Legislature(2005 - 2006)SENATE FINANCE 532

04/15/2005 09:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved Out of Committee 4/14
Moved Out of Committee 4/14
Moved Out of Committee 4/11
Moved CSSB 131(FIN) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSSSSB 16(TRA) Out of Committee
Moved SB 88 Out of Committee
Heard & Held
Moved SB 158 Out of Committee
Scheduled But Not Heard
     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                                                                
This was  the second  hearing for  this bill in  the Senate  Finance                                                            
Co-Chair Wilken,  the bill's sponsor, stated that  in the time since                                                            
the April  5, 2005  first hearing  on this legislation  he has  been                                                            
encouraged by the comments,  suggestions, and ideas that individuals                                                            
have  shared with  him.  During  those conversations,   it has  been                                                            
realized that  "this is a very flexible  plan … that can  be used as                                                            
needed  when needed".  He acknowledged  that "it  is strange"  to be                                                            
discussing  this legislation  during  a time  when  the State's  oil                                                            
revenues are increasing.  However, it is encouraging  that "we don't                                                            
have  our head  in the sand".  No one  should  ignore the  projected                                                            
future oil revenues the  State could receive as reflected on what he                                                            
referred to as the "sensitivity  chart", on page five of the "Senate                                                            
Bill 88  A Bridge to Development  A Policy  on General Fund  Revenue                                                            
Shortfall" handout  [copy on file] discussed during  the April fifth                                                            
Senator  Stedman   summarized  that   the  plan  proposed   in  this                                                            
legislation   would,  were  the  State   to  experience   a  revenue                                                            
shortfall, split  the draw that might historically  have occurred on                                                            
"the State's  savings account",  the Constitutional  Budget  Reserve                                                            
(CBR), between  the CBR and  the Earnings  Reserve Account  (ERA) of                                                            
the Permanent  Fund. While  the principal of  the Permanent  Fund is                                                            
protected,   the  Legislature   has  the   Statutory  authority   to                                                            
appropriate  money  from  the  ERA  after  dividends  and  inflation                                                            
proofing  have occurred.  Over the  past several  years, a total  of                                                            
approximately  five billion dollars  has been drawn from  the CBR to                                                            
address  the State's  funding shortfall.  The CBR  balance today  is                                                            
approximately  $2.4 billion.  Were the  State to  continue having  a                                                            
funding deficit,  the draw on the CBR might lower  the balance to "a                                                            
threshold of approximately  one billion dollars. This  is of concern                                                            
to the  Administration". While  there is debate  in regards  to what                                                            
appropriate  balance should  be maintained  in the CBR, "clearly  at                                                            
some point, the State needs  to have an adequate cash reserve to use                                                            
in cash managing  its week-to-week  business relationships".  Rather                                                            
than  incorporating  language   into  regulation  or  Statute,  this                                                            
legislation would "recommend  a policy for the Legislature to follow                                                            
to extend the  life of the CBR" by "jointly and equally"  drawing on                                                            
both the ERA  and the CBR. The intent  is to extend the life  of the                                                            
CBR  with the  hope  that the  State  could  reach the  point  where                                                            
revenue from  a gas pipeline or oil  field expansions could  provide                                                            
additional  revenue  to the State.  "On  the surface"  this is  good                                                            
policy … some  decision should be  made. While he had supported  the                                                            
Percent  of Market  Value  (POMV)  plan legislation  that  had  been                                                            
discussed the previous  year as a means through which to address the                                                            
State's  fiscal  dilemma,  the  Legislature   had  not  adopted  it.                                                            
Therefore another plan  must be pursued through which to address the                                                            
continuing problem. Compromises along the way would occur.                                                                      
Senator Stedman  shared that his concern with this  proposal is that                                                            
neither a maximum CBR or  ERA draw amount limit is specified nor has                                                            
a "trigger  point" or a specified  CBR balance been identified  upon                                                            
which  time  the draw  would  be split  between  the  two  accounts.                                                            
Nonetheless, he would not  oppose advancing the bill because he felt                                                            
that the  "debate  needs to  go forward".  It would  be in the  best                                                            
interest of  the State to further  discuss and debate the  merits of                                                            
the bill. "Clearly the  numbers" and the sponsor's presentations are                                                            
very "enlightening. The  impact is minimal" in comparison to that of                                                            
imposing a  State income or sales  tax "on the individual  wealth of                                                            
the Alaskan residents".                                                                                                         
Senator  Stedman suggested  that,  in the  "finer points  of a  long                                                            
range  fiscal  plan", consideration   be given  to  incorporating  a                                                            
trigger point of, for example,  a $2.5 billion CBR balance being the                                                            
point at which  any draw would be equally split between  the CBR and                                                            
the  ERA. Thus  the ERA  would not  be utilized  were  the State  to                                                            
experience "the good fortune"  of such things as economic expansion,                                                            
additional  resource development  revenues,  and budgetary  controls                                                            
that negated the need for  a CBR draw and its balance remained above                                                            
the  specified threshold.  He  considered  the "Permanent  Fund  the                                                            
source of  capital of last  resort for virtually  everything  in the                                                            
State".  It  is estimated  that  the  CBR would  contain  funds  for                                                            
approximately another ten  years; therefore the State must develop a                                                            
plan that would fund State  operations until at least the year 2015.                                                            
10:07:16 AM                                                                                                                   
Senator Stedman  desired that the State's policy decisions  relating                                                            
to this  bill would include  a maximum ERA  draw amount. This  issue                                                            
would require more work  than the issue of designating a CBR trigger                                                            
balance. "The  point is that" it would be very easy  for Legislators                                                            
to appease  constituents by presenting  "more proposals for  capital                                                            
spending than the State  could possibly fund … and it is also easier                                                            
to let  the budget  grow than to  hold it  back". Easily  accessible                                                            
funding could  serve to increase the  State's operating budget  to a                                                            
point  that would  not  be in  the best  financial  interest of  the                                                            
Senator  Stedman concluded  therefore that  incorporating a  maximum                                                            
limit on  the ERA  draw in addition  to establishing  a CBR  Trigger                                                            
mechanism  balance would be  worthwhile efforts  in regards  to this                                                            
bill. When this issue moves  from this Committee to the Senate Rules                                                            
Committee,  it should  be  accompanied  by a  clear  message to  the                                                            
people in the  State "that the Legislature is serious  about dealing                                                            
with  this  fiscal  issue".  The  State's   fiscal  issue  has  been                                                            
discussed for  years and cannot be ignored, even now  when the price                                                            
of North Slope  crude oil is in the range of $48 a  barrel. High oil                                                            
prices  would provide  additional  time in  which the  issue can  be                                                            
10:09:54 AM                                                                                                                   
Senator  Dyson concurred  with Senator  Stedman's  remarks and  also                                                            
echoed Senator  Stedman's compliments regarding the  efforts exerted                                                            
by Senator  Wilken in the  development of  this legislation  and his                                                            
"clear" portrayal  of the State financial  situation going  forward.                                                            
Senator Dyson  stated that  as the solutions  to the State's  fiscal                                                            
crisis are  discussed, it  would be his desire  that in addition  to                                                            
the  inclusion  of such  things  as a  "trigger  point"  on the  CBR                                                            
balance and "stringent  restraints" on State spending, that prior to                                                            
utilizing  ERA funds,  consideration  be  given to  incorporating  a                                                            
general  State tax.  He would  support  "a consumption  tax of  some                                                            
sort".  A paradigm  shift  is occurring  and these  discussions  are                                                            
alerting  the  public  that  the  State  could  not  continue  "with                                                            
business as usual". Tough decisions must be made.                                                                               
Senator  Dyson stated  that, while he  would object  to a motion  to                                                            
move this bill from Committee, the discussion is valuable.                                                                      
In  response  to a  question  from  Co-Chair  Green,  Senator  Dyson                                                            
restated that he would object to moving the bill from Committee.                                                                
Co-Chair  Green asked whether  the reason for  that position  was to                                                            
allow the  Committee to conduct  further the  work on it as  Senator                                                            
Dyson's desire  to not move the bill from Committee  was in conflict                                                            
with  his earlier  remarks  in  support  of developing  legislation                                                             
through which to address the State's fiscal gap.                                                                                
10:12:09 AM                                                                                                                   
Senator  Dyson opined  that a "better  product"  could be  developed                                                            
that  would  meet  his and  Senator  Stedman's  concerns.  While  he                                                            
"guessed" that  the bill would move forward, it would  do so without                                                            
"his support at this time".                                                                                                     
Co-Chair Green  asked Co-Chair Wilken whether his  desire is for the                                                            
legislation to move forward  at this time or whether the suggestions                                                            
presented   by  Senator  Stedman   and  Senator  Dyson  be   further                                                            
considered by this Committee.                                                                                                   
10:12:45 AM                                                                                                                   
Co-Chair  Wilken   responded  that  due  to  the  amount   of  other                                                            
legislation that the Committee  must address during the limited time                                                            
remaining in this  Legislative session and the fact  that he did not                                                            
expect this bill to be  adopted by the Legislature this year or even                                                            
the  following  year,  his desire  would  be  to  move it  from  the                                                            
Committee  at this  time. This  "very flexible"  policy legislation                                                             
could be revisited  and adjustments  could be made were the  need to                                                            
arise. He  noted that the  bill could be  returned to the  Committee                                                            
for further  consideration and that  he is receptive to some  of the                                                            
suggestions  that were  offered.  In view  of the  favorable  fiscal                                                            
situation  that  the State  is  currently  experiencing,  it is  his                                                            
determination  that  this  legislation  would  not be  awarded  much                                                            
forward  momentum.  Were  the decision  made  to  keep the  bill  in                                                            
Committee,  he  doubted  it  would  receive   another  hearing  this                                                            
Co-Chair Green commented  that in 1997, 1999, and 2002, she had been                                                            
"very involved"  in efforts to protect  the Permanent Fund  Dividend                                                            
and  incorporate  inflation  proofing of  the  Fund in  the  State's                                                            
Constitution.  This purpose was to protect the Fund  from being "the                                                            
focus  of the  conversation"  when  addressing  the  State's  fiscal                                                            
challenge.  It is frustrating  that  those efforts  did not come  to                                                            
fruition. Nonetheless,  language that is worthy of mentioning in Co-                                                            
Chair Wilken's aforementioned  presentation is the line item on page                                                            
25 that states that this  legislation "strengthens the Alaska's bond                                                            
rating and saves millions  of dollars". "There's a terrible irony in                                                            
the State's" funding, bonding,  and revenue scenarios because "we do                                                            
not use anything  from the Permanent Fund earnings";  that money "is                                                            
not considered part of  the State's revenue stream … Therefore, it's                                                            
not part of the  State's fiscal plan, it doesn't reflect  as well as                                                            
it should on" the State's  bond rating. However, people who "survey"                                                            
the State's  debt  situation determine  that the  State has  minimal                                                            
debt. Nonetheless,  they point out  that "the State does  not have a                                                            
fiscal plan, which really  means you don't have an income tax". This                                                            
is  being  mentioned  as,  today,  April  15th,  is  the  date  that                                                            
individual's federal  income tax is due. She declared  that she does                                                            
not support a State income  tax and for that reason alone, she is in                                                            
favor of this  legislation. The State must determine  how to improve                                                            
its ability,  "in times of  need", to bond  for a needed project  by                                                            
being able  to show that  the Permanent Fund  is a component  of the                                                            
State's portfolio.  Currently, that  is not the case. It  is "awful"                                                            
that  the  State must  be  required  to  show "on  paper"  that  the                                                            
Legislature  could  use Permanent  Fund  earnings,  even though  the                                                            
Legislature  already   has  the  authority  to  do   so.  "It's  not                                                            
prohibited,  it's  allowed,  it's provided  and  … nothing  in  this                                                            
should constitute a limitation on that right or charge".                                                                        
10:17:12 AM                                                                                                                   
Co-Chair Green voiced appreciation  for Co-Chair Wilken' development                                                            
of legislation  that would remove  "pressure" on both systems.  This                                                            
legislation,  "more than anything"  protects  the CBR. "It  ends the                                                            
conversation of  'oh, how horrible that you have to  take money from                                                            
the CBR'".                                                                                                                      
10:17:37 AM                                                                                                                   
Senator Dyson  voiced appreciation for Co-Chair Green's  remarks and                                                            
clarified  that  his comments  should  not  be misconstrued,  as  he                                                            
"clearly"  understands that  the Permanent  Fund was established  to                                                            
provide  funding   when  the  day   came  that  oil  revenues   were                                                            
insufficient  to  fund  State  operations.  Nothing  more  would  be                                                            
required to allow "the  Legislature to access the ERA for support of                                                            
government". Accusations  that he is "much too idealistic  or naïve"                                                            
occur when  he shares his position  that the three sources  of State                                                            
income: revenues,  the CBR, and the ERA, should be  accessed in that                                                            
order rather  than being  viewed as equals.  The CBR should  be used                                                            
for the short-term  and the ERA for the long-term.  He would support                                                            
utilizing "the  ERA to support a level of government  that the State                                                            
requires  when revenues  are insufficient  and  the CBR approaches"                                                             
some determined minimal threshold.                                                                                              
AT EASE 10:19:35 AM / 10:19:45 AM                                                                                           
Co-Chair Wilken reiterated  his earlier comment that, "the beauty of                                                            
this  is that  it provides  a  great deal  of flexibility  for  this                                                            
Legislature  and all  Legislatures  that will  follow  until we  can                                                            
build a bridge to development".  The details would be developed over                                                            
time, as currently  sufficient funds  are available; however,  there                                                            
would  be a  need to  complete the  task within  four,  six, or  ten                                                            
years.  That is  what  this legislation  "is  all about".  He  again                                                            
voiced  appreciation  for  the  support  that  the  legislation  has                                                            
received.  It is a  flexible plan  and would provide  one more  tool                                                            
through which  to balance the State's  budget, "with minimal  impact                                                            
to families and those people who choose to invest" in the State.                                                                
Co-Chair  Green asked  regarding  the use  of the  word "policy"  in                                                            
Section 1(b), line five,  page one of the bill; specifically whether                                                            
a "policy"  differs from  being a  mandate or  a requirement  or the                                                            
word "shall", in that it is a suggestion.                                                                                       
Co-Chair Wilken responded  that, in this sense, the term "policy" is                                                            
a  suggestion:  it  could  be  ignored,  changed,  or  whatever  the                                                            
Legislature seated at the time, might feel appropriate.                                                                         
Co-Chair  Wilken  moved  to  report the  bill  from  Committee  with                                                            
individual recommendations and accompanying fiscal note.                                                                        
Senator Dyson objected.                                                                                                         
A roll call was taken on the motion.                                                                                            
IN FAVOR: Senator  Olson, Senator Hoffman, Co-Chair  Wilken, and Co-                                                            
Chair Green                                                                                                                     
OPPOSED: Senator Dyson and Senator Stedman                                                                                      
ABSENT: Senator Bunde                                                                                                           
The motion to report the bill from Committee PASSED (4-2-1).                                                                    
SB 88 was REPORTED  from Committee  with Department of Revenue  zero                                                            
Fiscal Note #1, dated February 15, 2005.                                                                                        

Document Name Date/Time Subjects