaska's Fiscal Future."                                                                    
                                                                                                                                
   • Only Legislature in America deciding how to manage $27 billion                                                             
     for 640,000 people                                                                                                         
   • Every minute, every hour, every day, the world helps build                                                                 
     Alaska by                                                                                                                  
        o Investing in corporate America                                                                                        
        o Investing  in America's  society                                                                                      
        o Investing  in America's  future                                                                                       
   • The Earnings Reserve Account is an abutment to our Bridge to                                                               
     Development.                                                                                                               
                                                                                                                                
Co-Chair Wilken  referred to the chart titled " ?  but what about my                                                            
check  if you  use  the  Earnings  Reserve?",  as it  specifies  how                                                            
citizens' PFDs  might be affected  by addressing the State's  fiscal                                                            
deficit  with a  50/50 split  from  the ERA  and the  CBR. Based  on                                                            
Permanent  Fund financial  projections,  a $550  million fiscal  gap                                                            
that would  be addressed by a $275  million draw from the  CBR and a                                                            
$275 million from the ERA  for the next five years: would not reduce                                                            
the level  of the PFD  the first  year; would  decrease it by  three                                                            
dollars the  second year; and would  serve to decrease one's  PFD by                                                            
$32 the fifth year. The  cumulative affect of this would amount to a                                                            
total five-year  decrease of  $64. He pointed  out that the  average                                                            
CBR draw has been $350 million.                                                                                                 
                                                                                                                                
Co-Chair  Wilken  noted that  the chart  titled  " ?  how does  this                                                            
compare to  the status quo"  reflects what  the projected amount  of                                                            
the PFD  would be  in the forthcoming  years  based on projections.                                                             
Were  $275  million removed  from  the  ERA to  support  the  budget                                                            
deficit for  the next ten years, the  FY 2014 dividend would  amount                                                            
to $2,057 as opposed to being $2,177 were the ERA not utilized.                                                                 
                                                                                                                                
Co-Chair  Wilken  stated  that  the chart  titled  "  ? and  to  the                                                            
suggested POMV method"  indicates that, were the proposed Percent of                                                            
Market  Value plan  (POMV)  adopted,  the FY  2009 PFD  check  would                                                            
amount  to $1,151 rather  than $1,889  as proposed  in his plan  and                                                            
$1,319 in  FY 2014  under the POMV  as opposed  to $2,057 under  his                                                            
plan. "This  is a  powerful slide"  as were the  POMV plan  adopted,                                                            
citizens  PFDs would be  significantly affected  as compared  to his                                                            
50/50 ERA/CBR proposal.                                                                                                         
                                                                                                                                
Co-Chair  Wilken noted  that while  a State Income  Tax might  raise                                                            
$275 million,  the sheet  titled "but  is this  the best way?  Let's                                                            
compare  other revenue  sources"  depicts  that it  would cost  each                                                            
Alaskan  $1,059. A State  Sales Tax  might raise  $275 million  at a                                                            
cost of $1,035 to that  same person. Utilizing $275 million from the                                                            
Earnings Reserve Account  would cost that Alaskan $12. These amounts                                                            
reflect information  based on the second year of implementation  and                                                            
Department  of Revenue  projections  for a married  person with  two                                                            
children and a $57,000 adjusted gross income.                                                                                   
                                                                                                                                
Co-Chair Wilken continued  that the chart titled, " ? and what about                                                            
over  time" depicts  the cumulative  cost  to a family  of four  for                                                            
these three  options through the year  FY 2014. The cost  in FY 2014                                                            
would be $9,531, $9,315,  and $1,940 for implementation of an income                                                            
tax, sales tax, or use of the ERA proposals, respectfully.                                                                      
                                                                                                                                
Co-Chair Wilken  stated that the chart  titled, "but does  this help                                                            
the CBR" reflects the fact  that were only half of the amount of the                                                            
fiscal deficit  funded by the CBR, the CBR's life  could be extended                                                            
almost  an additional  three  years.  Total  funding of  the  Fiscal                                                            
deficit and  the 50/50 CBR/ERA  split portion  impact to the  CRB is                                                            
reflected on this chart.                                                                                                        
                                                                                                                                
Co-Chair Wilken  stated that the effect  of removing money  from the                                                            
ERA is depicted  in the chart  titled " ?  and what about  the ERA."                                                            
While it  would affect the  ERA balance that  balance would  reflect                                                            
growth when the projected new resource revenues begin.                                                                          
                                                                                                                                
Co-Chair Wilken read the following information.                                                                                 
                                                                                                                                
     " ? a brief comparison ?"                                                                                                  
     POMV Method verses Build the Bridge.                                                                                       
                                                                                                                                
     POMV Method               Build the Bridge                                                                                 
     1) Amount of PFD          1) Amount of PFD                                                                                 
     more predictable          follows the market                                                                               
     2) More  negative         2)  Less negative                                                                                
     impact  on your PFD       impact  on your PFD                                                                              
     3) Perm Fund principal    3) Perm Fund Principal                                                                           
     may be impacted           protected                                                                                        
     4) Perm Fund draw for     4) Earnings used only                                                                            
     state services is         if necessary for state                                                                           
     automatic                 services                                                                                         
                                                                                                                                
     "? let's use it only when we need it ?"                                                                                    
     • Build the Bridge Plan demands spending accountability                                                                    
        because                                                                                                                 
     • the Earnings Reserve Account is the people's money and                                                                   
     • each legislator must answer to the public on how much was                                                                
        spent from the Earnings Reserve to fund state services.                                                                 
                                                                                                                                
     "lets summarize .. The Build the Bridge Plan"                                                                              
        • Recognizes   Alaska's  natural   resource  potential   and                                                            
          opportunity for jobs                                                                                                  
        • Recognizes  the power of the Earnings  Reserve - the crown                                                            
          jewel of a fiscal plan                                                                                                
        • Bridges   the  State   of  Alaska   revenue  needs   until                                                            
          development can occur                                                                                                 
        • Establishes   accountability    by  forming   a   spending                                                            
          partnership with all voters                                                                                           
                                                                                                                                
     " ? and now the challenge to our governor and to the                                                                       
     Legislature"                                                                                                               
        • It's  time to recognize the power of the Earnings Reserve.                                                            
        • It's  time to have  the courage,  when needed, to  use the                                                            
          Earnings Reserve                                                                                                      
        • We're  elected to work hard, get smart, and make the right                                                            
          decisions for the people of Alaska,                                                                                   
        • That's why we're here                                                                                                 
                                                                                                                                
Co-Chair Wilken concluded his presentation.                                                                                     
                                                                                                                                
Senator Dyson asked whether the management plan proposed by the                                                                 
POMV could be incorporated with the revenue stream provided via the                                                             
50/50 CBR/ERA proposal.                                                                                                         
                                                                                                                                
Senator Bunde  interjected  that the POMV  plan would not  recognize                                                            
there being an ERA.                                                                                                             
                                                                                                                                
Senator  Dyson acknowledged  that point,  but stated  that the  POMV                                                            
could provide a revenue  stream that could, on some basis, provide a                                                            
revenue stream that could support the 50/50 CBR/ERA proposal.                                                                   
                                                                                                                                
Co-Chair Wilken asked for further clarification.                                                                                
                                                                                                                                
Senator  Dyson stated  that  a portion  of the  five-percent  income                                                            
provided  by POMV  for distribution  could be  utilized, perhaps  to                                                            
fund the Dividend and/or  to support the CBR. He asked that, at some                                                            
point, the Administration provide a response to this suggestion.                                                                
                                                                                                                                
Senator  Bunde characterized  Co-Chair  Wilken's  proposal as  being                                                            
"thoughtful, logical"  and reasonable. He asked how  the Legislature                                                            
might further this proposal.                                                                                                    
                                                                                                                                
Co-Chair  Wilken  responded  that  SCR  101 provides  some  of  this                                                            
detail. He  is willing to  compromise and  would support any  method                                                            
chosen  by the  Legislature  to further  the  concept.  While he  is                                                            
unsure as to whether the  proposal could be placed in law, he wished                                                            
to provide  citizens a method through  which to approach  the fiscal                                                            
deficit without  having the  proposal being  subject to the  risk of                                                            
failure as a ballet question.  We should not take a chance, and as a                                                            
Legislature,  we  should represent  our  constituents  and take  the                                                            
responsibility  for  addressing  the  situation.  The  plan  he  has                                                            
proposed  is "a viable  plan" that  would save  citizens' money.  He                                                            
declared that  "POMV is flawed mechanically and it  is flawed at the                                                            
ballot box as it is not going to pass."                                                                                         
                                                                                                                                
Senator Bunde  agreed that two messages  must be sent: one  relating                                                            
to the  Legislature and one  to the investment  community.  He noted                                                            
that  were a plan  adopted  either in  Resolution or  in Statute,  a                                                            
forthcoming Legislature  could either "abide by that  or ignore it."                                                            
A psychological  issue exists regarding spending a  large portion of                                                            
the earnings  of the Permanent Fund.  The only prevention  to change                                                            
is public and  political pressure.  The financial market  would also                                                            
desire that  a fiscal plan be adopted  in this State. "They  seem to                                                            
want something  on paper" that would  reassure them that  "the rules                                                            
would not change  cavalierly." He  stated that were the Legislature                                                             
to support  this proposal,  the methodology  to support it  would be                                                            
furthered.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken  stated  that  of  the  various  options  available                                                            
through which  to address the budget  deficit, use of the  ERA would                                                            
be his first choice. Were  that removed from the equation, the other                                                            
options would  move closer to the forefront. However,  those options                                                            
would have  more impact on financial  and business communities  than                                                            
the plan proposed  in SCR 101, as  it would eliminate the  threat of                                                            
an income tax, a sales  tax, and changes in corporate tax structure.                                                            
These  entities  should be  reminded  that the  use  of the  State's                                                            
assets would be  a better option than "going to their  pockets." The                                                            
Standard &Poors  national credit rating  analyst's message  was that                                                            
the State is not "judged  on what you are going to do," but "on what                                                            
you have  done." Alaska has  exceeded other  states in terms  of its                                                            
assets and liquid assets,  with only the inclusion of the CBR rather                                                            
than  the entire  Permanent Fund  assets.  He stated  that when  the                                                            
State's fiscal  crisis is addressed, "this place would  hum" just as                                                            
it did in 1999.                                                                                                                 
                                                                                                                                
Senator Bunde  understood that regardless  of whether a solution  to                                                            
the fiscal situation is  addressed via Statute or Resolution, action                                                            
on the part  of the Legislature would  speak louder than  words. The                                                            
Legislature must act.                                                                                                           
                                                                                                                                
Co-Chair Wilken  stressed that the State would be  faced with a $500                                                            
million deficit  for several years. Oil must continue  at a price of                                                            
$33.80 per barrel  in order for the State to have  a balanced budget                                                            
in FY  05. It is  difficult to predict  the price  of oil in  future                                                            
years. He reiterated that  his plan would cost residents less than a                                                            
one-dollar decrease  in their Permanent Fund dividend  in FY 06. The                                                            
Legislature must have the courage to address the issue.                                                                         
                                                                                                                                
Senator Hoffman  found the presentation interesting,  but noted that                                                            
some of  the "soft points"  would include the  fact that due  to oil                                                            
price  volatility   a  one  billion  dollar  CBR  balance   must  be                                                            
maintained.  A $2.3 billion budget  is flat spending. It  is a known                                                            
consideration that the  PERS and TRS obligation would amount to one-                                                            
third  of a  billion  dollars  over  the next  eleven  years.  Other                                                            
expense levels  are unknown.  He stated that  when $270 million  was                                                            
withdrawn from the CBR  in FY 02, its balance dipped to almost zero.                                                            
This  could have  jeopardized  the  PFD. The  effect  on the  monies                                                            
available  for PFD  would  also be  an area  of concern.  Under  the                                                            
current  status quo  system the Permanent  Fund  balance in FY  2015                                                            
would be $45  billion. He asked regarding  the level of the  FY 2015                                                            
Fund were this  proposal adopted.  The POMV plan would result  in an                                                            
eight million  dollar reduction in  the Fund. Another concern  would                                                            
be, as alluded  to by Senator Bunde,  how to assure the public  that                                                            
the Permanent  Fund Dividend would be protected, were  this proposal                                                            
furthered. This  is the primary reason that the Legislature  has not                                                            
voted to utilize the ERA to date.                                                                                               
                                                                                                                                
Co-Chair Green reminded  that there is no guarantee that there would                                                            
be a PFD payment each year.  The payment "is based on performance of                                                            
the investment  fund." If it is a guaranteed payment,  it should not                                                            
be called a Dividend.                                                                                                           
                                                                                                                                
Senator Hoffman  agreed that, while  this is true under the  current                                                            
scenario, it would not be true were the POMV plan adopted.                                                                      
                                                                                                                                
Co-Chair Green  declared that it would be difficult  to declare that                                                            
there would always be a  dividend payment, regardless of what occurs                                                            
with the Fund.                                                                                                                  
                                                                                                                                
Co-Chair Wilken agreed  that Senator Hoffman's CBR concern is valid.                                                            
Everything  being presented today  is based on projections.  While a                                                            
lot of  negative  things could  occur, a  lot of  good things  could                                                            
occur as  well. The  Permanent Fund  balance is  expected to  be $43                                                            
billion in 2014. It should  be clarified that the $100 million FY 02                                                            
amount referred to by Senator  Hoffman, related to realized earnings                                                            
resulting from  three years of negative earnings.  It should also be                                                            
noted that  there was, at  that time, in excess  of $1.1 billion  in                                                            
unrealized  earnings. If need  be, some of  the unrealized  earnings                                                            
could be sold to support  the payment of a Dividend. While "there is                                                            
no guarantee in  investments," the investments over  time "have been                                                            
very successful."                                                                                                               
                                                                                                                                
Senator  Hoffman  stated  that in  order  to  access the  ERA  Fund,                                                            
assurance  must be provided  that the Dividend  would be  protected.                                                            
Otherwise, the question  would be how many Legislators would provide                                                            
the required vote.                                                                                                              
                                                                                                                                
Co-Chair  Wilken responded  that that  might be  true, and  thereby,                                                            
access of  the ERA might  not occur for a  few years as the  options                                                            
are  reviewed.  Senator  Hoffman is  talking  about  enshrining  the                                                            
Permanent Fund  Dividend in the Constitution. He opined  that paying                                                            
a Dividend  Check is  not one of  the top four  priorities of  State                                                            
Government.  It would  be number  five  in his view,  behind  public                                                            
safety,  public  health,   public  education,  and  transportation.                                                             
Therefore,  he  could  not  support  enshrining  the  payment  of  a                                                            
Dividend check in the Constitution.                                                                                             
                                                                                                                                
Senator  Hoffman  responded  that  State  voters  should  make  this                                                            
decision.                                                                                                                       
                                                                                                                                
Senator B. Stevens  agreed, "that the POMV concept  as presented, is                                                            
flawed." Were  it exclusively a money  management tool it  would not                                                            
be flawed. The  Permanent Fund Board of Trustees have  supported the                                                            
POMV  proposal  for numerous  years;  however,  their  position  "is                                                            
solely based on  one thing alone", and that is enshrining  inflation                                                            
proofing of the  Permanent Fund. Legislators have  been convinced to                                                            
raise spending  levels in  order to allow  inflation proofing  to be                                                            
enshrined. However,  "the premise is flawed because  the Legislature                                                            
has never not fully funded  inflation proofing of the Permanent Fund                                                            
under the current formula."  The current dilemma is that in order to                                                            
fund the State's essential  services, inflation proofing of the Fund                                                            
must occur  first. "Then  you can enshrine  the Dividend, and"  were                                                            
any  funds left,  they  could be  used to  fund other  things.  This                                                            
argument is flawed  as the AS 37 Statutes "have never  been not been                                                            
fulfilled."  He argued that  it has been  "over-inflation  proofed."                                                            
Now that the  State has reached a  budgetary point to which  some of                                                            
the Permanent  Fund money should be accessed, the  Legislature might                                                            
be  required  "to  break  our  philosophical   positions"  by  being                                                            
required  to  enshrine  inflation   proofing  and  the  PFD  in  the                                                            
Constitution,  "even though  we have never  not done it." He  voiced                                                            
support  for  Co-Chair   Wilken's  comment  that,   were  it  deemed                                                            
necessary,  the Legislature could  access the money in the  ERA. The                                                            
POMV concept approach being presented is flawed.                                                                                
                                                                                                                                
Senator B. Stevens  stated that while Co-Chair Wilken  has presented                                                            
another alternative  to the problem, the true nature  of the problem                                                            
must  be determined.  Some opine  that  the State  is "not  spending                                                            
enough money  so we need  to get to the  Dividend; others say  that,                                                            
"we  don't have  enough money  to spend  so we  have to  get to  the                                                            
Dividend." Both of these  approaches are incorrect, as the State has                                                            
more money, in excess reserve,  than most governments on the planet.                                                            
                                                                                                                                
Senator  B.  Stevens  stated  that  he  is  one  of  several  fiscal                                                            
conservatives  who  view  the  level  of  State  services  as  being                                                            
adequate  to the demands  presented by the  State's citizens.  It is                                                            
common  knowledge that  aligns with  Co-Chair Wilken  in support  of                                                            
utilizing the ERA when  the time comes, after inflation proofing and                                                            
funding of the Dividend has occurred.                                                                                           
                                                                                                                                
                                                                                                                                
SFC 04, 1st SS #4, Side B 03:07 PM                                                                                              
                                                                                                                                
                                                                                                                                
Senator B.  Stevens stated  that there is  money available  and such                                                            
usage would have minimum effect on the Dividend payout.                                                                         
                                                                                                                                
Senator B. Stevens  suggested some changes to the  presentation. The                                                            
chart titled "? and a bridge  is needed" which depicts the potential                                                            
Future  Oil  and  Gas revenue  based  on  the  Spring  2004  Revenue                                                            
Forecast,  could provide a  few alternate  scenarios to reflect  how                                                            
significant   the  fiscal   deficit  would   be,  particularly   "as                                                            
projections become  more conservative as the years  out expand."  In                                                            
addition,  the Chart  titled "  ? and  what about  the ERA?"  should                                                            
include  a  projection  of the  Permanent  Fund  corpus  balance  in                                                            
addition to the ERA balance.                                                                                                    
                                                                                                                                
Senator Hoffman  commented in regards to Senator B.  Stevens's claim                                                            
that the  Legislature  "has never  not inflation  proofed and  never                                                            
not" funded  a Dividend.  Since it  would appear  that these  things                                                            
would  continue to  be done,  why not allow  the people  to vote  on                                                            
whether or  not to enshrine the Dividend  in the Constitution.  This                                                            
would "remove  the politics" regarding how to spend  the rest of the                                                            
earnings,  as it would  eliminate citizens'  fear that the  Dividend                                                            
would be negatively affected.                                                                                                   
                                                                                                                                
Senator B. Stevens  stated that Senator Hoffman omitted  his comment                                                            
that in times  of excess revenue,  the Legislature super-funded  the                                                            
corpus of the Fund. Now  is the time to utilize a portion of the ERA                                                            
to provide public services.                                                                                                     
                                                                                                                                
Senator  Bunde  stressed that  Alaska's  physical  resources,  being                                                            
finite,  would be  gone someday.  When  that occurred  and were  the                                                            
Dividend enshrined in Constitution,  the citizens of the State would                                                            
be required to pay such  things as an income tax in order to support                                                            
it. Demographics project  that in ten or fifteen years, the smallest                                                            
component  of the  State's population  would  be the  30 to 50  year                                                            
olds. This  "most productive age group"  would be the taxpayers  who                                                            
would  be   required  to  support   the  large  group  of   Dividend                                                            
recipients. He quoted that  "the democracy is doomed when the public                                                            
realizes  they   could  vote  themselves   money  from  the   public                                                            
treasury."  That is what  enshrinement would  do. He hoped  that, on                                                            
the other  hand, the State  would not resemble  "the miser  who died                                                            
with his mattress stuffed full of money."                                                                                       
                                                                                                                                
Senator Dyson  voiced appreciation  for the  efforts exerted  by Co-                                                            
Chair  Wilken  to  develop an  alternate  method  through  which  to                                                            
address the fiscal gap.                                                                                                         
                                                                                                                                
Co-Chair Wilken acknowledged  his staff person, Sheila Peterson, for                                                            
her efforts in developing the presentation.                                                                                     
                                                                                                                                
Co-Chair  Green  expressed  that  public  questions  regarding  this                                                            
proposal could be directed to Co-Chair Wilken and his staff.                                                                    
                                                                                                                                
Co-Chair  Green  asked  Senator  Hoffman   to  further  explain  the                                                            
intention   of  enshrining   the  Dividend   in  the  Constitution:                                                             
specifically  whether the intent is  to insure that a payment  would                                                            
be made, regardless  of the State's fiscal situation  or whether the                                                            
calculation mechanism for the dividend would be enshrined.                                                                      
                                                                                                                                
Senator  Hoffman  responded  that  Co-Chair  Wilken's  presentation                                                             
reflects  that, in 2014,  new resource revenues  would be  deposited                                                            
into the Fund. Proper management  of the Fund would insure continued                                                            
funding for Dividends.                                                                                                          
                                                                                                                                
Co-Chair Green understood  therefore that the desire is to guarantee                                                            
the Dividend rather than to establish a formula.                                                                                
                                                                                                                                
CHERYL FRASCA,  Director,  Office of Management  and Budget,  stated                                                            
that  while  the Administration   had a  copy  of  Co-Chair  Wilken'                                                            
presentation, until today,  they had not received the benefit of his                                                            
accompanying  narrative. While  she could  question some aspects  of                                                            
the proposal's  "practical application", she noted  that she had not                                                            
been  able   to  confer  with  the   Governor  in  regards   to  his                                                            
perspective.                                                                                                                    
                                                                                                                                
Co-Chair Green  requested that Ms.  Frasca present her remarks  and,                                                            
at a later date, provide comments from the Governor.                                                                            
                                                                                                                                
Ms. Frasca  spoke to her concerns,  including: the Administration's                                                             
desire to retain  a one billion dollar CBR balance  to provide "some                                                            
cushion" to the budget  were oil prices to drop dramatically whereas                                                            
Co-Chair  Wilken has presented  the alternate  idea that the  ERA be                                                            
used for this purpose;  what would happen were the fiscal deficit to                                                            
exceed $550 million: would  the direction be to impose an additional                                                            
income source or remove  more funds from the CBR or the ERA. This is                                                            
a concern,  as, in forward  years, the fiscal  deficit would  exceed                                                            
those of the past. Another  concern about implementing this proposal                                                            
as opposed  to the POMV is that the  POMV model is less volatile  in                                                            
terms of  the payout  and would  be easier to  budget. The  volatile                                                            
fund sources through  which to address the fiscal  deficit under Co-                                                            
Chair  Wilken's proposal  would  include the  stock  market and  the                                                            
current volatility of the price of oil.                                                                                         
                                                                                                                                
Co-Chair Green asked how  the volatility of the price of oil and the                                                            
stock market differs from the current situation.                                                                                
                                                                                                                                
Ms Frasca responded  that while it does not differ  from the current                                                            
situation,  it  would affect  the  ability  to provide  a  long-term                                                            
solution of fiscal  stability. Part of the Administration's  goal is                                                            
to  develop  a mechanism  that  would  "fund  future  services  with                                                            
stability."  Due  to  wide  swings  in  the  stock  market  and  the                                                            
investments  of the  Permanent  Fund,  the current  Fund's  earnings                                                            
income payout  calculation is not  as stable, going forward,  as the                                                            
methodology proposed in POMV.                                                                                                   
                                                                                                                                
Ms. Frasca  noted that another concern  evolves around whether  flat                                                            
spending, going forward,  is a realistic approach upon which to base                                                            
future budgetary projections.                                                                                                   
                                                                                                                                
Ms.  Frasca  also  asked  whether,  as  a  manner  in  which  to  be                                                            
accountable  to the voters  regarding how  programs are funded,  the                                                            
intention would  be to utilize the  ERA as a fund source  that could                                                            
be directly  identified  as the fund  source for  new programs  that                                                            
might be  developed such  a new funding for  schools, public  safety                                                            
officers, or transportation.                                                                                                    
                                                                                                                                
Senator  Bunde agreed  with Senator  B. Stevens  that the  Permanent                                                            
Fund  Trustees support  the  POMV  concept, as  it would  provide  a                                                            
mechanism  through  which to  guarantee  inflation  proofing of  the                                                            
Fund. The  only reason that  the Legislature  would support  POMV is                                                            
that  it would  provide  a predictable  revenue  source.  "The  only                                                            
reason that  you would need  a predictable  revenue source  would be                                                            
that you  are going  to use that  to fund government."  On a  public                                                            
policy basis,  "it is not  critical to the  State that Dividends  be                                                            
predictable." While POMV  would supply a predictable funding source,                                                            
it might be a  tool that is unacceptable to the public.  This brings                                                            
us  back to  determining  what would  be  possible,  and that  would                                                            
include accessing the ERA.                                                                                                      
                                                                                                                                
At EASE 3:23 PM / 3:24 PM                                                                                                       
                                                                                                                                
SENATOR  GENE THERRIAULT  opined that  the Permanent  Fund Board  of                                                            
Trustees' support  of the POMV is appropriate because  insuring that                                                            
inflation proofing  of the Permanent Fund must continue  in order to                                                            
protect  its value over  time, as  it is the  appropriate action  of                                                            
their role as fiduciaries of the Fund.                                                                                          
                                                                                                                                
Senator Therriault  noted that  the importance  placed on SJR  9 and                                                            
HJR  3 during  the  Legislative  Session  is interesting,  as  those                                                            
pieces of legislation  are not being discussed anymore.  The sponsor                                                            
of HJR 3 commented  that protection  of the purchasing power  of the                                                            
Permanent Fund  was the paramount thing that the Legislature  should                                                            
protect.  When  it  was pointed  out  that  HJR  3 did  not  provide                                                            
protection  to such things  as the inflation  proofing of the  Fund,                                                            
support of the bill diminished.                                                                                                 
                                                                                                                                
Senator  Therriault  stated  that  currently  the  argument  evolves                                                            
around  two things:  one  is that  protection  of the  PFD is  being                                                            
sought; and secondly,  the "growing realization" that  the POMV plan                                                            
is the sensible  thing to do as inflation  proofing the Fund  is the                                                            
"appropriate"  mechanism  through which  to protect  the  purchasing                                                            
power  of the  Fund.  "Unfortunately,"  these  two  approaches  have                                                            
become linked  together. Nonetheless,  he supported the development                                                             
of  a mechanism  that  would protect  the  purchasing  value of  the                                                            
assets  of  the Fund  as  well as  providing  a  predictability  "or                                                            
smoothing affect"  of the size of  the Dividend in the future  as it                                                            
infuses a substantial amount of money into the economy.                                                                         
                                                                                                                                
Senator   Therriault   applauded   Co-Chair  Wilken's   efforts   in                                                            
developing an  alternative proposal. He has some suggestions  to the                                                            
plan  that he  would discuss  separately  with Co-Chair  Wilken.  He                                                            
agreed that  the Legislature has the  ability to access millions  of                                                            
dollars in funding.                                                                                                             
                                                                                                                                
Co-Chair Green  commented that the  Legislature "is cursed"  because                                                            
it does  not utilize  the  ERA, which  is a viable  funding  source.                                                            
Because it does  utilize the ERA, an alternate approach  would be to                                                            
implement an income tax.                                                                                                        
                                                                                                                                
Senator Olson commented  that while there are a number of mechanisms                                                            
being  discussed  through  which to  address  the fiscal  gap,  "the                                                            
reality" is that  until the time when the public is  guaranteed that                                                            
the  Permanent Fund  Dividend  is protected,  the  public would  not                                                            
support a plan.                                                                                                                 
                                                                                                                                
The bill was HELD in Committee.                                                                                                 

Document Name Date/Time Subjects