Legislature(2005 - 2006)SENATE FINANCE 532
04/15/2005 09:00 AM FINANCE
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* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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 second hearing for this bill in the Senate Finance Committee. 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 hearing. 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 State. 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 addressed. 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 Session. 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.