Legislature(1995 - 1996)

03/01/1995 09:15 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
       SENATE BILL NO. 84                                                      
       "An Act making a special appropriation to the principal                 
  of the       permanent fund; and providing  for an effective                 
  Co-Chair Halford  took up SB  84, an appropriation  from the                 
  permanent fund reserve to the permanent fund  principal.  In                 
  the introduced form,  it appropriates the entire  reserve to                 
  the  principal.    There are  two  areas  which  have raised                 
  significant   questions.   What   is  the   effect   of  the                 
  appropriation  of  the entire  reserve  to the  principal on                 
  either dividends  or inflation-proofing? What is  the effect                 
  of appropriating the  reserve to the principal on  any other                 
  calculation  on revenue  available for  appropriation as  it                 
  applies to the constitutional reserve account.  He noted for                 
  the  record, "it  is not  his intention  to make it  easy to                 
  spend funds from other accounts.                                             
  Co-chair Halford recognized the two different CS Work Drafts                 
  indicating the differences between  the two.  He  noted that                 
  one provides, that  at any  time the amount  in the  reserve                 
  account exceeds $250 million, after dividends and inflation-                 
  proofing,   it  goes  to  the   principal.    The  other  CS                 
  appropriates all but $250 million to the principal.                          
  Senator   Phillips   stated  his   concern   regarding  this                 
  appropriation  affecting  the constitutional  budget reserve                 
  Co-chair Halford asked, "If you  reduce the amount available                 
  for appropriation by  taking the permanent fund  reserve off                 
  the table, do you  then trigger the simple majority  vote to                 
  the constitutional budget reserve?"                                          
  Senator  Rieger  expressed his  reservations  concerning the                 
  bill.  He  supports making  it more difficult  to spend  the                 
  money.  He noted with the  fiscal gap, people are cautiously                 
  looking  at  the spending.   Some  factions advocate  no new                 
  taxes, some factions do not want the dividend to be touched.                 
  Today, it is possible to confirm that the budget will not be                 
  cut, the taxes will not be raised, and the dividends will be                 
  left alone.  This would be possible for five years with  the                 
  present reserves.  This measure makes it less possible after                 
  that time.  The reserves would be exhausted, in that context                 
  he supports it. Senator  Rieger is convinced there needs  to                 
  be measures taken to protect the  permanent fund.  He stated                 
  that he is  also reserved with  a bill he has  co-sponsored.                 
  There is an effort  to build up the fund  which puts another                 
  billion dollars into it if it were to pass.  He indicated an                 
  insecurity of the  institutional protection  of the fund  in                 
  inflation-proofing   and   management.   The  two   previous                 
  administrations have removed and  selected new trustees. The                 
  elected  governor  controls  a $3  million  budget  which is                 
  dwarfed in  comparison to gaining  control of a  $16 billion                 
  fund.      He   expressed   strengthening   the   protection                 
  institutionally, given the power vested  in an individual to                 
  control these funds. He  stressed that as the fund  is built                 
  up, there is a need to protect it for future generations.                    
  Co-chair Halford asked Mike Greany to  give an update on the                 
  "sweep" mechanism.  Mr. Greany addressed the possible effect                 
  on SB 84  on the  constitutional budget reserve.   He  spoke                 
  from  a  chart  entitled,  "Preliminary  estimate  of  funds                 
  available  for  appropriation   for  FY96  for  illustrative                 
  purposes".    He  provided  information  based  on  a  rough                 
  calculation  on funds  available.   He  noted  that what  is                 
  needed  is a process  that identifies all  the accounts that                 
  the  court would  consider available  for appropriation  and                 
  those accounts that are subject  for sweep for repayment for                 
  the fund.                                                                    
  Co-chair Frank  spoke to the rough calculation. He asked, if                 
  a remainder of $452.2 million was left in the permanent fund                 
  reserve would that negate the provision?  There are a number                 
  of  subsidiary  accounts that  have  not been  included that                 
  could swing the number in either  direction.  He then asked,                 
  "is there a  direct dollar-for-dollar  relationship for  the                 
  amount left in  the permanent  fund reserve, unprotected  by                 
  being  in  the  principal,  to   the  amount  that  can   be                 
  appropriated  from the  constitutional reserve  by a  simple                 
  majority?  Mr. Greany responded that the earnings reserve of                 
  the permanent fund  is the largest single  fund available to                 
  appropriate. Co-chair Frank  asked that if  the calculations                 
  are correct and  the funds were appropriated,  except $452.2                 
  million  to the principal of the permanent fund, would there                 
  be  any   affect  at   all  on   the  availability  of   the                 
  constitutional budget reserve?  Mr. Greany answered that the                 
  legislature would not be able to  use the simple majority to                 
  access  the funds,  it would return  to Article  IX, Section                 
  17C, which requires  a three-fourths  vote.  Co-chair  Frank                 
  noted that if $500.0 million were left in the fund to give a                 
  margin of  error, then  it would be  clear you would  not be                 
  able  to use the simple majority  feature under Section 17B.                 
  If the funds were going to be utilized you would have to use                 
  Section 17C. Mr.  Greany pointed out  the other variable  is                 
  the amount of money available from AHFC or AIDEA.  The funds                 
  from those corporations is available to the extent that they                 
  have actually been  appropriated as opposed  to what may  be                 
  theoretically available  to appropriate. Discussion  was had                 
  regarding Article IX, Section 17 B,C, and D.                                 
  Jim  Kelly of the Alaska Permanent  Fund in Anchorage joined                 
  the   committee  via   teleconference.     Co-chair  Halford                 
  reiterated the previous  discussion.  He noted that two CS's                 
  are before the committee.  One provides that at any time the                 
  amount in the  reserve account  exceeds $250 million,  after                 
  dividends and inflation-proofing, it goes to the  principal.                 
  The  other  CS  appropriates all  but  $250  million  to the                 
  principal.    There  are  questions to  the  effect  of  the                 
  appropriation  of  the reserve  on  dividends  or inflation-                 
  Mr. Kelly responded that the problems  that arise are due to                 
  the  description  of  income  available  for   distribution.                 
  Income  available for distribution  is 21% of  the last five                 
  years income, but may not exceed  that income of the current                 
  year plus the balance.  Mr.  Kelly indicated that this year,                 
  there  is no  problem  with an  appropriation  of the  total                 
  amount.    The  reading of  the  bill  would  allow for  the                 
  dividend calculation to take place before the transfer.  The                 
  problem  would arise next year potentially, if the amount of                 
  money earned is  less than the  five year average.   If  the                 
  funds earned 6.49% next year, there  would be an earnings of                 
  $993 million.  The amount would  be less than the five  year                 
  average.  That would  be the amount that would  be available                 
  for distribution.  The appropriation  for the dividend would                 
  then take half of  that, which would have a  negative impact                 
  on the dividend of approximately $60  million.  The proposed                 
  CS's  that would  leave  $250 million  in the  account would                 
  alleviate that problem.  The permanent fund has added to the                 
  earnings reserve account 13 years out  of 15.  The two years                 
  it was taken out, amounted to a total of $30 million and $24                 
  million, respectively.                                                       
  Co-chair Halford stated that  in the past, the money  out of                 
  the  reserve,  went  to  inflation-proofing  not  dividends.                 
  There  is  a  dependance upon  income,  inflation  rate, and                 
  average, which determines  whether the short-fall occurs  on                 
  the  dividend-side or  inflation-proofing-side.   Mr.  Kelly                 
  projects  an  8.11%  rate  of  return  for next  year.    If                 
  inflation  is  3.75%,  there  would  be an  additional  $100                 
  million added to the earnings reserve account next year.                     
  Co-chair Halford  spoke to  the  committee substitute's.  He                 
  prepared a CS which provides that anytime the balance in the                 
  reserve  account   exceeded  $250   million,  it  would   be                 
  automatically transferred to the principal.   With regard to                 
  the impact  of inflation-proofing,  he said,  and with  $250                 
  million in  the earnings  reserve account  there would  have                 
  been  no problem  in the  last  15 years  at all.   Co-chair                 
  Halford then addressed  the problem of the  appropriation of                 
  funds exceeding $250 million which  becomes a dedication and                 
  a  substantive  law opposed  to  an appropriations  bill. He                 
  asked Mr.  Kelly to  give the  history of  the appropriation                 
  versus non-appropriation of inflation-proofing and dividends                 
  with regard to the permanent fund?  Mr. Kelly responded that                 
  in the  early years,  dividends and  inflation-proofing were                 
  not appropriated.  It wasn't until the Cowper administration                 
  that   sections  of  the   bill  provided  for  appropriated                 
  dividends and inflation-proofing.  Co-chair Halford asked if                 
  it  is  based  on the  last  phrase  of  the permanent  fund                 
  language in the constitution, "or as  provided by law"?  Mr.                 
  Kelly  responded  that  it  was  substantive  law,  and  was                 
  interpreted to  count as  the appropriations  for all  those                 
  years.   Co-chair Halford asked if  it was ever successfully                 
  challenged?    Mr. Kelly  said  there  was  never any  legal                 
  action,  just a  change of  policy.   The  legislature began                 
  including those sections in the front part of the bill.                      
  Senator Sharp asked if  the 6.49% was a line  of demarkation                 
  in ending up  without enough  funds for  inflation-proofing?                 
  Mr. Kelly's projection using  6.49% would be a problem.   He                 
  stated that if the  earnings were less than  $1,130 billion,                 
  there would be a problem.                                                    
  Senator Zharoff asked,  what is the balance in the permanent                 
  fund  to date?  Mr.  Kelly stated that  the principle at the                 
  end  of the year  will be  $13,500,000,000; in  the earnings                 
  reserve account, $1,116,000,000, both at cost.  There is  an                 
  additional $750 million in  unrealized gains.  Total is  $15                 
  billion.   Senator  Zharoff  referred to  the  CS that  made                 
  mention  of,  "June 30th  of each  year after  the transfers                 
  under B and C of  the Section, the amount that  exceeds $250                 
  million  shall be  transferred."   He  questioned if  the CS                 
  would bind the appropriation power of future legislators?                    
  End:           SFC-95, #6, Side 2                                            
  Begin:         SFC-95, #8, Side 1                                            
  Mr. Baldwin,  Assistant Attorney General, and  Mr. Slotnick,                 
  Assistant  Attorney  General   were  invited  to   join  the                 
  committee to review  past and present interpretation  of the                 
  law.  Mr. Baldwin  stated that in  a recent decision of  the                 
  supreme  court   interpreting  the   amendment,  there   was                 
  discussion of the  automatic transfer  mechanism that is  in                 
  statute.     The   opinion   written  during   the   Hammond                 
  administration expressed  the opinion,  that the  inflation-                 
  proofing   transfer  could   be  automatic,  based   upon  a                 
  fulfillment of a  fiduciary obligation by the  state to keep                 
  the fund above the inflation level. He stated that it is not                 
  set out  in statute.  Since  it was established as  a trust,                 
  the  reasoning dictated a   fiduciary obligation as trustees                 
  to  treat   it  as  a   trust.    He  noted   that  a  later                 
  administration decided  that the constitution was  not clear                 
  on how the  provision was  to be implemented.   Whether  the                 
  last sentence of the amendment  does authorize the automatic                 
  transfer, or whether it implies  that the legislature should                 
  appropriate  it.    From the  Cowper  administration  to the                 
  present,  the  money has  been  appropriated along  with the                 
  dividend.  With regard to the law, the implementation is not                 
  clear.  One could argue that  the constitution does not take                 
  away the  legislative power  to appropriate  funds, that  it                 
  merely authorizes  the  legislature to  act consistent  with                 
  other powers granted in the constitution.                                    
  Senator Rieger  asked if there  is a difference  between the                 
  responsibility of a  fiduciary and a trustee  in the context                 
  of overseeing  a fund?   Mr.  Baldwin stated  a trustee  has                 
  fiduciary  obligations,  to  make  prudent  investment   and                 
  management decisions.                                                        
  Senator Rieger stated that much of the debate concerning the                 
  constitutional provision on providing for the disposition of                 
  earnings requires a definition of earnings.  In the past the                 
  handling  of  the return  of  capital, which  represents the                 
  inflation rate, was treated as if it were earnings.                          
  Mr. Baldwin addressed the question of what is in the general                 
  fund versus what is not in the general fund.  He stated that                 
  there is a difference of opinion between legislative lawyers                 
  and executive branch lawyers.                                                
  Mr. Slotnick responded to the question of  funds, other than                 
  the  earnings   reserve,  which   would  be  available   for                 
  appropriation  for  purposes  of Section  17B,  but  not for                 
  purposes of 17D.   He cited Science and Technology  Funds as                 
  an example.  These particular funds  are outside the general                 
  fund and would  be available for appropriation  for purposes                 
  of 17B,  but not  for 17D.   There may  also be  other funds                 
  within  some  of  the  public  corporations which  would  be                 
  available for appropriation.   He said they  cannot be spent                 
  without  further  legislative  action,  but  would   not  be                 
  available for appropriation for  purposes of payback because                 
  they are lodged in public corporations.                                      
  Co-chair Frank asked  how this was  different from what  Mr.                 
  Greany said?  Mr. Slotnick stated that Mr. Greany identified                 
  only the earnings reserve as a certainty outside the general                 
  fund and not available for sweep.   He is correct that it is                 
  the only  fund the  supreme court  identified in  the Cowper                 
  case. Co-chair  Frank  said that  at  issue are  the  equity                 
  balances of  the large  public corporations.   Mr.  Slotnick                 
  stated that at issue  are certain funds within those  public                 
  corporations   which  cannot   be   spent  without   further                 
  legislative action. Actual  equity balances of AHFC  are not                 
  on  the table as available for  appropriation unless in fact                 
  they are  appropriated. There  may be funds  that cannot  be                 
  used  for  revolving loans,  or  that the  University cannot                 
  spend without an  appropriation.  These would  be considered                 
  available   for  purposes   of  the  calculation,   but  not                 
  necessarily for purposes of payback.                                         
  Senator Rieger asked if  this was made clear in  the judge's                 
  ruling or  is this an interpretation of  what was said?  Mr.                 
  Slotnick stated  that the supreme  court was  very clear  in                 
  footnote 32 which recognizes the distinction between 17B and                 
  17D. The  court stated  that "the  earnings reserve fund  is                 
  outside the general fund."  He  went on to say that, "if  no                 
  further legislative action is required, then it would not be                 
  considered available for appropriation unless it is actually                 
  Senator  Rieger  questioned the  feasibility  of  taking all                 
  assets in the general fund and moving it over for management                 
  by the permanent fund.   Mr. Slotnick responded that  it was                 
  debateable.      Not   everyone  agrees   with   his   legal                 
  interpretation of whether  the assets in the  permanent fund                 
  are in total  outside the general  fund.  Mr. Slotnick  said                 
  that the legislature does have that authority.  Mr.  Baldwin                 
  stated that  it is the  Legal Department's opinion  that the                 
  legislature has the  power to create certain  funds that are                 
  outside the general fund.  Senator  Rieger asked, "without a                 
  constitutional  amendment?"    Mr. Baldwin  noted  that  the                 
  legislature has done that by creating public corporations.                   
  Mr. Slotnick commented that the administration is opposed to                 
  SB 84. It  makes access to  the budget reserve easier  which                 
  could  lead to  smaller dividends  upsetting  the inflation-                 
  proofing process.  Another valid concern is the State's bond                 
  rate.   It  could  cause it  to  undergo scrutiny,  possibly                 
  leading to a down-grading.  It also takes away the insurance                 
  policy, it takes away options, and  it undercuts the work of                 
  the long-range fiscal  commission. No one has  identified to                 
  the administration's satisfaction  the need  for this  bill.                 
  Transferring  the  earnings  reserve will  not  increase the                 
  dividends,  because the earnings  from the  earnings reserve                 
  are already accounted for in the formula that calculates the                 
  dividends.   The  bill  is  not  necessary  to  protect  the                 
  earnings reserve account from sweep.  It is not eligible for                 
  sweep, back into  the constitutional budget reserve,  and it                 
  is  not  necessarily to  protect  the earnings  reserve from                 
  spending as there is no spending proposal.                                   
  Co-chair Halford stated  that the  committee has dealt  with                 
  the question of permanent fund  dividends and under existing                 
  projections it would have done nothing.   He said that there                 
  is an interest to deal with any impact on the constitutional                 
  budget reserve  availability.   Mr. Slotnick  stated he  was                 
  speaking  to  SB 84,  not  the committee  substitutes.   His                 
  largest concern is, access to the  budget reserve.  It's not                 
  clear that  the CS's  have solved that  problem because  the                 
  formula compares the  amount appropriated  in one year  with                 
  the  amount available  for  appropriation.   If  there is  a                 
  smaller balance in the earnings reserve, then  access to the                 
  budget reserve under a simple majority is more likely.                       
  Senator Phillips stated  that this fund of  over $1 billion,                 
  is subject to legislative appropriation.   He stressed there                 
  is  a  mistrust  of  this  legislature  to  spend the  money                 
  correctly, which is why it is wanted in the  permanent fund.                 
  Mr. Slotnick's response to that statement is, "if they don't                 
  spend it, it stays in the earnings reserve where  in fact it                 
  is  serving  a  purpose.    The  purposes are  to  keep  our                 
  financial picture healthy.                                                   
  Senator Phillips interjected  that it  is always subject  to                 
  legislative appropriation, and  the fear is the  legislature                 
  can appropriate that money for any purpose.  The legislature                 
  has that authority.   He felt that it is  good public policy                 
  to have that distrust of the legislature. He feels it should                 
  be in the permanent fund so that it cannot be spent. Senator                 
  Phillips wanted  the public  policy statement  announced for                 
  his constituents.                                                            
  Co-chair Halford asked if  there was anyone in the  room who                 
  believed  that  if  the  other  $1.2 billion  had  not  been                 
  deposited to  the principal of  the permanent fund,  that it                 
  would not have gone into the budget gap of the mid-eighties?                 
  There was no response.                                                       
  Mr.  Baldwin  stated  that  he  wasn't  sure  which  CS  the                 
  committee was considering or how the committee was proposing                 
  solving  the problem with  the constitutional budget reserve                 
  for FY95.   He felt that if  the amount of $250  million was                 
  left in the  account, it might  help solve the problem  this                 
  year. Assuming that  you appropriate  $700 million from  the                 
  earnings  reserve account into the permanent fund, we have a                 
  big  problem  next  year.  This   would  occur  because  the                 
  appropriation level for  FY96 just  jumped up $700  million.                 
  The amount available for appropriation is going  to be lower                 
  next year. This means, in an election year, access in CBR is                 
  very easy by the majority vote.                                              
  Co-chair Halford said  that the solution  is to combine  the                 
  CBR and the  permanent fund principal with  earnings reserve                 
  Mr.  Baldwin  pointed  out that  Mr.  Greany's  illustration                 
  addresses  the problem for  one year  only, it  doesn't show                 
  what happens the  next year based  on a large  appropriation                 
  this  year,  which  means the  appropriation  level  is much                 
  higher than the  amount that is available  for appropriation                 
  in the succeeding year.                                                      
  Senator Sharp  stated that  it was difficult  to accept  the                 
  transfer of funds being called an appropriation.                             
  Mr.  Baldwin  said  that if  you  are  sending  it from  the                 
  earnings  reserve  to   the  principal  that  would   be  an                 
  Senator Sharp indicated that the  debate during the election                 
  was the  appropriations of funds available to meet the needs                 
  of the  operation of  the governor,  not transferring  funds                 
  instead of retaining.                                                        
  Mr. Baldwin stated  the court did try to  argue a portion of                 
  this issue in  a supreme court  case, but the supreme  court                 
  has  come  down and  spoken on  this  question.   It  is the                 
  decision that governs.                                                       
  Co-chair  Halford  stated,  that  if   there  were  no  more                 
  questions on  this bill, it  would be taken  up at the  next                 
  meeting. and the two                                                         

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