Legislature(2003 - 2004)

05/17/2003 10:15 AM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
            SJR 19-CONST. AM: PERMANENT FUND INCOME                                                                         
                                                                                                                                
SENATOR GEORGIANA  LINCOLN, sponsor of SJR 19,  and Representative                                                              
Eric  Croft,  sponsor  of HJR  3  (House  companion  legislation),                                                              
introduced themselves.                                                                                                          
                                                                                                                                
SENATOR LINCOLN  told members that  members' bill  packets contain                                                              
a copy  of SJR 19,  its fiscal note,  a sectional analysis,  and a                                                              
letter  from  former  Governor Jay  Hammond.  She  described  each                                                              
section of SJR 19 as follows.                                                                                                   
                                                                                                                                
   · Section 1 requires that the income of the permanent fund be                                                                
     deposited into  the earnings reserve account  and distributed                                                              
     according  to  specific statutes  as  they  read  on July  1,                                                              
     2002,   which   contains   a  statutory   formula   for   the                                                              
     distribution.                                                                                                              
                                                                                                                                
   · Section 2 requires that the statutes referred to in Section                                                                
     1  remain   in  effect  as   they  were  on  July   1,  2002,                                                              
     essentially freezing  those statutes. That will  allow future                                                              
     Legislatures to  appropriate funds from the  earnings reserve                                                              
     account only  as authorized under the frozen  statutes unless                                                              
     the voters ratify a different appropriation.                                                                               
                                                                                                                                
   · Section 3 suspends and repeals the [constitutional]                                                                        
     amendment  if  the  IRS  makes  any  adverse  ruling  on  the                                                              
    earnings reserve account regarding taxation of the fund.                                                                    
                                                                                                                                
SENATOR LINCOLN  said the  crux of the  legislation is  to protect                                                              
the permanent  fund dividend.  She noted that  members of  a House                                                              
committee  met that  morning  and discussed  implementing  various                                                              
taxes  to  close the  fiscal  gap  and  using the  permanent  fund                                                              
earnings, which is frightening for constituents.                                                                                
                                                                                                                                
REPRESENTATIVE  CROFT informed  members that  he introduced  HJR 3                                                              
because  he believes  the  public  should weigh  in  on this  very                                                              
important  public policy  decision. The public  is very  concerned                                                              
about the  Legislature's ability  to take  away the dividend.  The                                                              
Legislature  has  been  a  responsible  steward  of  the  dividend                                                              
throughout  the permanent  fund's history,  but the public  should                                                              
be involved  in the  decision of whether  the Legislature  is able                                                              
to use  any portion of the  earnings. He said  this constitutional                                                              
amendment  assures  the  public   it  will  be  involved  in  that                                                              
decision.                                                                                                                       
                                                                                                                                
REPRESENTATIVE  CROFT  said,  regarding the  taxation  issue,  the                                                              
courts  apply a  number of  tests  to determine  whether a  public                                                              
fund  should be  taxable. The  two  tests of  primary concern  are                                                              
whether the  fund is  an integral  part of  the state and  whether                                                              
its proceeds  accrue  to a private  benefit.  He does not  believe                                                              
establishing   the  dividend  in   the  Alaska  Constitution,   by                                                              
statute,  or by  regulation will  change  whether the  fund is  an                                                              
integral part  of the state or whether  it is a public  or private                                                              
benefit.  He  maintained  that   the  Michigan  Educational  Trust                                                              
ruling should  provide the Legislature  with solace  regarding the                                                              
tax  issue  and  said he  does  not  believe  this  constitutional                                                              
change will create any new risk.                                                                                                
                                                                                                                                
REPRESENTATIVE CROFT concluded:                                                                                                 
                                                                                                                                
     We put on  those provisions that Senator  Lincoln talked                                                                   
     about at the  end that give protection if  my reading of                                                                   
     those  cases is  wrong. So,  we've tried  to protect  it                                                                   
     two or  three different ways  to make sure that  this is                                                                   
     not taxed,  and if we can  solve that problem,  then the                                                                   
     fundamental  policy question  becomes is it  appropriate                                                                   
     that we  ask the  people before  we change the  dividend                                                                   
     or  use their  earnings. We  believe it  is and that  is                                                                   
     why we introduced this constitutional amendment.                                                                           
                                                                                                                                
SENATOR LINCOLN  referred members to  a 1998 letter  from Morrison                                                              
& Foerster, a  legal firm in Washington, D.C.,  that addresses the                                                              
tax issue.  In the  executive summary the  author says  that three                                                              
primary  arguments support  the position  that the  income of  the                                                              
fund and the APFC  are not subject to federal taxation.  The first                                                              
argument is that  the constitutional doctrine of  implied immunity                                                              
of state instrumentality  of federal taxation applies.  The second                                                              
argument is  that, according  to the history  of the  IRS rulings,                                                              
income earned  by a state  or an integral  part of a state  is not                                                              
specifically  subjected  to  taxation.   The  third  argument,  an                                                              
alternative, is  that the income  is excluded from Section  115 of                                                              
the IRS  Code, which  excludes gross income  from any  income that                                                              
is derived  from the conduct  of an essential government  function                                                              
and accrues to the state or political subdivision.                                                                              
                                                                                                                                
SENATOR FRENCH  thanked Senator  Lincoln and Representative  Croft                                                              
for introducing  the resolutions  and said, in  his mind,  this is                                                              
the central public  policy question before the state  for the next                                                              
several years. The  issue is whether to let the people  have a say                                                              
before the  Legislature takes part  of their dividends  and spends                                                              
that money on government. He stated:                                                                                            
                                                                                                                                
     That is  a train that's  on the tracks  and I think  the                                                                   
     history  of the permanent  fund and  the history  of our                                                                   
     grappling  with  the fiscal  issues  in the  state  says                                                                   
     that  the people  expect to  vote. The  people expect  a                                                                   
     say and  the only way they're  going to get a say  is if                                                                   
     this or a  very similar amendment gets in  front of them                                                                   
     on the ballot  soon so that this is subject  to a public                                                                   
     vote.                                                                                                                      
                                                                                                                                
He said  he is  not very  concerned about  the tax  issue. He  has                                                              
read the Morrison  & Foerster letter twice and his  reading is the                                                              
permanent fund is  nothing but an integral part of  the state.  It                                                              
is  made   of  Alaskan   oil  that   has  been  transferred   from                                                              
underground to a  bank above ground. He thanked  both sponsors for                                                              
the  work  they  have  done  and   stated  full  support  for  the                                                              
resolutions.                                                                                                                    
                                                                                                                                
CHAIR SEEKINS  said the Senate  Judiciary Committee plans  to hold                                                              
hearings  during the  interim  to  get public  input  on the  POMV                                                              
issue.  He intends  to  work in  conjunction  with  APFC Board  of                                                              
Trustees and to  discuss SJR 19 and HJR 3 simultaneously.  He said                                                              
his concern is that  the legal opinion cited today  was written in                                                              
1998 and  he wants  to make  sure the  Legislature is  updated. He                                                              
feels it would be  valid to ask for a legal opinion  from the IRS.                                                              
He  emphasized his  intent is  to make  sure the  public trust  is                                                              
protected.                                                                                                                      
                                                                                                                                
SENATOR  THERRIAULT  indicated  he did  not  have  a copy  of  the                                                              
letter from former Governor Hammond.                                                                                            
                                                                                                                                
MR.  BRIAN  HOVE,  committee  aide,  said  he  would  be  sure  to                                                              
distribute copies of that letter to members.                                                                                    
                                                                                                                                
SENATOR THERRIAULT then stated:                                                                                                 
                                                                                                                                
     I really would  like to take a look at that.  Of course,                                                                   
     we saw  a letter  from a former  Governor the other  day                                                                   
     that  suggested that  to save  the  longevity bonus,  we                                                                   
     just go  back and  ignore the Zobel  case. I don't  know                                                                   
     exactly  how  many  times  we have  to  lose  that  case                                                                   
     before  it's clear that  we can't  do what the  Governor                                                                   
     suggested. The  other thing, Senator, I'm not  sure this                                                                   
     letter  from Mr.  Martin -  is this  something that  you                                                                   
     had included in the packet and had distributed?                                                                            
                                                                                                                                
SENATOR LINCOLN  was not  aware of  the letter Senator  Therriault                                                              
was referring to.                                                                                                               
                                                                                                                                
REPRESENTATIVE  CROFT pointed  out that Mr.  Martin was  available                                                              
to testify  at the  meeting scheduled the  prior day,  but because                                                              
that meeting  was postponed  until today, Mr.  Martin sent  in his                                                              
written testimony.                                                                                                              
                                                                                                                                
CHAIR SEEKINS  repeated his  intent is to  include SJR 19  as part                                                              
of the  committee's discussions on  the permanent fund  during the                                                              
interim.                                                                                                                        
                                                                                                                                
SENATOR ELLIS said  his personal preference is  that the committee                                                              
take action  on SJR  19 today  and move  it to  the full body  for                                                              
consideration.                                                                                                                  
                                                                                                                                
CHAIR SEEKINS said  he is concerned about the  legal ramifications                                                              
and does  not believe the committee  can address those  before the                                                              
end of session.                                                                                                                 
                                                                                                                                
10:32 a.m.                                                                                                                    
                                                                                                                                
SENATOR THERRIAULT  indicated the Board  of Trustees, at  its next                                                              
meeting, plans  to discuss  the issue of  who would  have standing                                                              
to request an IRS ruling and the mechanics of that procedure.                                                                   
                                                                                                                                
CHAIR  SEEKINS maintained  that  answers  to those  questions  are                                                              
essential.                                                                                                                      
                                                                                                                                
SENATOR  FRENCH said  his view  differs. He  stated the  IRS is  a                                                              
subsidiary of the  U.S. Congress, which is where  this battle will                                                              
be fought if it  is to be fought decisively. If  the IRS issues an                                                              
adverse  ruling, the  state will  take  the ruling  to court.  The                                                              
court  will not  look to  previous IRS  rulings; it  will look  to                                                              
Congress  to determine  whether Congress  has written  a law  that                                                              
affects  this fund.  He noted  that Congress  has been  enormously                                                              
reluctant to  tax the state.  He believes  that in the  absence of                                                              
clear direction  from Congress,  the court  is highly  unlikely to                                                              
say that  the United  States government can  tax an  integral part                                                              
of the state.                                                                                                                   
                                                                                                                                
CHAIR SEEKINS  responded that Senator  French has much  more faith                                                              
in the court system than he does.                                                                                               
                                                                                                                                
10:35 a.m.                                                                                                                    
                                                                                                                                
SENATOR THERRIAULT  indicated that  he is  not concerned  that the                                                              
permanent fund,  in its  current structure, will  be deemed  to be                                                              
taxable.  He  believes  Congress  would  have to  take  action  to                                                              
change that  status. However,  he is  concerned that  establishing                                                              
the  payout  mechanism  in  the  Alaska  Constitution  instead  of                                                              
keeping  it completely  within legislative  control could  trigger                                                              
the  question of  whether  the fund  is being  used  for a  public                                                              
purpose; that  is the question he  would like the IRS  to address.                                                              
He  then  said he  does  not  understand  the  need to  push  this                                                              
legislation  through now  since the  public could  not vote  on it                                                              
until next year.  He believes it is important to  take the time to                                                              
find out  who has  standing to make  a request  for a  ruling from                                                              
the IRS.                                                                                                                        
                                                                                                                                
SENATOR  FRENCH maintained  the  particular genius  of  SJR 19  is                                                              
Section 3,  which would revert the  permanent fund to  its pre-tax                                                              
status should Congress take action.                                                                                             
                                                                                                                                
CHAIR  SEEKINS maintained  it is  better to have  a clear  picture                                                              
ahead of time and reduce any risk.                                                                                              
                                                                                                                                
REPRESENTATIVE  CROFT  asked  if  the committee  would  be  taking                                                              
public testimony on SJR 19.                                                                                                     
                                                                                                                                
CHAIR SEEKINS said  the committee would have ample  opportunity to                                                              
take  public testimony  on  SJR 19  at this  time  and during  the                                                              
interim.                                                                                                                        
                                                                                                                                
SENATOR  LINCOLN said  legal counsel  from  Legislative Legal  and                                                              
Research  Services  does not  believe  the Morrison  and  Foerster                                                              
opinion needs  to be  updated. Director  Tam Cook reiterated  that                                                              
assets and  income of the  permanent fund  are those of  the state                                                              
and  therefore   are  not   subject  to   federal  taxation.   She                                                              
questioned opening  Pandora's box  when the resolution  contains a                                                              
repeal clause.                                                                                                                  
                                                                                                                                
CHAIR SEEKINS  argued the  committee should  address the  question                                                              
of who  has standing to  request an IRS  opinion and how  the POMV                                                              
proposal  would  work.  He  said  he is  not  ready  to  determine                                                              
whether constitutional  amendments  for both SJR  19 and  the POMV                                                              
proposal  should be on  the ballot  simultaneously without  giving                                                              
full consideration to both proposals first.                                                                                     
                                                                                                                                
REPRESENTATIVE CROFT  stated it is his understanding  that the IRS                                                              
is  reluctant  to  issue prospective  rulings.  He  then  informed                                                              
members:                                                                                                                        
                                                                                                                                
     The  integral   part  of  the  state  test,   which  the                                                                   
     Michigan  Educational Trust, the  Sixth Circuit  in that                                                                   
     case   determined,  where   private   money  went   into                                                                   
     government  hands  and  then   was  paid  back  out  for                                                                   
     tuition,  they ruled that  was an  integral part  of the                                                                   
     state  -  that educational  trust.  This  is  government                                                                   
     money that  started as government  money and  stays. And                                                                   
     the  distinction  between   putting  it  in  regulation,                                                                   
     statute   or   the  Constitution,   for   example,   Mr.                                                                   
     Chairman, the  CBR is no  less governmental by  the fact                                                                   
     that we have  a three-quarter vote on it.  The fact that                                                                   
     you  have  made  it  through  a  different  governmental                                                                   
     process   -    accessing   it   through    a   different                                                                   
     governmental  process,  sometimes with  higher  hurdles,                                                                   
     doesn't  change  its essential  governmental  character.                                                                   
     But to make  doubly, triply sure, we put  that Section 3                                                                   
     on.                                                                                                                        
                                                                                                                                
     I  hope we  don't let  this taxation  issue, which  will                                                                   
     never  conclusively  be  solved  I  believe,  delay  the                                                                   
     public  right   to  have  a  constructive  say   in  the                                                                   
     dividend  and the  future  of the  fund.  I'm glad  that                                                                   
     we're  going to  take it out  to public  hearing but  as                                                                   
     long  as the ultimate,  complete power  rests solely  in                                                                   
     the  legislature,  I don't  think  you're going  to  get                                                                   
     broad  public authority to  use some  of those funds.  I                                                                   
     don't  think you're  going  to get  that public  buy-in.                                                                   
     So,  I understand  what you're  going  to do.  Obviously                                                                   
     I'm  disappointed  about it.  I'll  let you  hear  other                                                                   
     testimony  or not  as  you will,  but  I appreciate  you                                                                   
     hearing it here today.                                                                                                     
                                                                                                                                
CHAIR SEEKINS  replied that every  legislator should  advocate for                                                              
his  or her  position. He  believes,  as a  former permanent  fund                                                              
trustee, that  the Legislature should  not hurry into  a position.                                                              
He then took public testimony.                                                                                                  
                                                                                                                                
MS. VICTORIA  PATE, a  resident of Nikiski  testifying on  her own                                                              
behalf, stated  strong support  for SJR 19.  She believes  it will                                                              
guarantee for  the permanent  fund what 83  percent of  the voters                                                              
supported in  1999. She said almost  every candidate she  heard in                                                              
November  of  2002  promised  not  to  touch  the  permanent  fund                                                              
without a  vote of the  people. She believes  SJR 19  will fulfill                                                              
that promise.  She asked members to  pass SJR 19 out  of committee                                                              
so that all members  of the Senate could vote on  it. She believes                                                              
Section  3  provides  a  back  door  if  the  IRS  does  not  rule                                                              
favorably.                                                                                                                      
                                                                                                                                
10:46 a.m.                                                                                                                    
                                                                                                                                
MR.  JAMES PRICE,  a resident  of  Nikiski testifying  on his  own                                                              
behalf,  echoed  Ms.  Pate's  testimony.  He believes  SJR  19  is                                                              
supported by an  overwhelming majority of the  citizens of Alaska.                                                              
He believes  the threat of  IRS taxation  is real, however  SJR 19                                                              
recognizes  and  addresses  that threat.  He  strongly  encouraged                                                              
legislators  to  give  Alaskans  the  opportunity  to  vote  on  a                                                              
constitutional amendment.                                                                                                       
                                                                                                                                
MR. BILL  ARNOLD, a  resident of  Sterling testifying  on  his own                                                              
behalf,  thanked  Representative  Croft and  Senator  Lincoln  for                                                              
introducing  the  resolutions. He  said  the Morrison  &  Foerster                                                              
1998 report  boils down to two  issues. First, the report  says it                                                              
might   be   argued   that   the   implied   immunity   of   state                                                              
instrumentalities from  federal taxation applies.  Second, federal                                                              
taxation  cannot reach  income earned  by  an integral  part of  a                                                              
state.  He  said he  has  researched  germane U.S.  Supreme  Court                                                              
cases  and believes  the argument  boils down  to states'  rights.                                                              
The IRS promulgates  regulations and interprets the  code, but the                                                              
court  would  decide  any  conflict. However,  it  all  begins  in                                                              
Congress.  [A portion of  Mr. Arnold's  testimony was  inaudible.]                                                              
He said his desire is to protect future generations of Alaskans.                                                                
                                                                                                                                
MR.  BOB  BARTHOLOMEW,  Chief  Operating  Officer  of  the  Alaska                                                              
Permanent  Fund Corporation,  told  members the  current board  of                                                              
trustees  has  not  deliberated  SJR  19  and  taken  an  official                                                              
position. He said  many people have commented that  the Morrison &                                                              
Foerster report  supports the tax-exempt  status of  the permanent                                                              
fund  as  it  is  today.  The  executive  summary  and  the  final                                                              
paragraphs of  the opinion focus  on the proposed change.  He said                                                              
the Board of  Trustees has been concerned about  understanding the                                                              
effects of  that change and plans  to focus on  them, particularly                                                              
on the  creation of  a private  benefit. He  informed members  the                                                              
Board of  Trustees will consider its  role in this issue,  if any,                                                              
at  its  June meeting.  The  board  needs  to determine  its  role                                                              
versus the  role of the  executive branch  versus the role  of the                                                              
legislative branch.                                                                                                             
                                                                                                                                
MR. BARTHOLOMEW  told members  if the policy  decision is  to move                                                              
forward, he  hopes two issues are  considered. The first  issue is                                                              
the Board of  Trustees has proposed constitutional  changes to the                                                              
permanent fund because  the board deals with how  much money comes                                                              
out  of the  permanent  fund each  year and  desires  to make  the                                                              
rules that govern  the permanent fund consistent  with its current                                                              
investment strategy.  The board  believes that issue  is critical,                                                              
regardless of the  outcome of SJR 19. The second  issue is that if                                                              
the Board  of Trustees'  percent of  market value (POMV)  proposal                                                              
is adopted,  the mechanics  of it would  be inconsistent  with SJR                                                              
19. Under  SJR 19,  the calculation of  the dividend  amount would                                                              
be  based  on  existing  statute,  but  the  board  believes  that                                                              
calculation  was designed  for a  fund that was  created 26  years                                                              
ago  and it  no longer  works  in the  same  way. He  said if  the                                                              
dividend  were enshrined  in the  Alaska  Constitution, the  board                                                              
would  recommend that  the Legislature  look at  using a  dividend                                                              
calculation  method   that  is  compatible  with   the  POMV.  Mr.                                                              
Bartholomew  noted that legal  counsel to  the APFC was  available                                                              
to answer questions about the tax status.                                                                                       
                                                                                                                                
10:55 a.m.                                                                                                                    
                                                                                                                                
SENATOR THERRIAULT  noted Mr. Storer  said last week  the trustees                                                              
are  primarily interested  in  the POMV  because  they view  their                                                              
highest goal as  preserving the purchasing power of  the fund over                                                              
time. He  asked if the legislature  takes what he considers  to be                                                              
an  overly simplistic  step  to  ensure a  dividend  [SJR 19],  it                                                              
would be  inconsistent with the  POMV proposal, which  is designed                                                              
to preserve  purchasing power.  He stated  the philosophy  [of the                                                              
resolution] is not inconsistent but the methodology is.                                                                         
                                                                                                                                
MR. BARTHOLOMEW  said if the citizens  adopt the POMV  payout, and                                                              
SJR  19 is  also adopted,  the  mechanics  would be  incompatible.                                                              
Although  the mechanics  of  SJR 19  are in  use  today, they  are                                                              
problematic, and  one motive behind  the POMV proposal is  to make                                                              
the payout strategy work with the investment strategy.                                                                          
                                                                                                                                
SENATOR  THERRIAULT  asked if  the  question  of ensuring  that  a                                                              
percentage  of the  payout would  be  used for  dividends and  the                                                              
question  of adopting  the  POMV  methodology are  compatible  and                                                              
could be linked  or whether the two issues would  have to be posed                                                              
as separate questions.                                                                                                          
                                                                                                                                
MR.  BARTHOLOMEW  said  they  could  be  separate  questions.  The                                                              
trustees' POMV proposal  allows [up to] 5 percent of  the value of                                                              
the   permanent   fund  to   be   made  available   annually   for                                                              
distribution.  He  pointed  out  that a  House  bill  attempts  to                                                              
determine  how that  money  would be  distributed  and provides  a                                                              
mechanical  set up  that would  work with  the POMV.  He said  the                                                              
House bill  would delineate  the distribution  in statute;  SJR 19                                                              
sets a distribution method in the Constitution.                                                                                 
                                                                                                                                
SENATOR  THERRIAULT said  he noted  a previous  testifier said  if                                                              
the  POMV methodology  is  adopted,  and  a percentage  payout  is                                                              
enacted  to  guarantee  a  dividend, that  would  smooth  out  the                                                              
swings in the  dividend amount. He said that  would benefit people                                                              
who build the dividend into their budget.                                                                                       
                                                                                                                                
11:00 a.m.                                                                                                                    
                                                                                                                                
MR. BARTHOLOMEW responded:                                                                                                      
                                                                                                                                
     ...  To  reiterate,  the highest  dividend  that's  been                                                                   
     paid was  $1,950. We're projecting  two years  from now,                                                                   
     all  things  staying  equal in  the  financial  markets,                                                                   
     we'll have  a dividend of $600.  If you roll that  up to                                                                   
     a statewide  perspective, the total amount paid  out for                                                                   
     a  dividend at  its  largest was  $1.1  billion. In  two                                                                   
     years, we  project the payout  to be $400 million.  Just                                                                   
     when  you look  at  it in  that scale,  that  is a  huge                                                                   
     difference -  $1.1 billion to $400 million  - what comes                                                                   
     into    the    economy.   What's    available    changes                                                                   
     significantly  and it varies  drastically. If you  had a                                                                   
     percentage of  market value and decided  whatever amount                                                                   
     of  that you wanted  to go  to the  dividend, you  would                                                                   
     not see those  yearly swings. You'd have a  much tighter                                                                   
     range.  You would  not have  had a  $1,950 dividend;  it                                                                   
     would  have been  smaller.  You would  not  have a  $600                                                                   
     dividend;   it  would  be   larger.  Again,   everything                                                                   
     depending  on what you  pick, but if  you tried  to keep                                                                   
     the percentage  that goes to the dividend  the same, you                                                                   
     would have had a much narrower range.                                                                                      
                                                                                                                                
     But  the  more  important  issue  that  the  percent  of                                                                   
     market  value   proposal  has   is  under  the   current                                                                   
     constitutional  structure, you can  go to zero,  you can                                                                   
     have  no  distribution.  So  you  can  have  a  dividend                                                                   
     formula as  we have today that  says come this  June 30,                                                                   
     our 5-year  formula says pay  to the citizens  of Alaska                                                                   
     an $1100  dividend. If the  stock market takes a  dip or                                                                   
     there's  an international  event that  drives the  stock                                                                   
     market  down  before  June   30,  there  could  be  zero                                                                   
     available.  I think the  second most significant  change                                                                   
     that  the percent  of market  value offers  is it  would                                                                   
     remove  the   floor  that  there  would  ever   be  zero                                                                   
     available.  And that has  as large  an effect on  future                                                                   
     payouts  from  the  fund  for  dividends  or  any  other                                                                   
     purpose.                                                                                                                   
                                                                                                                                
     So  there's  a  formula issue.  You  could  improve  the                                                                   
     formula to make  it smoother, more predictable,  but you                                                                   
     could also  have a policy  decision of whether  you want                                                                   
     to  risk going  to zero  or  whether there  should be  a                                                                   
     distribution  every year. That's  the second issue  that                                                                   
     can  really   affect  payouts  in  the  future   and  we                                                                   
     believe, by  making the change, you could  achieve both.                                                                   
     A  stable consistent  payout  is one  policy issue.  The                                                                   
     second  one   is  how  do  you  want  to   approach  the                                                                   
     determination of the dividend.                                                                                             
                                                                                                                                
SENATOR  FRENCH  said  he  is concerned  about  the  effect  of  a                                                              
deflationary  period  on  the  POMV  method.  He  asked  that  the                                                              
trustees analyze  that scenario at great length  because a 10-year                                                              
period of deflation  could result in a loss of half  of the fund's                                                              
value. He  asked Mr. Bartholomew to  take back to the  trustees an                                                              
interesting  example  of a  parallel  to  the permanent  fund  and                                                              
dividend  in its  current  form. He  referred  to page  21 of  the                                                              
Morrison  & Foerster  letter,  and  explained that  another  state                                                              
created a  lifeline fund to subsidize  utility bills of  the poor.                                                              
The IRS  concluded that use  of the fund  was an integral  part of                                                              
the  state. The  funds  came from  a  state ordered  surcharge  on                                                              
utility  bills  and   were  invested  until  paid   out  to  needy                                                              
individuals.                                                                                                                    
                                                                                                                                
TAPE 03-51, SIDE B                                                                                                            
                                                                                                                                
He asked  that the trustees, as  they examine the  proposals, make                                                              
the point  that the  IRS has  looked at  state created  funds that                                                              
pay dividends  directly to  individuals and found  that use  to be                                                              
an  integral part  of the  state and  the fund  was thus  shielded                                                              
from taxation.                                                                                                                  
                                                                                                                                
MR.  ROGER  SHANNON, testifying  from  Kenai  on his  own  behalf,                                                              
said, in  regard to  SJR 19,  "The hens  have been disturbed,  the                                                              
fox is on the loose, the [indisc.] are aware."                                                                                  
                                                                                                                                
CHAIR SEEKINS closed public testimony.                                                                                          
                                                                                                                                
SENATOR ELLIS  asked that the  entire committee decide  whether to                                                              
take action on  SJR 19 at this  time. He then moved SJR  19 to the                                                              
Senate Finance Committee with its accompanying fiscal note.                                                                     
                                                                                                                                
SENATOR  THERRIAULT  objected  to  the motion.  He  asked  Senator                                                              
Lincoln  if it  was  her  intent when  she  introduced  SJR 19  to                                                              
preclude  public   and  legislative  consideration   of  the  POMV                                                              
methodology.                                                                                                                    
                                                                                                                                
SENATOR LINCOLN replied the POMV issue is separate from SJR 19.                                                                 
                                                                                                                                
SENATOR THERRIAULT  noted that  the committee  was just  told that                                                              
the  mechanics of  SJR 19  are not  compatible with  the POMV.  He                                                              
asked  if it  is her  intention to  cut off  consideration of  the                                                              
POMV proposal.                                                                                                                  
                                                                                                                                
SENATOR LINCOLN  said she  is aware  that folding  SJR 19  and the                                                              
POMV together  would create  some complications,  but she  did not                                                              
explore  those  complications  because  she  feels  very  strongly                                                              
about SJR 19.                                                                                                                   
                                                                                                                                
SENATOR  THERRIAULT maintained  that guaranteeing  a dividend  via                                                              
SJR 19  would prevent  passage of  the POMV  proposal. He  pointed                                                              
out that Mr. Storer  said if the Legislature wants  to guarantee a                                                              
dividend, SJR 19  is a clumsy way of doing that.  He asked Senator                                                              
Lincoln  why she is  not interested  in looking  at a  methodology                                                              
that would mesh with the POMV proposal.                                                                                         
                                                                                                                                
SENATOR  LINCOLN said  she  has not  concluded  that SJR  19 is  a                                                              
clumsy  way  of guaranteeing  a  dividend.  She  said she  is  not                                                              
prepared  at this point  to say  whether the  two are  compatible.                                                              
She said right now,  SJR 19 and the POMV are  very separate issues                                                              
and she  believes SJR 19  is very workable.  She then  thanked the                                                              
Chair for hearing  SJR 19 at this time. She acknowledged  that she                                                              
would be  disappointed if  the committee does  not take  action on                                                              
SJR 19  at this  time. However,  if that  is the  case, she  hopes                                                              
that  she  and  Representative   Croft  can  be  involved  in  the                                                              
discussion during the interim.                                                                                                  
                                                                                                                                
CHAIR SEEKINS said he hopes so too.                                                                                             
                                                                                                                                
CHAIR  SEEKINS  announced the  following  result  of a  roll  call                                                              
vote:  Senators   French  and  Ellis   were  in   favor;  Senators                                                              
Therriault  and  Seekins were  opposed.  Chair Seekins  noted  the                                                              
motion to move SJR 19 to the Senate Finance Committee failed.                                                                   

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