Legislature(2003 - 2004)

03/16/2004 09:07 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     CS FOR SENATE JOINT RESOLUTION NO. 19(JUD)                                                                                 
     Proposing  amendments  to  the  Constitution  of the  State  of                                                            
     Alaska relating to the Alaska permanent fund.                                                                              
                                                                                                                                
                                                                                                                                
This  was the  first  hearing  for  this resolution  in  the  Senate                                                            
Finance Committee.                                                                                                              
                                                                                                                                
Co-Chair Wilken  stated this resolution, "places the  current method                                                            
to calculate the PFD dividend  in the Constitution. In addition, the                                                            
constitution amendment  requires a majority vote by  Alaskans before                                                            
the  Permanent Fund  earnings  reserve may  be appropriated  by  the                                                            
legislature. This is a  constitutional amendment that must be placed                                                            
in front of the voters in November of 2004."                                                                                    
                                                                                                                                
MARK STOPHA,  Staff  to Senator  Georgianna Lincoln,  informed  that                                                            
Senator  Lincoln  is out  of town  and he  read testimony  into  the                                                            
record as follows.                                                                                                              
                                                                                                                                
     SJR  19  before  you  contains  three  elements.  It  puts  the                                                            
     Permanent   Fund  Dividend  into  the  Constitution.   It  puts                                                            
     inflation   proofing   of   the   Permanent   Fund   into   the                                                            
     Constitution,   and  it  creates  a  special  account  for  the                                                            
     remaining  earnings reserve of the Permanent  Fund, rather than                                                            
     depositing  those earnings into the general fund  as we do now.                                                            
     Those  earnings will be available  for use by the legislature,                                                             
     but only by a vote of Alaskan voters.                                                                                      
                                                                                                                                
     This  bill  does  not  change  the  current  structure  of  the                                                            
     dividend   program.  It  continues  to  payout   dividends  and                                                            
     inflation  proofs the  Permanent Fund in  that order, as  we do                                                            
     now, but  places these processes in the Constitution.  The bill                                                            
     would never use the  principal of the Permanent Fund to pay out                                                            
     dividends or pay for other government services.                                                                            
                                                                                                                                
     Subsection  (a) of Section 3 was added in the  Senate Judiciary                                                            
     Committee. Senator  Lincoln did not concur with that amendment.                                                            
     The vast  majority of our constituents are in  favor of putting                                                            
     the Permanent  Fund Dividend  into the Constitution  period. We                                                            
     believe  the  Judiciary  Committee   amendment  of  an  unknown                                                            
     spending  limit as part  of this bill  is a separate issue  and                                                            
     should be addressed in separate legislation.                                                                               
                                                                                                                                
     Finally,  subsection (b) and  (c) of Section 3 ensures  that if                                                            
     the bill were to make  the Permanent Fund taxable by the IRS if                                                            
     dividends  become part of the Constitution, then  the amendment                                                            
     would  be suspended and repealed.  Attorney General  Renkes has                                                            
     provided  an opinion  that he  does not believe  that the  bill                                                            
     would  make the Permanent  Fund taxable.  Section 3 provides  a                                                            
     provision to rescind the amendment if it does.                                                                             
                                                                                                                                
     As you can  see from this stack of e-mails in  front of me that                                                            
     has been  sent to all legislators  for the most part,  the bill                                                            
     is supported by voters  from all corners of the State. The bill                                                            
     is easy for  the public to understand because  it maintains the                                                            
     status quo regarding  how the Permanent Fund Dividends are paid                                                            
     out.  Guarantees  payment  of  Permanent  Fund Dividends  as  a                                                            
     priority  and protects  the earnings  reserve from legislative                                                             
     spending by requiring a vote of the people.                                                                                
                                                                                                                                
Co-Chair Wilken  questioned the claim made in the  sponsor statement                                                            
that  permanent  fund dividends  represent  one-eighth  of  Alaska's                                                            
economy.  He  therefore  calculated  the  economy  of Alaska  at  $8                                                            
billion,  but had  understood  the amount  to be  approximately  $40                                                            
billion.                                                                                                                        
                                                                                                                                
MARK GNADT, staff to Representative Eric Croft, was unsure where                                                                
this figure was derived.                                                                                                        
                                                                                                                                
Co-Chair Green acknowledged her comments were premature, recalling                                                              
the  conversation  from the  previous  meeting indicating  that  the                                                            
Permanent Fund  is currently being over inflation  proofed and asked                                                            
if  this  resolution  contains  a  provision  in the  event  that  a                                                            
determination is made that  investments are self-inflation proofing,                                                            
the inflation proofing provision could be "relaxed".                                                                            
                                                                                                                                
Mr. Stopha  responded  that the  Permanent Fund  would be  inflation                                                            
proofed in  the same manner  as currently  provided for in  statute,                                                            
except   this  resolution   would  place   the  provisions   in  the                                                            
Constitution.                                                                                                                   
                                                                                                                                
Co-Chair Green  asked if the language in Section 1  on page 1, lines                                                            
10 -  12, inserting  new language  into Article  IX, sec. 15  Alaska                                                            
Permanent Fund,  reflect this. This language, following  "All income                                                            
from  the  permanent   fund  shall  be  deposited   in  the…"  reads                                                            
"…earnings reserve account  and distributed as provided for under AS                                                            
37.13.140,  37.13.145, and AS 43.23.025,  as those statutes  read on                                                            
July 1, 2002."                                                                                                                  
                                                                                                                                
Mr.  Gnadt  affirmed  and  explained  this  is  standard  method  of                                                            
determining inflation proofing from the prior year.                                                                             
                                                                                                                                
Co-Chair  Green  asked if  changes  were  made in  current  statutes                                                            
whether changes would automatically be made to this amendment.                                                                  
                                                                                                                                
Co-Chair Wilken answered yes.                                                                                                   
                                                                                                                                
SENATOR RALPH SEEKINS asked  if the witnesses were aware of the Bess                                                          
versus Ulmer case.                                                                                                            
                                                                                                                                
Mr. Gnadt was aware of this litigation.                                                                                         
                                                                                                                                
Senator Seekins  asked if the sponsor had procured  a legal analysis                                                            
regarding  whether or  not this resolution  would  be defined  as an                                                            
amendment or a revision to the Constitution.                                                                                    
                                                                                                                                
Mr. Gnadt  did not have  an official legal  opinion to address  this                                                            
resolution  specifically.  He indicated  that other  legal  opinions                                                            
pertain to a "potential  Bess v. Ulmer problem"; however,  he stated                                                          
these opinions recommend  language to comply the resolution with the                                                            
amendment criteria.                                                                                                             
                                                                                                                                
Senator   Seekins  asked   if  witnesses   were  concerned   that  a                                                            
constitutional  amendment establishing  a percentage  of the  annual                                                            
budget that  would be allocated  to the Permanent  Fund and  thereby                                                            
removing  this authority  from the  legislature  would constitute  a                                                            
revision to the Constitution.                                                                                                   
                                                                                                                                
Mr. Gnadt  replied that  no such  formal analysis  of this had  been                                                            
conducted.                                                                                                                      
                                                                                                                                
Senator Seekins expressed  concern that any constitutional amendment                                                            
that  removes  significant  discretion   from  the  legislature  may                                                            
constitute a revision rather than an amendment.                                                                                 
                                                                                                                                
Senator  Bunde  spoke to  the  proposal presented  by  Governor  Jay                                                            
Hammond,  referred to  as "the Hammond  Plan", and  a related  legal                                                            
opinion that determines  the proposal to likely be  unconstitutional                                                            
because  it proposes  major revisions  to the  Alaska Constitution.                                                             
Senator Bunde  was unsure  whether this pertains  to the  resolution                                                            
before the  Committee, but recommended  a legal opinion be  procured                                                            
on this resolution before proceeding.                                                                                           
                                                                                                                                
Senator Bunde  remarked that the framers of the Alaska  Constitution                                                            
"learned from  the mistakes" of other state constitutions  and chose                                                            
to not allow  dedicated funds in Alaska's  Constitution.  He pointed                                                            
out this resolution  would dedicate  funds and asked if the  sponsor                                                            
has  considered   the  potential  situation  of  required   dividend                                                            
payments  in the  event of  inadequate  funding for  public  safety,                                                            
education, or other government services.                                                                                        
                                                                                                                                
Mr. Stopha  replied that funding for  those purposes would  continue                                                            
to be  available,  however would  require  a vote of  the people  to                                                            
authorize such expenditures from the Permanent Fund.                                                                            
                                                                                                                                
Senator Bunde  clarified that  each year in  drafting the budget  an                                                            
election would  be required to authorize specific  expenditures from                                                            
the Permanent Fund.                                                                                                             
                                                                                                                                
Mr.  Stopha  affirmed  and noted  the  voting  structure  for  these                                                            
appropriations could be  negotiated as to whether they were specific                                                            
appropriations,  "blanket"  appropriations,  or  "forward  funding,"                                                            
etc.                                                                                                                            
                                                                                                                                
Senator  Hoffman  reported  he  has  heard  much  on  the  topic  of                                                            
dedicated  funds and  concluded  that the  State has  turned a  non-                                                            
renewable  resource,  oil,   into  a renewable   resource  i.e.  the                                                            
Permanent Fund, and that  the Constitution allows the Legislature to                                                            
allocate resources. He  therefore questioned whether this resolution                                                            
would be dedication of  funds or rather, an allocation of resources.                                                            
                                                                                                                                
SENATOR  HOLLIS   FRENCH  asked  about   public  reaction   to  this                                                            
resolution since it was introduced.                                                                                             
                                                                                                                                
Mr. Stopha qualified he  has only worked for Senator Lincoln for one                                                            
year, but  relayed Senator  Lincoln's claim  that no other  bill she                                                            
has sponsored has received  this much attention during her tenure in                                                            
the legislature. He told  of the importance of dividends to families                                                            
in the Yukon  Kuskokwim census area,  where these payments  comprise                                                            
18 percent of annual family income.                                                                                             
                                                                                                                                
Mr. Gnadt added  that constituents of Representative  Croft are also                                                            
very supportive of this proposal.                                                                                               
                                                                                                                                
Senator Bunde  asked if this resolution would not  change the method                                                            
in which dividends are calculated.                                                                                              
                                                                                                                                
Mr. Stopha affirmed.                                                                                                            
                                                                                                                                
Senator  Bunde noted  testimony  provided  at the  previous  hearing                                                            
warning  that  if  the  dividend  calculation  were  unchanged,  the                                                            
dividend amount  would be very low  or zero in some years.  He asked                                                            
if the sponsor has relayed this to constituents.                                                                                
                                                                                                                                
Mr.  Stopha  responded  that  the "spirit"  of  this  resolution  is                                                            
constitutional protection of the Permanent Fund Dividend.                                                                       
                                                                                                                                
Senator  Hoffman asked  if public  feedback on  this resolution  has                                                            
been primarily related  to constitutional protection of the dividend                                                            
program, inflation proofing, or other provisions.                                                                               
                                                                                                                                
Mr.  Stopha replied  that  Permanent  Fund  Dividends  has been  the                                                            
primary concern.                                                                                                                
                                                                                                                                
Senator Hoffman  asked if a large  margin of expressed interest  has                                                            
been related to the dividends.                                                                                                  
                                                                                                                                
Mr. Stopha answered yes.                                                                                                        
                                                                                                                                
Mr. Gnadt added that Representative  Croft's office has had the same                                                            
experience.  He noted that residents  are accustomed to the  current                                                            
system and how it affects their dividend payments.                                                                              
                                                                                                                                
Senator Olson  addressed Senator Bunde's  comments regarding  public                                                            
understanding  of the  Percent of  Market Value  (POMV) approach  to                                                            
managing   the  Permanent   Fund.   Senator  Olson   reported   that                                                            
constituents  are largely in favor  of retaining the current  system                                                            
despite  understanding  that POMV  would  stabilize  the amounts  of                                                            
dividend  payments. He conveyed  these residents  are "wary"  of the                                                            
POMV management method.                                                                                                         
                                                                                                                                
Co-Chair  Green recalled  that she  introduced  legislation in  1997                                                            
that would have  accomplished similar goals but in  a different way.                                                            
She  learned from  these efforts  that  to "get  to the  end of  the                                                            
race", actions  must be taken  to provide  assurance to the  public.                                                            
She opined that legislatures  have been "very honorable stewards" of                                                            
the  earnings reserve  fund  and have  "faithfully  put forward  the                                                            
dividend program to the  greatest extent every year" as well has had                                                            
"great expectations  of the  investment boards"  and Fund  managers.                                                            
She reiterated  that the public must be provided assurance  that the                                                            
dividend  program would  continue, although  she  was unsure of  the                                                            
proper procedure  to attain this.  She was unsure she supported  all                                                            
elements of this resolution, but recognized it as an option.                                                                    
                                                                                                                                
Senator Hoffman concluded  the dilemma is that three-quarters of the                                                            
members of the legislature  must approve any changes to the dividend                                                            
program,  after  which,  Alaskan  voters  must  then  approve  those                                                            
changes.  He  heard  "overwhelming"  support  for  a constitutional                                                             
guarantee of  dividend payments. He  also noted that the  membership                                                            
of the  Conference of Alaskans  did not make  recommendations  as to                                                            
what  amounts  should be  allocated  for  dividends  and  government                                                            
spending.  He  reiterated  that  the  Committee  must  address,  and                                                            
subsequently  reach an  agreement  that could  receive support  from                                                            
both the full Senate and the House of Representatives.                                                                          
                                                                                                                                
Senator Dyson  paraphrased Senator  B. Stevens comments made  at the                                                            
Conference  of  Alaskans  that  guaranteeing  the  dividend  in  the                                                            
Constitution would  "tie the hands of legislators"  in the future in                                                            
the  event  of a  fiscal  crisis  in  which  inadequate  funds  were                                                            
otherwise available  for education, public safety  or other critical                                                            
needs. Senator Dyson warned  this would be a difficult situation and                                                            
he asserted that future  legislature should not be subjected to this                                                            
possibility.  He quoted Carl Marx,  "The and once they've  tasted it                                                            
they will be insatiable  until they have drained it."  Senator Dyson                                                            
cautioned the Committee to be wary of this.                                                                                     
                                                                                                                                
Senator Bunde  asserted the reason  legislators are not elected  at-                                                            
large  for the  entire State  is because  they  represent  different                                                            
constituencies. He reported  that his constituency is of the opinion                                                            
that  the dividend  program  has "morphed"  from  an opportunity  to                                                            
receive extra  money for themselves, into an entitlement.  He deemed                                                            
this a  serious matter and  did not support  an enshrinement  of the                                                            
dividend  in the  Constitution  and  stated  that residents  in  his                                                            
election district  do not support  this either. He told of  findings                                                            
of a poll  conducted by  Dittman Research,  in which a question  was                                                            
posed  as to  whether  the  dividend  should  be guaranteed  in  the                                                            
Constitution.  He informed  that the  results of  this poll show  an                                                            
equal  division  among  respondents.  He  commented  this  could  be                                                            
considered   contentious,   but  disputed   that  a  Constitutional                                                             
enshrinement is widely supported statewide.                                                                                     
                                                                                                                                
SENATOR BERT STEDMAN commented  that some aspects of this resolution                                                            
might  seem  "attractive"  but  do  not fit  well  into  the  entire                                                            
"mosaic". He asked  what consideration the sponsor  has given to the                                                            
effect a  constitutional guarantee  of dividends  would have  in the                                                            
event  of  an  immediate  need  to respond  to  a  disaster,  or  in                                                            
addressing the current fiscal dilemma.                                                                                          
                                                                                                                                
Mr. Stopha  pointed out the earnings  reserve account would  remain.                                                            
He  understood the  concerns  that a  vote of  the  people would  be                                                            
required  before  dividend  funds  could  be  expended  even  if  an                                                            
immediate need were present,  such as in the event of a disaster. He                                                            
emphasized this resolution  is intended to be a part of a long-range                                                            
fiscal plan and he relayed  Senator Lincoln's assertion that the all                                                            
options should be considered  and that the permanent fund should not                                                            
be singled out.                                                                                                                 
                                                                                                                                
Senator Stedman gave a  historical perspective noting that since its                                                            
inception,  the legislature  has had  the authority  to appropriate                                                             
funds from the earnings  reserve account; rather than doing this, he                                                            
noted  the legislature  has  deposited $7.1  billion  more into  the                                                            
Permanent Fund than required.                                                                                                   
                                                                                                                                
Mr. Gnadt  agreed the  legislature  has a "fairly  good history"  of                                                            
depositing  monies into the  Permanent Fund.  However, he  cautioned                                                            
against  relying  upon  past actions  to  reflect  future  decision-                                                            
making.  He furthered  that the  past actions  were primarily  taken                                                            
during years with  high oil prices and a strong economy.  He assured                                                            
this  resolution  would not  eliminate  the ability  to appropriate                                                             
funds from the earnings  reserve account, but rather stipulates that                                                            
the State  currently  garners  75 percent  of oil  revenues for  the                                                            
general fund  and the remaining revenues  are "the people's  money".                                                            
He furthered  this resolution  would require  voter approval  before                                                            
the  remaining  25  percent  of oil  revenues  could  be  spent  for                                                            
government services.                                                                                                            
                                                                                                                                
Senator Bunde  challenged characterization that the  legislators are                                                            
"running  off to Vegas"  to spend oil revenues  unscrupulously,  and                                                            
countered that  much of the money  is spent in rural areas  in which                                                            
residents do not contribute to education or public safety.                                                                      
                                                                                                                                
Senator Olson  commented that much of the oil revenues  are expended                                                            
in  rural Alaska  just  as much  of the  resources  came from  rural                                                            
Alaska.                                                                                                                         
                                                                                                                                
Senator Hoffman  pointed out  that Alaska is  the only state  with a                                                            
permanent fund  situation and subsequent  perceived "problems"  with                                                            
deciding  how  to  utilize  those  funds.  He  disagreed  that  this                                                            
resolution  would  "tie  our  hands",   arguing  that  this  is  the                                                            
"peoples'  money" and if  "they want to tie  our hands," voters  had                                                            
that right.  He also surmised that  this resolution could  also fail                                                            
and therefore the voters  would not impose these restrictions on the                                                            
legislature.  He  remarked  this  would  not  be  known  unless  the                                                            
question is placed in the ballot.                                                                                               
                                                                                                                                
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
                                                                                                                                
AT EASE 9:45 AM / 9:46 AM                                                                                                       
                                                                                                                                

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