Legislature(2005 - 2006)SENATE FINANCE 532

04/05/2005 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 141 PUBLIC EMPLOYEE/TEACHER RETIREMENT TELECONFERENCED
Heard & Held
+= SB 100 ENHANCED 911 SURCHARGES TELECONFERENCED
Heard & Held
+ SB 88 POLICY ON GENERAL FUND REVENUE SHORTFALL TELECONFERENCED
Heard & Held
*+ SB 151 DECOUPLING FROM FED TAX DEDUCTION TELECONFERENCED
Heard & Held
+ SB 70 CRIMES INVOLVING CONTROLLED SUBSTANCES TELECONFERENCED
Bill Postponed
+ Bills Previously Heard/Scheduled TELECONFERENCED
                                                                                                                                
     SENATE BILL NO. 88                                                                                                         
     "An  Act relating  to the  policy  of the state  regarding  the                                                            
     source  of funding used  to cover a  shortfall in general  fund                                                            
     revenue."                                                                                                                  
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken, the bill's  sponsor, informed  the Committee  that                                                            
this  legislation  is  an  enhanced   and  updated  version  of  the                                                            
information  that  he presented  during  the June  2004 Legislative                                                             
Special Session.  In addition  to the bill,  the sponsor  statement,                                                            
and a  zero Fiscal  Note from  the Department  of Revenue,  Members'                                                            
packets contain  a copy of  a March 2, 2005  letter he had  received                                                            
from Chris  Phillips, Director  of Finance  of the Alaska  Permanent                                                            
Fund  Corporation.  A  copy of  the  "Senate  Bill  88 A  Bridge  to                                                            
Development A policy on  General Fund Revenue Shortfall" power point                                                            
presentation  titled dated  April 5,  2005 [copy  on file] has  also                                                            
been provided.                                                                                                                  
                                                                                                                                
Co-Chair Wilken read his sponsor statement as follows.                                                                          
                                                                                                                                
     Senate Bill 88                                                                                                             
     A Policy on General Fund Revenue Shortfall                                                                                 
                                                                                                                                
     Senate Bill 88 reads  as follows: It is the policy of the State                                                            
     of  Alaska that  the  amounts necessary  to  cover a  projected                                                            
     shortfall  in  general fund  revenue  during a  fiscal year  be                                                            
     appropriated  equally  from the Constitutional  Budget  Reserve                                                            
     fund and the Earnings  Reserve Account. These few words adopt a                                                            
     course  of  action  that  balances  the  state  budget  when  a                                                            
     shortfall in general fund revenue exists.                                                                                  
                                                                                                                                
     Senate Bill 88                                                                                                             
                                                                                                                                
          · When needed, fills the potential fiscal gap in a way                                                                
             that minimizes the financial impact on Alaska                                                                      
             families.                                                                                                          
          · When needed, provides a bridge over the gap between                                                                 
             general fund expenditures and general fund revenues                                                                
             until our state's natural resources can be further                                                                 
             developed.                                                                                                         
          · Doubles the life expectancy of the Constitutional                                                                   
             Budget Reserve fund.                                                                                               
          · May strengthen the State of Alaska bond rating, and                                                                 
             save millions of dollars on future bond offerings.                                                                 
                                                                                                                                
        Senate Bill 88  affirms a policy of the state  that provides                                                            
        fiscal  certainty   when   the  general   fund  revenue   is                                                            
        insufficient to fully fund  the state budget. Please join me                                                            
        in support of this legislation.                                                                                         
                                                                                                                                
Co-Chair  Wilken  pointed  out that  the  term  "'the bridge'  is  a                                                            
metaphor [meaning]  to get us from  here to there." "There  are only                                                            
nine letters that  describe economic development in  this State: Oil                                                            
and Gas … it's  not mining, it's not fishing, it's  not tourism, and                                                            
its certainly not taxes."                                                                                                       
                                                                                                                                
Co-Chair   Wilken  noted   that  the  aforementioned   power   point                                                            
presentation     is     available     on     the     Internet     at                                                            
"www.akrepublicans.org/Wilken".                                                                                                 
                                                                                                                                
Co-Chair Wilken stated  that were this legislation adopted, it would                                                            
be a component  of the AS 37.07.010 Executive Budget  Act as opposed                                                            
to being incorporated  into State  Statute. "It's policy  and can be                                                            
ignored as  needed". The fact that  it would not be mandated  is "an                                                            
important consideration".                                                                                                       
                                                                                                                                
Co-Chair  Wilken stated  that the  pie chart  on page  three of  the                                                            
presentation depicts the  FY 06 $7,600,000,000 Operating and Capital                                                            
Budget, as proposed  by Governor Frank Murkowski.  75-percent of the                                                            
State's revenue  budget is attributed  to three primary things:  the                                                            
Permanent Fund  (PF) equating to $1.42 billion or  19 percent of the                                                            
budget; federal funds of  $2.52 billion or 33 percent of the budget;                                                            
and General  Fund  (GF) Revenue  amounting  to $2.63  billion or  34                                                            
percent of the  budget. The General Fund "is the home  of the fiscal                                                            
gap". He  noted that  Oil and  Gas Tax Revenues  typically  comprise                                                            
between 68-percent and  90-percent of the State's GF revenues. It is                                                            
anticipated that  they would amount of 87-percent  of the GF revenue                                                            
in FY 06. It  should also be noted  that, in FY 06, the federal  and                                                            
GF funding are  expected to mirror each other. The  State should "be                                                            
vary of  any changes" that  might alter federal  funding support  in                                                            
the future.                                                                                                                     
                                                                                                                                
Senator Dyson  asked for examples of what types of  funding comprise                                                            
the "Statutory  Restricted" component, which at $744  million, would                                                            
equate to ten percent of the proposed FY 2006 budget.                                                                           
                                                                                                                                
Co-Chair Wilken  replied that those revenues consists  of Department                                                            
of Fish and Game receipts  or federal money that is considered "flow                                                            
through  money"  in that  it  is earmarked  to  support  a  specific                                                            
program.                                                                                                                        
                                                                                                                                
Co-Chair Wilken  remarked that the  information on page four  titled                                                            
"What's the  problem?" presents three  variables in graph  form: the                                                            
State's  General Fund  Budget, the  General Fund  Baseline, and  New                                                            
General  Fund Revenue  from the years  FY 1990  through FY 2020.  As                                                            
shown,  the General  Fund  Baseline  tapers  downward  as the  years                                                            
advance;  the General  Fund  Budget trends  upward  two percent  per                                                            
year; and  the New General  Fund Revenue  reflects the insertion  of                                                            
new oil and gas development revenue in approximately FY 2013.                                                                   
                                                                                                                                
Co-Chair Wilken stated  that this graph depicts the fiscal gap issue                                                            
facing the State:  the General Fund budget would exceed  the General                                                            
Fund  Baseline beginning  in  approximately  FY 2007;  however,  the                                                            
receipt of New General  Fund Revenue is not projected until the year                                                            
FY 2013.                                                                                                                        
                                                                                                                                
Senator  Stedman asked  for further  information  about the  General                                                            
Fund Baseline".                                                                                                                 
                                                                                                                                
Co-Chair Wilken  responded that the  General Fund Baseline  reflects                                                            
general  unrestricted  revenues  as calculated  by  the Division  of                                                            
Legislative Finance.  As mentioned earlier, 87-percent  of the FY 06                                                            
General Fund  Baseline component  would be  attributable to  Oil and                                                            
Gas Tax  revenue.  The General  Fund Baseline,  as  depicted on  the                                                            
graph,  is based "on  current reserves  and  current production  and                                                            
their forecast out to the year 2020".                                                                                           
                                                                                                                                
Senator Stedman understood  therefore that the General Fund Baseline                                                            
is General Fund revenue.                                                                                                        
                                                                                                                                
Co-Chair Wilken affirmed.                                                                                                       
                                                                                                                                
Senator  Dyson   asked  for  confirmation   that  the  Division   of                                                            
Legislative Finance based the forecast on oil prices.                                                                           
                                                                                                                                
Co-Chair Wilken confirmed.                                                                                                      
                                                                                                                                
Co-Chair  Wilken stated that  he valued the  information in  the " …                                                            
and things  can change  quickly 'For  the Good  and the Bad'"  graph                                                            
depicted on page five,  so much that he had a small wallet size card                                                            
[copy on file]  of the information made for distribution.  The graph                                                            
depicts  a variety of  fiscal scenarios  based on  the price  of oil                                                            
ranging from $25 to $50  per barrel. The graph indicates that, given                                                            
the Governor's  FY 06 budget, the State's break even  point would be                                                            
a North  Slope Crude  Oil price  of $42  per barrel.  The oil  price                                                            
scenarios  are  accompanied  by  projections  of  the "Unrestricted                                                             
General Fund Revenue" as well as projected "Surplus" levels.                                                                    
                                                                                                                                
Co-Chair Wilken  stated that, as exampled, the State's  FY 06 budget                                                            
"would break  even at  $42 per barrel";  a price  of $50 per  barrel                                                            
would  generate a  surplus  of approximately  $450  to $500  million                                                            
dollars.                                                                                                                        
                                                                                                                                
Co-Chair  Wilken  pointed out,  however,  that, "things  can  change                                                            
quickly for the  good or for the bad." The price of  oil on April 1,                                                            
2004 was  approximately $32  dollars a barrel.  The Legislature  was                                                            
ecstatic at  the time that the price  had surpassed $30 per  barrel.                                                            
"Money was rolling out  of our pockets" at that price. However, were                                                            
that price applied  to the Governor's FY 06 budget  there would be a                                                            
$600 million shortfall.  "That's how fast" the scenario  changes. In                                                            
1999, the per-barrel  price was ten  dollars and the State  was $1.3                                                            
billion out of balance.  Therefore, when people bring up the subject                                                            
of how  much money the  State has, showing  them the aforementioned                                                             
card would open the discussion to "what if" scenarios.                                                                          
                                                                                                                                
In response  to a  question from  Senator Stedman,  Co-Chair  Wilken                                                            
calculated that  the Governor's FY 06 budget would  exceed the FY 05                                                            
budget by approximately  $400 million.  The current price  of oil is                                                            
in the  $33 range.  A price of  $42 per barrel  would "essentially"                                                             
generate sufficient revenue  to absorb the difference between the FY                                                            
05 and the FY 06 budget.                                                                                                        
                                                                                                                                
Senator Hoffman  argued that the information conveys  "only half the                                                            
story" as, while the per-barrel  price has increased, oil production                                                            
has  been   experiencing   "a  steady  decline"   over  the   years.                                                            
Continuance of this trend would further increase the fiscal gap.                                                                
                                                                                                                                
Co-Chair  Green  asked whether  the  Division  had factored  in  the                                                            
reduction in oil production.                                                                                                    
                                                                                                                                
Co-Chair  Wilken  affirmed   that  the decline   in  production  was                                                            
factored  into the projections.  The projection  is based on  a flat                                                            
930,000 barrels  per day. Were the Trans Alaska Pipeline  to operate                                                            
at full  capacity  the scenario  would definitely  change. The  fact                                                            
that things do change is  exemplified by the fact that the State has                                                            
had to withdraw a total  of $5.5 billion from the CBR over eight out                                                            
of the last twelve years, in order to balance the budget.                                                                       
                                                                                                                                
Co-Chair Wilken  stated that the information on page  six specifies,                                                            
as authorized  by Article  IX of the Alaska  Constitution,  that the                                                            
CBR  was established  in  1990 as  a  separate fund  to  be used  to                                                            
support the State budget when necessary.                                                                                        
                                                                                                                                
Co-Chair  Wilken stated that  the chart on  page seven reflects  the                                                            
draws on the CBR since  the initial draw in 1994. The chart depicts,                                                            
from  FY 94 through  FY 05,  the "CBR  Ending  Balance", the  "Draw"                                                            
amount, and the  "Average Draw". $369,000,000 was  drawn in FY 94, a                                                            
peak draw of  $1,042,000,000 was drawn  in FY 99, no draws  occurred                                                            
in FY 97 or FY 01, and  a low draw of $11,000,000 occurred in FY 04.                                                            
No draw is expected  for FY 05. The "Average Draw"  is approximately                                                            
$320,000,000.  The CBR  Balance is  currently $2.1  billion and  the                                                            
balance is expected to increase to $2.5 billion by June 2005.                                                                   
                                                                                                                                
Senator Bunde  asked whether the presentation would  address the ERA                                                            
balance.                                                                                                                        
                                                                                                                                
Co-Chair  Wilken assured  that ERA  information  is forthcoming.  He                                                            
reiterated that the current CBR balance is $2.1 billion.                                                                        
                                                                                                                                
Co-Chair  Green  understood  therefore,  that contrary  to  previous                                                            
projections, the CBR would not be depleted by the year 2006.                                                                    
                                                                                                                                
Co-Chair  Wilken affirmed  and recalled  that, at  one time,  it was                                                            
thought that the CBR would  be depleted by the year 2002. "It's like                                                            
the furniture  store at the corner, it's been going  out of business                                                            
in the same location for  years." "The CBR is pretty healthy" today.                                                            
                                                                                                                                
10:43:39 AM                                                                                                                   
                                                                                                                                
Co-Chair Wilken  noted that page eight of the presentation  provides                                                            
samplings of  press releases pertaining  to the State's oil  and gas                                                            
resource  opportunities. Reiterating  that Oil  and Gas Tax  revenue                                                            
would  generate 87-percent  of  the FY  06 General  Fund monies,  he                                                            
noted  that in  order  for the  State  to continue  to  pay for  the                                                            
demands  placed on  State  government, the  State  must develop  its                                                            
natural resources.                                                                                                              
                                                                                                                                
Co-Chair   Wilken  stated   that   because  new   natural   resource                                                            
development would evolve  gradually rather than overnight, the State                                                            
must address the points  in time between now and then. This scenario                                                            
is  depicted  in  the  "  …  a  bridge  is  needed   from  today  to                                                            
development"  chart on  page nine.  This page projects  oil and  gas                                                            
revenues from the years 2006 through 2016.                                                                                      
                                                                                                                                
Co-Chair  Wilken noted  that the General  Fund Budget  on the  chart                                                            
encompasses a  two percent growth factor. The "Unfilled  Fiscal Gap"                                                            
in  the General  Fund  is  depicted  as is  the  "onset of  the  Gas                                                            
Pipeline" and  new oil expected from  the development of  the Arctic                                                            
National Wildlife Refuge  (ANWR). The projected unrestricted General                                                            
Fund Revenue is also included.                                                                                                  
                                                                                                                                
10:45:03 AM                                                                                                                   
                                                                                                                                
Senator Bunde asked for  further information about the "General Fund                                                            
Budget"  variable  depicted   on the  chart,   as,  oftentimes,  the                                                            
argument is heard that  the State's fiscal gap could be addressed by                                                            
reducing State  expenditures. He commented  that the inclusion  of a                                                            
two percent per year growth  factor in the General Fund Budget would                                                            
be  less  than  the  inflation  rate  that  would   be experienced.                                                             
Therefore,  what is depicted  in the information  "is a very  modest                                                            
budget growth prediction".                                                                                                      
                                                                                                                                
Co-Chair Wilken  agreed. He shared  that during his Special  Session                                                            
presentation   of  this  proposal,  the  General  Fund   Budget  was                                                            
presented with  no growth. "Many people  took exception to  that and                                                            
rightfully   so".   The  two-percent   growth   included   in   this                                                            
presentation  "is  the literary  license  to just  kind  of throw  a                                                            
number  up there":  three percent  "is  probably too  high" and  one                                                            
percent "is probably too low".                                                                                                  
                                                                                                                                
Senator  Bunde pointed  out that  a two percent  growth calculation                                                             
would  be  less  than  that  proposed  in  separate  spending  limit                                                            
legislation proposed by Senator Dyson.                                                                                          
                                                                                                                                
Co-Chair Wilken expressed  that a two-percent growth in general fund                                                            
spending  over a  15-year  period  would reflect  "a  great deal  of                                                            
fiscal constraint."                                                                                                             
                                                                                                                                
Senator  Stedman commented  that a two-percent  general fund  growth                                                            
rate  would be  a lesser  level  than  that proposed  in  the FY  06                                                            
budget.                                                                                                                         
                                                                                                                                
Co-Chair Wilken agreed.                                                                                                         
                                                                                                                                
Co-Chair  Wilken stated that,  as portrayed  on page ten, there  are                                                            
seven  possible sources  or "pots"  of  money for  the State:  State                                                            
spending  could be  reduced; between  $50 and  $100 million  dollars                                                            
might be raised through  increased Corporate Taxes; between $200 and                                                            
$300 million  might  be raised by  implementing  a State Sales  Tax;                                                            
$400 to $600  million dollars might  be generated by a State  Income                                                            
Tax; approximately  $30 million could be raised under  Other Revenue                                                            
by  increasing  such   things  as  Tobacco  Taxes,  Alcohol   Taxes,                                                            
Fisheries  Taxes,  Car Rental  Taxes,  and  Studded Tire  Fees;  the                                                            
Constitutional  Budget Reserve could  provide $2.1 billion;  and the                                                            
$2.1 billion  in realized earnings  of the Permanent Fund,  referred                                                            
to as  the Earnings  Reserve  Account (ERA),  could  be used,  after                                                            
accounting for the Permanent  Fund Dividends and Inflation-proofing.                                                            
Utilizing the ERA is the focus of this legislation.                                                                             
                                                                                                                                
Co-Chair  Wilken stated that,  as depicted  in the chart titled  " …                                                            
why  not just  the CBR?"  the CBR  could be  used  to sustain  State                                                            
Budget  shortfalls for  a finite  time, as,  absent another  funding                                                            
source,  the CBR  would  be deleted  by FY  2010.  However, at  that                                                            
point, there would still be "a gap to bridge".                                                                                  
                                                                                                                                
Co-Chair Wilken stated,  therefore, that the question, as written on                                                            
page twelve, is  " … so what if … The Legislature  splits the future                                                            
fiscal gaps with equal  contributions from the Constitutional Budget                                                            
Reserve and the Earnings Reserve Account?"                                                                                      
                                                                                                                                
Co-Chair Wilken  conveyed that the graph on page thirteen,  titled "                                                            
… and we build a bridge"  portrays the scenario were both an ERA and                                                            
CBR  draw to  occur.  This  scenario  would provide  "a  bridge"  of                                                            
funding that  would support the State's  budget until the  time when                                                            
"Potential  Resource Development Revenue"  could support  the budget                                                            
beginning in approximately the year 2013.                                                                                       
                                                                                                                                
Co-Chair Wilken  declared, "so, there's the bridge  to development."                                                            
                                                                                                                                
Senator Hoffman  asked how, in this  scenario, the capital  needs of                                                            
State would be addressed.                                                                                                       
                                                                                                                                
Co-Chair Wilken clarified  that capital projects are included in the                                                            
operating budget in the overall State budget.                                                                                   
                                                                                                                                
Senator Hoffman understood  therefore that the proposed FY 2006 $2.5                                                            
billion budget would include capital expenditures.                                                                              
                                                                                                                                
Co-Chair Wilken affirmed.                                                                                                       
                                                                                                                                
Senator Hoffman  asked regarding the  level of capital funding  that                                                            
would be included in the FY 06 budget.                                                                                          
                                                                                                                                
Co-Chair  Wilken responded  that it is embodied  in the two  percent                                                            
growth.                                                                                                                         
                                                                                                                                
Senator Hoffman  asked whether  the amount  would be above  or below                                                            
$100 million.                                                                                                                   
                                                                                                                                
Co-Chair  Wilken stated  that the  Division of  Legislative  Finance                                                            
would provide specific information in that regard.                                                                              
                                                                                                                                
Co-Chair  Wilken  stated  that the  information  presented  on  page                                                            
fourteen, affirms  that the Legislature, by a simple  majority vote,                                                            
could access the earnings of the Permanent Fund.                                                                                
                                                                                                                                
10:52:05 AM                                                                                                                   
                                                                                                                                
Senator  Bunde suggested  that consideration  be given to  obtaining                                                            
the information  that included in the State's voter  pamphlet at the                                                            
time the  Establishment of  the Permanent Fund  was voted on  in the                                                            
early 1970s. That information  "clearly" stated that the money would                                                            
be available  "for appropriation and  use to support State  services                                                            
when oil revenues have diminished".                                                                                             
                                                                                                                                
Co-Chair Wilken assured that that would be done.                                                                                
                                                                                                                                
Senator Hoffman,  referencing  the graph on  page 13, asked  whether                                                            
the total  CBR/ERA  Draw amount  that would  be  required until  new                                                            
resource development comes on line is known.                                                                                    
                                                                                                                                
Co-Chair  Wilken stated  that  that information  was  included in  a                                                            
Division of  Legislative Finance spreadsheet  titled "50/50  model",                                                            
dated  Feb  18,  2005  [copy  on  file]  that  had  been  previously                                                            
distributed.                                                                                                                    
                                                                                                                                
Senator Hoffman  asked whether this proposal would  deplete the CBR.                                                            
                                                                                                                                
Co-Chair Wilken replied in the affirmative.                                                                                     
                                                                                                                                
Co-Chair  Green  asked  whether  CBR  growth  was  included  in  the                                                            
projections.                                                                                                                    
                                                                                                                                
Co-Chair Wilken deferred to the Division of Legislative Finance.                                                                
                                                                                                                                
Senator Hoffman restated  his question regarding the total amount of                                                            
the CBR and ERA draws that would be expected.                                                                                   
                                                                                                                                
ROB CARPENTER,  Fiscal  Analyst,  Division of  Legislative  Finance,                                                            
Legislative Affairs Agency,  clarified that the proposal would split                                                            
the draws  equally between  the CBR  and the ERA.  The total  amount                                                            
required  from  the ERA  and  the  CBR would  exceed  $2.1  billion.                                                            
Earnings of the funds would also be utilized.                                                                                   
                                                                                                                                
Senator Hoffman estimated  that the total could exceed $4.2 billion.                                                            
                                                                                                                                
Mr. Carpenter responded  that the amount would be approximately $2.4                                                            
billion.                                                                                                                        
                                                                                                                                
Mr.  Carpenter  re-distributed  the  aforementioned  spreadsheet  to                                                            
Members.                                                                                                                        
                                                                                                                                
Senator Stedman suggested  that a "sensitivity table" be included in                                                            
the presentation in order  to recognize the changing price of oil as                                                            
it increases  and decreases.  This would  reflect the expansion  and                                                            
retraction and the price of oil that would be required.                                                                         
                                                                                                                                
Co-Chair Wilken stated  that such a presentation could be developed.                                                            
Continuing, he noted that  the thrust of the issue is whether or not                                                            
the Legislature,  after  considering  all these  components,  should                                                            
adopt a policy  that would allow joint  use of the CBR and  the ERA.                                                            
                                                                                                                                
Co-Chair  Wilken  stated  that  the  Alaska   Permanent  Fund,  Fund                                                            
Financial History & Projections  as of December 31, 2004 spreadsheet                                                            
is provided  on page 15.  It was included  as verification  that the                                                            
numbers provided  in the presentation have a legitimate  basis. This                                                            
sheet is the source for  the forthcoming conclusions reached in this                                                            
proposal.                                                                                                                       
                                                                                                                                
10:56:55 AM                                                                                                                   
                                                                                                                                
Co-Chair Wilken  voiced the importance  of the realization  that, as                                                            
reflected on page  16, there are two pots of money  in the Permanent                                                            
Fund: the principal  consisting of  25-percent of oil revenues  with                                                            
the exception  of  the National  Petroleum  Reserve-Alaska  (NPR-A);                                                            
"special  deposits" authorized  by  the Legislature;  and  inflation                                                            
proofing  drawn  from  the ERA.  The  Permanent  Fund  principal  is                                                            
protected in the State's  Constitution. While it is highly unlikely,                                                            
it "would be  a dark day" for the  State were the time to  come that                                                            
it would  be required  to  ask voters  to approve  accessing the  PF                                                            
principal to provide for State services.                                                                                        
                                                                                                                                
Co-Chair Wilken  continued that the  second pot of money  comprising                                                            
the Permanent  Fund is the  ERA, currently  valued at $3.3  billion.                                                            
Money from  the ERA  is used to  provide for  annual Permanent  Fund                                                            
Dividends,  inflation proofing  of the Principal,  and, by  a simple                                                            
majority vote  of the Legislature, the balance of  the fund could be                                                            
accessed  in order to fund  a State fiscal  gap. He voiced  surprise                                                            
that a  large portion  of the population  are  unaware that  the ERA                                                            
could be accessed in this manner.                                                                                               
                                                                                                                                
Co-Chair  Green   commented  that   the  "Other"  ERA  expenditure,                                                             
reflected  on page  16  as $2.1  billion, could  be  referred to  as                                                            
"excess earnings".                                                                                                              
                                                                                                                                
Co-Chair  Wilken asserted  that Co-Chair  Green's  term or the  word                                                            
"remaining" would be descriptively appropriate.                                                                                 
                                                                                                                                
10:59:09 AM                                                                                                                   
                                                                                                                                
Senator Bunde shared the  suggestion that the excess earnings be put                                                            
toward Permanent  Fund Dividends. It should be pointed  out however,                                                            
that the previous  year, Alaskans sent $180 million  to the Internal                                                            
Revenue Service  (IRS) as the federal  tax on that year's  dividend.                                                            
"A  great deal"  more  money  would  be sent  to  the IRS  were  the                                                            
Dividend  increased substantially.  That  money, being  sent out  of                                                            
State,  would not  thereby  support  the building  of  new roads  or                                                            
schools or some other "State service that people would value".                                                                  
                                                                                                                                
Co-Chair   Wilken  stressed   the  importance   of  clarifying   the                                                            
distinction  between  the principal  of the  Fund and  the ERA  when                                                            
discussing the Permanent Fund with people.                                                                                      
                                                                                                                                
Senator Bunde concurred.                                                                                                        
                                                                                                                                
Co-Chair  Wilken characterized  the  CBR and  the  ERA as  "Alaska's                                                            
Crown Jewels" as referenced  on page 17. We are the only Legislature                                                            
in  the nation  "deciding  how to  manage  $31 billion  for  650,000                                                            
people". Only  a few countries have  that sort of wealth.  While the                                                            
State  is  not  at  the  financial  level  of  major  oil  producing                                                            
countries  like Qatar  or Saudi  Arabia, "it  is in  the next  level                                                            
down". The  power of the PF earnings  could be a big consideration,                                                             
and each  day, through a  variety of avenues  such as the  financial                                                            
market,  "the  world helps  build  Alaska".  Stock market  and  real                                                            
estate investments  assist  in building the  State's Permanent  Fund                                                            
holdings. It is a form of economic development for the State.                                                                   
                                                                                                                                
11:01:47 AM                                                                                                                   
                                                                                                                                
Co-Chair  Wilken reminded that  the average  CBR draw has been  $318                                                            
million.  Under this  proposal,  a hypothetic  $500  million  annual                                                            
fiscal gap for  the next ten years would be equally  split with $250                                                            
million being  drawn each  year from both the  CBR and the  ERA. The                                                            
chart  depicted  on  page eighteen  was  developed  to  address  the                                                            
concern about  how withdrawing money  from the ERA would  affect the                                                            
Permanent  Fund Dividend  (PFD)  check. The  $250  million ERA  draw                                                            
specified in this example,  would result in a total PFD reduction of                                                            
$446 for the ten-year period.  "This is a very important" chart, "as                                                            
it brings home" the realization  of how much money is in the ERA. In                                                            
order  to communicate  this  information  to  the public,  the  page                                                            
eighteen chart is duplicated  on the flip side of the aforementioned                                                            
wallet sized card.                                                                                                              
                                                                                                                                
Co-Chair Green agreed that this is "great" information.                                                                         
                                                                                                                                
Senator  Hoffman   suggested  that,  to  further  alleviate   public                                                            
concern,  a column that  reflects the expected  dividend amount  for                                                            
each  of  the ten  years  should  be  included on  the  chart.  This                                                            
information would  be based upon the "Alaska Permanent  Fund History                                                            
and Projections  as of December  31, 2004"  information on  page 15,                                                            
and  would assure  people  that their  dividends  would continue  to                                                            
grow.                                                                                                                           
                                                                                                                                
Senator Bunde  stated that  the information  on page eighteen  could                                                            
address the  difficulty that some  citizens have in recognizing  the                                                            
fact that,  unlike the  federal government,  the State cannot  print                                                            
more money. State  services are supported in a manner  somewhat akin                                                            
to "robbing  Peter to  pay Paul",  in that,  through either  citizen                                                            
taxation  or other  means, the  State must  raise money  to pay  for                                                            
services. While  some people opine that a State income  tax would be                                                            
the most  fair, others  say it  would be regressive.  Therefore,  it                                                            
might be  instructive to  develop "a parallel  chart" to the  one on                                                            
page eighteen that would  reflect what folks might pay were an State                                                            
income tax in place.                                                                                                            
                                                                                                                                
Co-Chair Wilken replied  that a forthcoming presentation chart might                                                            
address Senator Bunde's suggestion.                                                                                             
                                                                                                                                
Co-Chair Wilken stated  that the chart on page nineteen provides, as                                                            
suggested Senator  Hoffman, information regarding  the estimated PFD                                                            
for the next ten years  compared to the PFD amount were $250 million                                                            
withdrawn  from the  ERA as  per this  proposal.  After his  initial                                                            
review  of the numbers,  he had  asked the  Division of Legislation                                                             
Finance  to recalculate  them,  as  they appeared  "too  good to  be                                                            
true". They are legitimate.                                                                                                     
                                                                                                                                
Co-Chair Wilken  noted that the information on page  twenty reflects                                                            
the potential impact of  this proposal to one's PFD in common terms:                                                            
there would be almost no  impact the first year; the amount lost the                                                            
second year could  equate to the cost of a specialty  cup of coffee;                                                            
the amount lost the third  year might amount to the price of a movie                                                            
ticket; the  amount the fourth year  could equate to the  price of a                                                            
large pizza;  the amount  lost the  fifth year  could equate  to the                                                            
price  of a woman's  haircut,  and the  amount lost  the tenth  year                                                            
would  equate  to  the  price  of  a  dinner  for  two  at  a  fancy                                                            
restaurant.                                                                                                                     
                                                                                                                                
Co-Chair  Wilken  stated  that  the information   on page  21  might                                                            
address  Senator  Bunde's  earlier  suggestion  as it  compares  the                                                            
affect  of an ERA  draw to that  of implementing  alternate  revenue                                                            
generating  sources such as a State  income or sales tax.  An income                                                            
tax  would  cost a  married  couple  with two  children  earning  an                                                            
adjusted  gross income  of $57,000  approximately  $1,000 a year;  a                                                            
State  sales tax  would cost  that  family approximately  $950;  and                                                            
tapping  the ERA  would cost  that  family approximately  $12.  This                                                            
information is based on the second year of implementation.                                                                      
                                                                                                                                
11:10:10 AM                                                                                                                   
                                                                                                                                
Senator Bunde  suggested that a comparison  reflecting the  costs to                                                            
someone  earning  $30,000  a year  be  developed,  as that  was  the                                                            
minimum  income   baseline  utilized  during  income   tax  proposal                                                            
discussions.                                                                                                                    
                                                                                                                                
Co-Chair Wilken stated  that the graph depicted on page 22 indicates                                                            
how adopting  this policy  would extend the  life of the CBR  to the                                                            
time when resource development revenues would come online.                                                                      
                                                                                                                                
Co-Chair  Wilken stated that  "unlike" the  Percent of Market  Value                                                            
(POMV)  budgeting   concept  legislation  that  had   been  recently                                                            
considered, the  policy proposed in SB 88 would only  be implemented                                                            
when there were  a fiscal gap. Years might pass without  there being                                                            
the need to tap the CBR  or the ERA or they could be tapped one year                                                            
and  not  the next.  This  legislation  would  establish  a  "unique                                                            
accountability"  between the Legislature and the electorate  because                                                            
the affect  of the  decision could  be quantified.  As presented  on                                                            
page 23, this  legislation "demands spending accountability  because                                                            
… (1) the  Earnings Reserve  Account is the  people's money  and (2)                                                            
each legislator  must  answer to the  public on  how much was  spent                                                            
from the Earnings Reserve to fund state services."                                                                              
                                                                                                                                
Co-Chair Wilken  read the summary of the presentation,  as presented                                                            
on pages 24 and 25.                                                                                                             
                                                                                                                                
   The Bridge to Development Plan                                                                                               
     ·  Bridges the State of Alaska  revenue needs until development                                                            
        can occur                                                                                                               
     ·  Recognizes   Alaska's   natural   resource   potential   and                                                            
        opportunity for jobs                                                                                                    
     ·  Recognizes  the power of  the Earnings  Reserve - the  crown                                                            
        jewel of a fiscal plan                                                                                                  
     ·  Establishes   accountability   by   forming   a   investment                                                            
        partnership will all voters                                                                                             
                                                                                                                                
   … and …                                                                                                                      
                                                                                                                                
     ·  When  needed,  minimizes  the  financial  impact  on  Alaska                                                            
        families                                                                                                                
     · Doubles the life of the CBR                                                                                              
     ·  Strengthens the  Alaska's bond rating and  saves millions of                                                            
        dollars                                                                                                                 
     ·  Provides  Alaska  with a  stable  and dependable  long  term                                                            
        fiscal plan                                                                                                             
                                                                                                                                
Senator Bunde  pointed out that, were this legislation  adopted, the                                                            
CBR  and the  ERA  would not  be  utilized  in FY  06  as oil  price                                                            
projections indicate  that sufficient revenue would  be generated to                                                            
support that  year's budget.  In addition,  were those who  are more                                                            
optimistic  than him about oil prices  and production correct,  this                                                            
might be the scenario for the next several years.                                                                               
                                                                                                                                
Co-Chair  Wilken  agreed,  but  cautioned   that  oil  prices  could                                                            
decrease  as quickly  as they had  increased. He  voiced the  belief                                                            
that the State  "has a structural  deficit" in that over  a ten-year                                                            
period,  State revenues  would be  inadequate more  often than  they                                                            
were "flush". "We need to be ready."                                                                                            
                                                                                                                                
Senator  Stedman "liked  the  presentation  and the  concept" of  "a                                                            
bridging mechanism"  that could be utilized until  the time that new                                                            
resource revenues  came on line, but opined that further  discussion                                                            
should  occur on a  couple of issues.  To that  point, he  suggested                                                            
that "some sidebars" or  a maximum limit on the amount that could be                                                            
drawn from  the ERA be  considered. This  would address the  concern                                                            
that  there  might be  budget  increases  of  five, ten,  or  twelve                                                            
percent were  no limits placed  on the revenue  side. The  objective                                                            
would be include  "sidebars" in order  to prevent the occurrence  of                                                            
"ballooning budgets". "This year's a good example."                                                                             
                                                                                                                                
Senator  Hoffman  declared   that,  "this  year  is  a  really  good                                                            
example".  To that point,  however, he opined  that, "when  it's all                                                            
said and done, we would find that we were the sideboards".                                                                      
                                                                                                                                
11:18:08 AM                                                                                                                   
                                                                                                                                
Co-Chair  Green   applauded  the  presentation,  and   reminded  the                                                            
Committee that  regardless of the  outcome of this legislation,  the                                                            
ability  for  the  Legislature  to  access  the ERA,  via  a  simple                                                            
majority vote,  has always been an  option. She agreed with  Senator                                                            
Hoffman that the  Legislature does play the roll of  the sideboards.                                                            
She  doubted   that  the   Legislature  "would   limit,  under   any                                                            
circumstances",  the amount  that could be  withdrawn as that  could                                                            
jeopardize appropriate action in the case of an emergency.                                                                      
                                                                                                                                
11:18:53 AM                                                                                                                   
                                                                                                                                
Senator  Bunde  stated   that  while  the  Legislature   could  have                                                            
exercised its  ability to access the  money in the ERA "many  times"                                                            
that has not occurred.  There is a "huge political dike between" the                                                            
Legislature  and  its  ability  to spend  the  ERA.  Therefore,  the                                                            
question  is were  a mechanism  such  as the  one  provided by  this                                                            
legislation   available,   would  future   Legislators  take   "more                                                            
political courage" and utilize it.                                                                                              
                                                                                                                                
Senator  Bunde also  noted that, in  order to  further the  spending                                                            
limit  goal  as  previously  proposed  in  separate  legislation  by                                                            
Senator  Dyson, provisions  could  be included  in this legislation                                                             
that would  allow this ERA/CBR  mechanism to  be utilized only  were                                                            
the budget  no more than perhaps a  three percent increase  over the                                                            
previous year's budget.                                                                                                         
                                                                                                                                
Co-Chair Green  remarked that such  a provision would prohibit  this                                                            
CBR/ERA funding  mechanism from being utilized in  regards to the FY                                                            
06 budget.                                                                                                                      
                                                                                                                                
Senator  Bunde  continued  that, while  such  legislation  could  be                                                            
modified, it  would put in place "pretty  serious sideboards  that a                                                            
future Legislature  would be changing  at its own political  peril."                                                            
                                                                                                                                
Senator Dyson  suggested that the passage of this  legislation could                                                            
be contingent on the passage of a Constitutional spending limit.                                                                
                                                                                                                                
Co-Chair  Wilken, in  response to  Senator Bunde's  comment,  stated                                                            
that his recent bid for  re-election to his Senate seat had provided                                                            
him the opportunity  to discuss this ERA/CBR concept  with a variety                                                            
of people. Although  he had been initially "afraid"  to discuss this                                                            
plan, which  his opponent  painted as a raid  on the PF, the  public                                                            
response to it was gratifying.  The opportunity proved successful in                                                            
enlightening  people about the power  of the earnings of  the PF. He                                                            
encouraged people who might  run for a public office to continue the                                                            
dialogue of positioning the earnings "as an asset".                                                                             
                                                                                                                                
Co-Chair  Wilken commented  that  the idea  of imposing  a  spending                                                            
limit  of two  or three  percent above  the previous  year's  budget                                                            
could be  doable provided  the Legislature  "could define what  goes                                                            
into the two or three percent increase".                                                                                        
                                                                                                                                
Senator   Bunde   commented   that,   "the   groundwork   has   been                                                            
established".                                                                                                                   
                                                                                                                                
Senator  Hoffman  asked Co-Chair  Wilken's  position  in regards  to                                                            
placing this proposal on a Statewide ballot.                                                                                    
                                                                                                                                
Co-Chair  Green interjected  that  this proposal  would not  require                                                            
voter approval.                                                                                                                 
                                                                                                                                
Co-Chair  Wilken stated  that  this issue  is not  addressed in  the                                                            
proposal.                                                                                                                       
                                                                                                                                
Senator Hoffman agreed.                                                                                                         
                                                                                                                                
Co-Chair Wilken  expressed that the  Legislature should not  request                                                            
voter permission to spend the ERA. "That's our job".                                                                            
                                                                                                                                
Senator Hoffman  argued that,  rather than  the issue being  whether                                                            
the Legislature  could  access the  ERA, the issue  is whether  this                                                            
proposal, rather  than a State sales  tax, income tax, or  user tax,                                                            
would be  the mechanism  through which  to fill  the State's  fiscal                                                            
gap. Rather than  his concern being that voter permission  should be                                                            
required to  spend money from the  ERA, his concern is whether  this                                                            
proposal  should be the  long-term solution.  He surmised that  upon                                                            
voter review of the various  options, this option "would have a high                                                            
potential of passing."                                                                                                          
                                                                                                                                
11:24:43 AM                                                                                                                   
                                                                                                                                
Co-Chair  Wilken characterized  this  legislation  as "soft  policy"                                                            
which  future  Legislators   could  either  use  or  ignore.  Future                                                            
legislators would  continue to have the opportunity  to pursue other                                                            
options   if  needed  to   raise  revenue.   The  ramifications   of                                                            
implementing  a  sales  tax  or income  tax  would  include  placing                                                            
pressure upon  corporations and families.  He opined that  were this                                                            
legislation  in place and  used, it would  work. At that point,  "it                                                            
would become the  standard". He voiced discomfort  at the thought of                                                            
asking the voters whether this should be "the" fiscal plan.                                                                     
                                                                                                                                
Senator  Hoffman   questioned  the  reason  for  Co-Chair   Wilken's                                                            
unwillingness to allow  the people to vote on the issue since he had                                                            
previously mentioned that  after discussing the proposal with people                                                            
during  his re-election  campaign,  they had  recognized its  worth.                                                            
Therefore, they would support it.                                                                                               
                                                                                                                                
Co-Chair Wilken stated  that it would be a challenge to discuss this                                                            
issue with 640,000 citizens.                                                                                                    
                                                                                                                                
In response to a comment from Co-Chair Green, Senator Hoffman re-                                                               
stated Co-Chair  Wilken's remarks about how, during  his bid for re-                                                            
election, he  had broached the subject  of this bill and  that, as a                                                            
result,  people had warmed  up to  the idea. The  other options  had                                                            
drawbacks; this proposal "is markedly different".                                                                               
                                                                                                                                
Senator Bunde questioned  the reason for there being such a thing as                                                            
the Senate Finance  Committee, were the Legislature  "to accept what                                                            
State  law  says"   regarding  the  availability   of  the  ERA  for                                                            
appropriation, but nonetheless  putting that action to a vote of the                                                            
people.  Were that to  occur, perhaps  all spending  of State  funds                                                            
should be put  before a vote of the  people. There is no  difference                                                            
between  the ERA, "corporate  income  tax, and any  other source  of                                                            
funds that the State has access to".                                                                                            
                                                                                                                                
Senator Olson  recognized there to be "a lot of difference"  between                                                            
a State  income tax and  corporate income  tax, and the spending  of                                                            
the ERA. He  echoed Senator Stedman's  concern that, were  a "bigger                                                            
and  bigger and  more swollen  budget"  to evolve,  few individuals                                                             
would possess  the ability to hold a budget in line.  He praised the                                                            
work  conducted  by  the  chair  of  the Senate   Finance  Committee                                                            
Department  of Natural Resources  subcommittee,  who, in an  earlier                                                            
presentation, had held that Department's budget down.                                                                           
                                                                                                                                
Co-Chair  Wilken clarified,  in response  to  Senator Stedman's  and                                                            
Senator Olson's  concerns, that the  only time this policy  would be                                                            
necessary would  be when State revenue were insufficient  to support                                                            
the  State's  budget. "That  automatically  dampens  the  desire  to                                                            
spend, spend,  spend". It  is not something  that would occur  every                                                            
year.                                                                                                                           
                                                                                                                                
Senator  Olson  respectively  disagreed  by commenting  that,  "when                                                            
somebody spends someone  else's money, there is always a shortage of                                                            
money".                                                                                                                         
                                                                                                                                
The bill was HELD in Committee.                                                                                                 

Document Name Date/Time Subjects