Legislature(2001 - 2002)

05/01/2002 09:49 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     SENATE BILL NO. 267                                                                                                        
     "An Act  establishing the Alaska  veterans' memorial  endowment                                                            
     fund  and  providing  for credits  against  certain  taxes  for                                                            
     contributions  to that fund; relating to other  tax credits for                                                            
     certain  contributions; and providing  for an effective  date."                                                            
                                                                                                                                
                                                                                                                                
This was the first hearing for this bill in the Senate Finance                                                                  
Committee.                                                                                                                      
                                                                                                                                
LADDIE SHAW, Special Assistant, Office of Veteran Affairs,                                                                      
Department of Military and Veterans Affairs read a statement into                                                               
the record as follows.                                                                                                          
                                                                                                                                
     SB 267 sets up an  endowment fund to support the maintenance of                                                            
     existing and construction  of new memorials, to Alaska veterans                                                            
     and  the military. Today  Alaska has over  70 memorials  to our                                                            
     veterans. These tributes  range from small plaques to memorials                                                            
     like  Byers Lake. Funds  to maintain  these existing  memorials                                                            
     are few.                                                                                                                   
                                                                                                                                
     The  bill before the  Committee would  allow the Department  of                                                            
     Revenue  to  accept  donations   from  the  private  sector  of                                                            
     legislative appropriations,  to invest the funds to earn a real                                                            
     rate of return  of at least 5%, and identify  amounts available                                                            
     for appropriation each year.                                                                                               
                                                                                                                                
     The  Department  of Military  and  Veterans Affairs,  with  the                                                            
     assistance  of appropriate veterans' organizations  would grant                                                            
     the  appropriated funds  to organizations  that would  maintain                                                            
     the  monuments  or  memorials.  If funds  were  available,  new                                                            
     memorials or monuments  could be constructed. Regulations would                                                            
     be promulgated to describe this process.                                                                                   
                                                                                                                                
     In addition,  the bill  allows a tax  credit to taxpayers  that                                                            
     choose to donate money  to the endowment fund. Credits would be                                                            
     limited  to 50% of the  first $100,000  and 100% of the  second                                                            
     $100,000. The tax  credit mirrors the structure of the existing                                                            
     education  tax credit. A taxpayer's total credit  under both of                                                            
     these credits would be limited to $150,000.                                                                                
                                                                                                                                
     By  providing  a  mechanism   to  take  care  of  the  existing                                                            
     veterans'  memorials in  Alaska and to  building additional  in                                                            
     the  future,   this  bill  recognizes  the  contribution   that                                                            
     veterans and the military have made to our state.                                                                          
                                                                                                                                
Co-Chair Kelly referenced language in Sec. 4 on page 3, lines 21                                                                
through 25, which reads as follows.                                                                                             
                                                                                                                                
                Article 8. Alaska Veterans' Memorial Endowment Fund.                                                            
     …                                                                                                                          
          Sec. 37.14.730. Use of the fund. (a) As soon as                                                                       
     practicable  after  July 1 of  each year,  the commissioner  of                                                            
     revenue shall  determine the average month-end  market value of                                                            
     the fund for the immediately  preceding three fiscal years. The                                                            
     commissioner  shall  identify five  percent of  that amount  as                                                            
     available  for  appropriation   by  the  legislature  for  uses                                                            
     described in (b) of this section…                                                                                          
                                                                                                                                
Co-Chair  Kelly asked if  this would essentially  create a  "sinking                                                            
fund" in the event  of a period of poor earnings on  the investment,                                                            
noting the requirement that five-percent must be appropriated.                                                                  
                                                                                                                                
                                                                                                                                
SFC 02 # 83, Side B 10:38 AM                                                                                                    
                                                                                                                                
                                                                                                                                
NEIL SLOTNICK, Deputy Commissioner,  Department of Revenue, deferred                                                            
to Mr. Jenks to explain how this would be avoided.                                                                              
                                                                                                                                
JOHN JENKS, Chief Investment  Officer, Treasury Division, Department                                                            
of  Revenue,  assured   that  the  "investment  features"   of  this                                                            
endowment  are  designed to  ensure  a "stable  payout"  over  time,                                                            
despite  fund  performance.   He noted   the  amount  available  for                                                            
appropriation  is limited  even  in those  years in  which the  fund                                                            
earnings are high.  He furthered that this legislation  also directs                                                            
the Department  of Revenue to manage the endowment  in a manner that                                                            
provides  a five-percent  "real  or inflation-adjusted  return  over                                                            
time."                                                                                                                          
                                                                                                                                
Co-Chair Kelly  posed a scenario whereby  earnings in the  first two                                                            
years  of the  fund's  existence  are  less than  five  percent  and                                                            
surmised  that the  corpus  of the  fund would  immediately  "erode"                                                            
under the provisions of this legislation.                                                                                       
                                                                                                                                
Mr. Jenks agreed the value of the fund would decline.                                                                           
                                                                                                                                
Co-Chair  Kelly suggested  amending  the bill to  stipulate that  an                                                            
appropriation  would not  be made  using funds  from this  endowment                                                            
before a  year in which  the endowment has  realized a five-percent                                                             
rate of return.                                                                                                                 
                                                                                                                                
Mr. Jenks replied  that such a provision is possible,  but cautioned                                                            
it would  defeat  the purpose  of establishing  a  link between  the                                                            
long-term investment  policy i.e., the long-term expected  earnings,                                                            
and  the payout  of the  fund.  He acknowledged  the  corpus of  the                                                            
endowment could be reduced  in the first two years, but assured that                                                            
long-term performance is the higher priority.                                                                                   
                                                                                                                                
Co-Chair  Kelly qualified  his expertise on  the matter is  limited,                                                            
but wanted to  ensure that the principal of the endowment  would not                                                            
be  compromised.   He  informed   this  has   occurred  with   other                                                            
endowments.                                                                                                                     
                                                                                                                                
Mr. Jenks  reiterated that  such action would  be inconsistent  with                                                            
the intended management of the fund.                                                                                            
                                                                                                                                
Mr. Slotnick  clarified  that the  language in  the bill  stipulates                                                            
that  the  funds   would  be  identified  and  made  available   for                                                            
appropriation.  However, he stressed  the language does not  require                                                            
that an appropriation  actually be  made. He foresaw the  Department                                                            
issuing  an annual  report on  the condition  of the  fund, and  the                                                            
legislature making the  determination as to whether an appropriation                                                            
is appropriate in a given year.                                                                                                 
                                                                                                                                
Co-Chair Kelly indicated this is satisfactory.                                                                                  
                                                                                                                                
Senator Ward agreed.                                                                                                            
                                                                                                                                
Senator Wilken referenced  Sections 1, 2 and 3 of the bill and asked                                                            
if the tax  credits proposed in this  legislation are comparable  to                                                            
donations made to the University of Alaska.                                                                                     
                                                                                                                                
Mr.  Slotnick  affirmed  this  legislation   is  modeled  after  the                                                            
University of Alaska endowment program.                                                                                         
                                                                                                                                
Co-Chair  Kelly noted  the presence  of students  from Floyd  Dryden                                                            
Middle School  in Juneau who were  attending the meeting  as part of                                                            
the Close Up Program. He directed them to introduce themselves.                                                                 
                                                                                                                                
Senator Wilken asked about other tax credit programs.                                                                           
                                                                                                                                
Mr. Slotnick responded  two programs are in existence, both relating                                                            
to the University of Alaska and postsecondary education.                                                                        
                                                                                                                                
Senator Wilken  noted this legislation  would establish a  third tax                                                            
credit program.                                                                                                                 
                                                                                                                                
Co-Chair Kelly  directed attention to multiple statutory  references                                                            
in the  bill relating to  "credits taken  during the taxpayer's  tax                                                            
year". He asked for elaboration.                                                                                                
                                                                                                                                
Mr. Slotnick  noted  the "seven  different  tax types"  for which  a                                                            
contribution   credit   would  be   eligible,   pointing  out   that                                                            
"overlapping"  credits  is disallowed.  He exampled  an oil and  gas                                                            
company providing  a contribution and explained the  credit could be                                                            
taken against  the company's oil and  gas property tax, oil  and gas                                                            
severance tax, or oil and  gas corporate income tax in an amount not                                                            
to  exceed  the  maximum  allowed  $150,000.   He listed   fisheries                                                            
business tax, fisheries  landing tax, license tax, insurance premium                                                            
tax, and  the three aforementioned  oil and  gas taxes as the  seven                                                            
tax types.  He qualified  that other  tax types  are ineligible  for                                                            
this tax credit  program including  motor fuel tax and tobacco  tax.                                                            
                                                                                                                                
Co-Chair Donley  questioned the 100  percent tax credit allowed  for                                                            
the second $100,000 contribution  and asked who made the decision to                                                            
include this provision.                                                                                                         
                                                                                                                                
Mr. Slotnick  answered  this legislation  was drafted  to model  the                                                            
University of Alaska endowment tax credit program.                                                                              
                                                                                                                                
Co-Chair  Donley  wanted to  know  the "human  being"  who made  the                                                            
public policy decision to provide the 100 percent tax credit.                                                                   
                                                                                                                                
Mr. Slotnick  was unaware  of who made the  decision. He  emphasized                                                            
the  intent  is  to provide  an  incentive  for  a  second  $100,000                                                            
contribution.                                                                                                                   
                                                                                                                                
Co-Chair  Donley pointed  out this  would result  in a "100  percent                                                            
loss to the treasury" of those funds.                                                                                           
                                                                                                                                
Mr.  Slotnick  explained   the  rational  that  the  fist   $100,000                                                            
contribution is only available for 50 percent tax credit.                                                                       
                                                                                                                                
Co-Chair Donley  recalled the extensive debate on  this issue at the                                                            
time the University of  Alaska endowment program was established. He                                                            
expressed  he did not support  this structure  in the University  of                                                            
Alaska endowment  program and  does not support  it as proposed  for                                                            
the veterans' memorial  fund. He stated this method does not benefit                                                            
the State's treasury  and predicted that rather than  the government                                                            
determining  the best use of funds,  companies would make  donations                                                            
in lieu of paying taxes.                                                                                                        
                                                                                                                                
Co-Chair  Donley  disagreed  with  using the  University  of  Alaska                                                            
endowment  program as  a model  for this legislation.  He  cautioned                                                            
against  "just blindly  be  copying mistakes  of  the past"  without                                                            
debating the issue.                                                                                                             
                                                                                                                                
Senator Wilken  suggested the fiscal  note must be corrected,  as it                                                            
does not reflect the subsequent  reduction of the credited donations                                                            
from the general fund.                                                                                                          
                                                                                                                                
Senator  Ward requested  the  Department  of Military  and  Veterans                                                            
Affairs speak to the 100  percent tax credit for the second $100,000                                                            
contribution.                                                                                                                   
                                                                                                                                
Mr.  Shaw qualified  his limited  understanding  of  the tax  credit                                                            
system.  He predicted  that actual  donation amounts  would be  less                                                            
than  $100,000,  citing  information  indicating   actual  donations                                                            
average  less than  $5,000. He  stated this  legislation includes  a                                                            
$125,000  legislative  appropriation   to  match  the  $125,000  the                                                            
Department has already collected.                                                                                               
                                                                                                                                
Co-Chair Kelly ordered the bill HELD in Committee.                                                                              
                                                                                                                                

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