04/06/1998 01:40 PM Senate JUD

                                                                               
        SJR 18 - CONST AM: PERM. FUND INCOME & DIVIDEND                        
                                                                               
                                                                               
MS. RENEE HOWELL, staff to Senator Lyda Green, presented SJR 18,               
which would require a vote of the people to spend any of the                   
earnings reserve of the Permanent Fund. The measure would also                 
inflation-proof the Permanent Fund.  MS. HOWELL explained that the             
bill would require voters' approval to cap or lower dividends from             
the permanent fund or change the fund in any way.                              
                                                                               
Number 082                                                                     
                                                                               
MR. JIM KELLEY, Director of Communications for the Alaska Permanent            
Fund Corporation (APFC), reported that their attorney has advised              
APFC that the adoption of this amendment may weaken the state's                
position that the income of the fund is not subject to taxation.               
MR. KELLEY also commented on the letter submitted from Mr. Michael             
O'Leary that talked about the volatility of the stock market. MR.              
KELLEY said that Alaska has enjoyed the upside of this volatility              
in recent years but may also sometime face the downside and the                
legislature may decide they want to change the distribution of                 
funds, even put them into an endowment or another type of                      
structure. He said if a change is put into the Constitution, it                
will be difficult to change again in the future.                               
                                                                               
SENATOR PARNELL asked if the inflation proofing calculation on page            
two was related to the Consumer Price Index (CPI), and, if so if               
MR. KELLEY thinks the CPI could overstate or understate inflation.             
MR. KELLEY agreed this was possible and said the CPI lags one year             
behind as well.                                                                
                                                                               
SENATOR PARNELL asked if MR. KELLEY believes inflation proofing                
should be included in the Constitution and, if so, how should it be            
calculated? MR. KELLEY said this is how the law is written, with               
the inflation rate calculated relative to the CPI.                             
                                                                               
SENATOR PARNELL asked if the language in this bill reflects how the            
dividend is currently calculated and MS. HOWELL agreed it is the               
same.                                                                          
                                                                               
CHAIRMAN TAYLOR asked if making a deposit from the undistributed               
income account to the corpus of the fund could adversely impact                
future dividends? CHAIRMAN TAYLOR then asked what amount should be             
left in the undistributed income so dividends would not be                     
adversely impacted. MR. KELLEY replied $625 million provided that              
the fund realizes the anticipated median expected return for next              
year.                                                                          
                                                                               
CHAIRMAN TAYLOR questioned why there was no reduction in the                   
dividend amount as a result of previous deposits, he asked MR.                 
KELLEY if the fund had always surpassed its median estimates. MR.              
KELLEY replied it had in the past couple of years.                             
                                                                               
CHAIRMAN TAYLOR asked if he had recommended a change to the manner             
in which the income of the fund is calculated. MR. KELLEY replied              
that the Trustees has set up a committee on investment policy                  
options to look at other possible distribution policies for the                
fund, but have as of yet come forward with no specific                         
recommendations. CHAIRMAN TAYLOR asked if that change would be                 
appropriately added as an amendment to this bill. MR. KELLEY said              
he was not sure the board was ready to do that, but he would find              
out. CHAIRMAN TAYLOR commented that he found it ludicrous that                 
someone was waging a campaign to convince people that this bill                
will result in lower dividends. MR. KELLEY responded that any                  
change to the fund generates a financial projection which explains             
all the possible consequences of the change. MR. KELLEY said he has            
distributed this paper to members of the Legislature. He stated                
that the Legislature makes the policy regarding the fund, but the              
fact is that they will not continue to get the high rate of return             
on the fund they have gotten over the past few years. Consequently,            
a future liability is being created which may necessitate use of               
the earnings reserve, or the reduction of the dividend. CHAIRMAN               
TAYLOR asked if they should amend the formula so the undistributed             
income can just spill over into the fund unless the people vote to             
spend it on something else. MR. KELLEY said the formula                        
specifically says the income available for distribution is the                 
income of five years times 21 percent, but may  not exceed the                 
amount of money earned in a given year plus the earnings reserve               
account. He believes this formula was written to keep the fund from            
paying out more than it takes in during any given year.                        
                                                                               
CHAIRMAN TAYLOR asked if the board was scheduled to meet soon. MR.             
KELLY indicated the board would meet on April 22nd. CHAIRMAN TAYLOR            
asked MR. KELLEY to bring this issue up to them so any concern                 
could be addressed before the passage of this bill. MR. KELLEY                 
agreed to do so.                                                               
                                                                               
SENATOR ELLIS asked if the sponsor was available to speak to her               
legislation. CHAIRMAN TAYLOR said she was not.  SENATOR ELLIS asked            
about the language in section one, questioning if that language was            
what was intended to appear on the ballot or to be included as the             
title of the ballot initiative. MS. HOWELL was unable to respond to            
this question and SENATOR ELLIS asked generally if it was routine              
to for this to occur. CHAIRMAN TAYLOR said he was not certain but              
he believed the language does not bind the Lt. Governor to describe            
the initiative in that manner.                                                 
                                                                               
CHAIRMAN TAYLOR then took testimony from MR. TERBECK, who testified            
via teleconference from Anchorage. MR. TERBECK said 25 percent of              
Alaska Natives have no other income and he does not believe the                
Legislature should touch the permanent fund. He stated that if they            
need money they should bring back a state income tax. MR. TERBECK              
suggested the permanent fund dividend might be better distributed              
over a twelve month period. CHAIRMAN TAYLOR assured MR. TERBECK                
that there is nothing before either body of the Legislature that               
will invade the permanent fund.                                                
                                                                               
SENATOR MILLER moved SJR 18 from committee with individual                     
recommendations. Without objection, it was so ordered.