Legislature(2003 - 2004)

02/09/2004 08:12 AM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
[The following is a verbatim transcript.]                                                                                       
                                                                                                                                
            SJR 19-CONST. AM: PERMANENT FUND INCOME                                                                         
                                                                                                                                
MR. MARK  STOPHA: Good  morning. For the  record, my  name's Mark                                                               
Stopha, staff  for Senator Georgiana  Lincoln. She's not  able to                                                               
be  here today.  She's  attending  a funeral  for  Chief John  in                                                               
Copper  Center   and  for  approval   of  the   committee  chair,                                                               
Representative  Croft   will  present  SJR  19   and  answer  any                                                               
questions.                                                                                                                      
                                                                                                                                
REPRESENTATIVE ERIC CROFT: And this  is Representative Eric Croft                                                               
from Spenard  and I'm the author  of the House companion  of this                                                               
measure, so  Senator Lincoln asked  me to  be here to  answer any                                                               
questions.  I've learned  enough from  observing the  Senate over                                                               
the  last 8  years that  sometimes the  Senate wants  to act  and                                                               
sometimes it  wants to  talk and I'll  do whichever  the Chairman                                                               
wants this morning.                                                                                                             
                                                                                                                                
CHAIR SEEKINS:  Mr. Croft,  why don't  you do  what you  think is                                                               
best for  your position  at the  moment and  we'll hear  and then                                                               
we'll ask questions.                                                                                                            
                                                                                                                                
REPRESENTATIVE  CROFT:  Okay.  The   bill  before  you,  SJR  19,                                                               
protects the  permanent fund dividend. It  protects the inflation                                                               
proofing of  the fund and it  provides that the earnings  may not                                                               
be  used.  It's  hard  to  talk   about  this  in  a  vacuum  and                                                               
particularly  in light  of the  discussion we've  just had  about                                                               
percent of market  value. We introduced it - the  House bill over                                                               
on my side and Senator Lincoln,  the Senate bill, as an effort to                                                               
reassure  Alaskans that  their dividend  would  always be  there,                                                               
and,  in  particular that  the  current  fiscal structure  -  the                                                               
current dividend  structure that reflects the  market performance                                                               
of the  fund in  the dividend,  we thought  then and  continue to                                                               
think is appropriate.   In addition, I  think inflation proofing,                                                               
and  possibly  we  just  disagree   Mr.  Chairman,  is  the  most                                                               
important aspect of  the fund, that it provides  that my children                                                               
have the  same buying power  of the  fund, have the  same choices                                                               
available to them that we have  today. To inflation proof at less                                                               
than  the actual  rate  of  inflation I  believe  steals from  my                                                               
children those very  choices. I want this debate  to be happening                                                               
10 years and 50  years from now on what's the  proper use for the                                                               
permanent fund earnings and have  them have that same debate with                                                               
the same  effective real  buying power. So,  possibly we're  at a                                                               
situation of  sort of core  fundamental disagreement.  This would                                                               
protect a  structure that  has served  well to  provide dividends                                                               
for  Alaskan  citizens and  protect  an  inflation proofing  that                                                               
protects the  actual real value  of the  fund and protects  it by                                                               
inflation proofing  at the real  observed actual  inflation rate,                                                               
not a rate we can assume.                                                                                                       
                                                                                                                                
Percent of  market value, while  it has certain aspects  that are                                                               
in its favor, certain aspects  that are positive, assumes that we                                                               
can  guess what  is  going to  happen over  the  next 100  years,                                                               
assumes  from  the  last  100 years  of  market  performance  and                                                               
inflation  performance,  that over  the  average  it has  been  3                                                               
percent inflation  over the  last long  extended period  of time.                                                               
And over  that same period of  time, the market has  been able to                                                               
perform at about 8 percent, that  therefore we can, over the next                                                               
100  years, take  the difference,  take 5  percent. I  don't know                                                               
that. I  think if  I knew  what the  market performance  would be                                                               
over the  next 100 years  and knew  what inflation would  be over                                                               
the next 100  years, that I'd be  making a lot more  money than I                                                               
am today. I think  there are a lot of people who,  if I could say                                                               
I know absolutely what that will  be, who'd be very interested in                                                               
that number. We don't know. We're  talking about a period of time                                                               
that was  the Dow Jones  Industrial Average where it  was largely                                                               
an  American  phenomenon  in   a  pre-industrial  and  industrial                                                               
setting.  I don't know what a  global DOW - as the stock markets,                                                               
ours and  the worlds, become  more global as the  economy becomes                                                               
more  global  and becomes  more  high  technology, I  don't  know                                                               
whether those 8 percent returns are  going to continue to exist -                                                               
be lower  or higher. I don't  want to bet the  real earning power                                                               
of the fund  on that experience. I don't think  we know enough to                                                               
do that. I'm much more  comfortable inflation proofing every year                                                               
by the actual inflation that we  saw. Mr. Storer, when he was up,                                                               
talked  about we  hope we  don't see  the '70s  again. I  hope we                                                               
don't either but if  we take - I mean if we're  going to take the                                                               
percent of market value construction,  that we can look back over                                                               
the  last 100,  80, 50  years, and  say that  is going  to repeat                                                               
itself,  then  we have  to  assume  that  things like  the  Great                                                               
Depression and the  '70s recession are going to  happen. And when                                                               
those things do  happen, and you have 8 or  10 percent inflation,                                                               
you  continue  under percent  of  market  value to  pretend  that                                                               
inflation  was 3  percent. We  have had  those periods  before. I                                                               
think we  have to assume that  we will again and  under a percent                                                               
of  market  value  formulation,  we  would  be  eating  into  the                                                               
principal.                                                                                                                      
                                                                                                                                
I listened to  the discussion up here. I looked  at yesterday the                                                               
earnings reserve balance of the  permanent fund. It's around $900                                                               
million.  The  great $4.5  billion  you're  talking about  is  in                                                               
unrealized gains.  According to the  most recent AG  opinion from                                                               
Attorney General Renkes,  that should be put  into the principal.                                                               
I'm not  sure whether that's  the right  legal opinion but  it is                                                               
the legal opinion that the permanent fund is operating on.                                                                      
                                                                                                                                
CHAIR SEEKINS: I  don't agree with your  interpretation but we'll                                                               
put it on the record for you.                                                                                                   
                                                                                                                                
REPRESENTATIVE CROFT:  Okay. Individuals,  I guess,  can disagree                                                               
on that.  I've read that  opinion a  number of times.  I disagree                                                               
with whether  the opinion is  right legally but I  believe that's                                                               
what it says.                                                                                                                   
                                                                                                                                
CHAIR  SEEKINS:  I  think  it's counted  into  principal  but  it                                                               
doesn't require that it be  deposited into principal. I mean it's                                                               
counted in terms  of the calculation, that's how  I would portray                                                               
it.                                                                                                                             
                                                                                                                                
REPRESENTATIVE CROFT:  You might have a  brilliant career forward                                                               
in the  legal profession, Mr. Chairman,  because that distinction                                                               
evades even me.                                                                                                                 
                                                                                                                                
CHAIR  SEEKINS: Well,  I can  understand how.  Please, I'm  being                                                               
facetious, just having some fun there.                                                                                          
                                                                                                                                
REPRESENTATIVE CROFT:  The fundamental  aspect of the  percent of                                                               
market value that  disturbs me is that presupposing  what we know                                                               
what  inflation  will  be  and pretending  that  it's  that  and,                                                               
frankly, the  portion, and you've referred  to it in some  of the                                                               
testimony  before, that  deletes  the word  'principal' from  our                                                               
Constitution. We  put it  in there  in the  '70s. We're  going to                                                               
take it  out. I  think it  would be better  and a  sounder fiscal                                                               
policy to  start by reassuring  people that their  dividend won't                                                               
be  touched,  reassuring  people that  real  inflation  proofing,                                                               
inflation  proofing  at the  rate  that  actually occurred,  will                                                               
happen and that's  what the bill before you does.  I can see that                                                               
the....                                                                                                                         
                                                                                                                                
CHAIR  SEEKINS: Senator  Therriault  has a  question  and if  you                                                               
don't object,  as we  go along,  we like  to ask  questions while                                                               
they're fresh in the minds of our members.  Senator Therriault.                                                                 
                                                                                                                                
SENATOR THERRIAULT:  I don't  think you  can guarantee  those two                                                               
things that you  just said you want to guarantee.  I believe that                                                               
I tend to agree probably more -  fall on the side of the spectrum                                                               
with -  that you're  on, as  far as  the importance  of inflation                                                               
proofing. But we've  just heard from Mr. Storer that  we can have                                                               
a  situation in  a down  equity market  but continue  real estate                                                               
earnings that  come in  that have  to be paid  out as  a dividend                                                               
that could in  fact erode the principal of the  permanent fund if                                                               
we  didn't have  that  buffer  that we  talked  about. So  you're                                                               
desiring to have absolutely guaranteed  two things that under the                                                               
current situation, I don't think you can.                                                                                       
                                                                                                                                
CHAIR SEEKINS: Please go right ahead.                                                                                           
                                                                                                                                
REPRESENTATIVE  CROFT: I  listened  to the  entire testimony  for                                                               
that reason.  What Mr.  Storer said  was that  you could  reach a                                                               
situation where you  couldn't pay out dividends  and you couldn't                                                               
inflation  proof  because  you'd  gotten to  the  bottom  of  the                                                               
barrel. At  that point, and  because of market  performance after                                                               
that, you  could have a  book value of  less than principal  - it                                                               
could be negative for  a while. All that is true  and what you do                                                               
in that  situation is you  stop spending. That's  the appropriate                                                               
response when you've  hit the bottom of your  savings account and                                                               
that's not  what happens in percent  of market value   - you keep                                                               
spending, in  fact you keep  spending at 5 percent  assuming that                                                               
things are happening that are not happening in the real world.                                                                  
                                                                                                                                
CHAIR SEEKINS:  You mean  the bottom of  your savings  account or                                                               
this line below, which you  should not participate. The bottom of                                                               
the savings account  means it's all gone to me.  How did you mean                                                               
that?                                                                                                                           
                                                                                                                                
REPRESENTATIVE  CROFT: The  bottom  of the  checking account  and                                                               
maybe you still  have savings that you declared  you're not going                                                               
to get into yet.                                                                                                                
                                                                                                                                
SENATOR THERRIAULT:  It seems  to me  if you get  down to  a poor                                                               
market  situation, in  fact we  almost got  to a  point where  we                                                               
didn't have  money to  pay a  dividend within  the last  year and                                                               
there  were bills  that  were introduced  to pay  it  out of  the                                                               
regular state treasury because it got  so close. But I think that                                                               
one of  the things that Mr.  Storer was alluding to  is you still                                                               
would  have real  estate earnings  coming in  so you  have income                                                               
that goes into  the calculation of your dividend but  you have no                                                               
money. The first money to go  is the inflation proofing. The very                                                               
thing  that  you  said  should  be  paramount.  I  agree  if  the                                                               
permanent fund is the mechanism is  to be a mechanism of taking a                                                               
one-time revenue  stream and making it  truly multi-generational,                                                               
you should  put inflation  proofing as your  number one  goal. It                                                               
should  be paramount  to  everything else  but  with what  you're                                                               
proposing  here when  you get  into  a bad  situation, the  first                                                               
thing to go is the inflation proofing.                                                                                          
                                                                                                                                
REPRESENTATIVE  CROFT:  This  constitutional  amendment  protects                                                               
inflation proofing and....                                                                                                      
                                                                                                                                
SENATOR THERRIAULT: I don't see inflation proofing in here.                                                                     
                                                                                                                                
REPRESENTATIVE  CROFT:   The  statutes  that  we   put  into  the                                                               
Constitution  that we  say -  AS  37.13.140, .145,  and 23.025  -                                                               
13.145 is  the inflation  proofing statute and  then when  we add                                                               
Section  2 that  says  that you  can't amend  them  as they  were                                                               
effective on 2002, that says dividend....                                                                                       
                                                                                                                                
SENATOR THERRIAULT:  What happens  when we  get into  a situation                                                               
where we  don't have the  money under  the current system  to pay                                                               
them both. Which one gets paid?                                                                                                 
                                                                                                                                
REPRESENTATIVE CROFT: What  you should do when you  reach the end                                                               
of your principal  and you get down - and  principal just means a                                                               
number below which we don't want  to fall, below which we want to                                                               
stop doing business  as usual, and in this system  you do stop. I                                                               
mean I can't protect....                                                                                                        
                                                                                                                                
CHAIR SEEKINS: In which system - the 19?                                                                                        
                                                                                                                                
REPRESENTATIVE    CROFT:    The    current    system    protected                                                               
constitutionally  as  SJR 19  would  do.  I can't  guarantee  you                                                               
market  performance that  will  always allow  us  a dividend  and                                                               
inflation proofing.  Nobody can.  I can,  though, write  a system                                                               
that  says  we  will do  that  each  year  and  when we  hit  the                                                               
principal number that  we don't want to fall below,  we've got to                                                               
stop. You  have no question in  my opinion, and you  wait for the                                                               
markets to  rebound. And then  when you  do, you pay  those back.                                                               
You start paying  dividends again and you pay  back the inflation                                                               
at  the  real amount.  Percent  of  market value  would  continue                                                               
through that entire time, pretending  we could pay out 5 percent,                                                               
eroding principal and  continuing to operate as  though there was                                                               
something normal about that.                                                                                                    
                                                                                                                                
CHAIR  SEEKINS: Percent  of market  value  does not  mandate a  5                                                               
percent payout.  It limits it  to 5  percent based on  the fiscal                                                               
responsibility of the legislature. Senator Therriault?                                                                          
                                                                                                                                
SENATOR THERRIAULT: Thank  you Mr. Chairman and  I think language                                                               
can be,  as we  discussed earlier,  developed that  would prevent                                                               
that from happening.  But you say we've got  the current dividend                                                               
payout system and  we've got inflation proofing.  When money gets                                                               
tight, which  one gets paid? Is  it prorated between the  two? If                                                               
you only got  enough money to pay a portion,  which one gets paid                                                               
- inflation  proofing or  a dividend  under this  language? Which                                                               
one takes precedent?                                                                                                            
                                                                                                                                
REPRESENTATIVE  CROFT: Right.  Under  the  current structure  and                                                               
under the  structure we incorporate  here in  SJR 19, if  you get                                                               
down to that  point, you keep dividends. It's  a calculation that                                                               
you and I have been through.                                                                                                    
                                                                                                                                
SENATOR  THERRIAULT: Right  - you  keep  dividends. So  inflation                                                               
proofing, the  very thing that you  said to be paramount,  is now                                                               
secondary.                                                                                                                      
                                                                                                                                
REPRESENTATIVE CROFT:  It's secondary  to dividends  and superior                                                               
to everything else.                                                                                                             
                                                                                                                                
SENATOR THERRIAULT: It's secondary  to dividends and, for myself,                                                               
that's a  problem.  Another  question. In addition, Section  2 on                                                               
page 2,  lines 5 through  8, you talk  about an allowance  for an                                                               
appropriation, above  and beyond B  and C sections, that  I guess                                                               
would  just  be a  majority  vote  of  the legislature  and  then                                                               
ratification of the  state voters and that would come  out of the                                                               
earnings  reserve.  So you  are  allowing  for spending  here  in                                                               
addition to the dividends and the inflation proofing.                                                                           
                                                                                                                                
REPRESENTATIVE   CROFT:   Well,   through  the   chair,   Senator                                                               
Therriault, we  saw that  as a protection.  Of course  they could                                                               
spend  now but  this would  require that  the people  approve any                                                               
spending out of the earnings reserve.                                                                                           
                                                                                                                                
SENATOR THERRIAULT:  The people  that year.  So with  pressure on                                                               
the budget,  and the  public demand for  dividends, where  do you                                                               
think  the  dollars  are going  to  go?  Is  it  going to  go  to                                                               
inflation proofing?                                                                                                             
                                                                                                                                
REPRESENTATIVE CROFT:  Well, and  that became  the final  sort of                                                               
point  in the  discussion  here  before, the  idea  that we,  the                                                               
people or  we, the legislature,  would fail in our  commitment on                                                               
inflation proofing. I happen to  think inflation proofing is very                                                               
popular publicly and I think it should  be. I hope it still is in                                                               
this  legislature. I  think  keeping the  earning  power for  our                                                               
future generations will win politically  but the provision you're                                                               
talking about doesn't  have to do with either. It  has to do with                                                               
putting  another protection  against  getting  into the  earnings                                                               
reserve and  that government use  of the earnings reserve  is, in                                                               
the long run, as big a  threat to inflation proofing as dividends                                                               
as  the market  - government  getting in  and taking  substantial                                                               
amounts of  the earnings reserve is  what drives you to  the very                                                               
situations you were talking about, of  having no money and how do                                                               
we choose between  dividend and inflation proofing.  We wanted to                                                               
set  one  more protection  to  make  sure that  earnings  reserve                                                               
stayed healthy and  it wasn't used for government.  If the people                                                               
say  that they  want to,  that's their  choice but  we not  do it                                                               
ourselves.                                                                                                                      
                                                                                                                                
CHAIR SEEKINS: Go ahead, Senator Therriault.                                                                                    
                                                                                                                                
SENATOR  THERRIAULT:   Mr.  Chairman,  this  mechanism   by  just                                                               
enshrining  the statutes,  which  we've also  had testimony  that                                                               
says we're 27 years down  the track. We've changed our investment                                                               
strategy  and now  we're  trying to  freeze  these statutes  that                                                               
haven't kept  pace with the  means by which we  generate revenue.                                                               
It just  seems that to  suggest that this  is a better  way, when                                                               
clearly  you get  into a  situation where  you don't  have enough                                                               
money  so you're  going to  have  to pick  between dividends  and                                                               
inflation proofing,  you could have  an appropriation  because of                                                               
budgetary  pressure   that  could   also  take   precedence  over                                                               
inflation  proofing, leaving  nothing for  inflation proofing.  I                                                               
think  with a  segment  of the  state  population, the  inflation                                                               
proofing  is  very important,  but  we've  also got  a  transient                                                               
section  of  the  state  population  that  carrying  forward  the                                                               
purchasing value for the next  generation, they don't care a bit.                                                               
I've  heard from  - I  have one  constituent that  I just  had to                                                               
agree to  disagree with and  he said  you know nobody  looked out                                                               
for  my  generation so  let  the  next  generation look  out  for                                                               
themselves.  I completely  disagree with  that and  I think  that                                                               
truly we  should go toward  something that really  does guarantee                                                               
that we  preserve the purchasing  power. And although  POMV might                                                               
not be  100 percent, it sure  seems like it's a  whole lot better                                                               
than what we've currently got.                                                                                                  
                                                                                                                                
CHAIR  SEEKINS:  And   we'll  go  to  Senator   French  next  but                                                               
purchasing power that doesn't meet needs is useless.                                                                            
                                                                                                                                
REPRESENTATIVE CROFT: Doesn't meet? Sorry Mr. Chairman?                                                                         
                                                                                                                                
CHAIR SEEKINS:  Purchasing power  that doesn't  meet any  need is                                                               
useless.  What are  we trying  to preserve  purchasing power  for                                                               
future generations  if we  can't feed our  kids today  and that's                                                               
where you and I  probably basically philosophically disagree. I'd                                                               
feed my  kids before I'd  inflation proof my savings  account. So                                                               
that's not a  hard decision for me  in that case. When  I look at                                                               
projected  shortfalls in  general fund  versus expenditures,  you                                                               
know, we're shooting  for a number around $400  million and we're                                                               
going to put  $500 million first into inflation  proofing. How do                                                               
people want  to spend their  money? Do they  want to spend  it to                                                               
inflation proof and then we tax  them and take it away from them?                                                               
There are  a lot  of questions there  that become  very debatable                                                               
when the reality  hits the pocketbook and so I'm  not so sure how                                                               
people would  react. I  know how  my wife would  react if  I said                                                               
baby, we're  going to put  the money  in our savings  account and                                                               
you don't have anything to go  buy groceries to feed the kids and                                                               
grandkids. There'd  be a revolution  in the house.  So, sometimes                                                               
the  legislature has  to  live up  to  its fiscal  responsibility                                                               
without  undue restraint  and I  think they've  got a  good track                                                               
record of  doing that. I  haven't been here  as long as  you, but                                                               
the track record  has been good. It's been admirable  and I think                                                               
to  some respect  anything  that  we do  that  unduly limits  the                                                               
ability  for the  legislature to  act in  a fiscally  responsible                                                               
manner in the face of  uncertainties, as you mentioned are surely                                                               
going to come, puts us in a  position where if we don't know, why                                                               
do  we want  to  eliminate  the ability  for  the legislature  to                                                               
respond appropriately? That's where  I get into problems. Senator                                                               
French?                                                                                                                         
                                                                                                                                
9:37 a.m.                                                                                                                       
                                                                                                                                
SENATOR FRENCH:  I think one  of the remarkable things  about the                                                               
current set  of statutes is the  degree to which the  public kind                                                               
of gets how the system works.  When the dividend went from $1,900                                                               
just  a few  years  ago down  to  $1,000 this  year,  none of  my                                                               
constituents  were  squealing  about,  you  know,  some  kind  of                                                               
terrible  inequity in  the system.  They understood  that it  was                                                               
just  a  down  market  year  and   I  think  that's  one  of  the                                                               
difficulties  with POMV  that proponents  haven't  quite come  to                                                               
grips with  that somehow  POMV implies  stability, that  you will                                                               
have this money paid out  every year irrespective of the market's                                                               
performance and  yet there's  sort of  that little  language that                                                               
says you  can go up  to 5 percent  as if  there were going  to be                                                               
years when we wouldn't do that.                                                                                                 
                                                                                                                                
CHAIR SEEKINS: Well we did that in 1996, Senator French.                                                                        
                                                                                                                                
SENATOR FRENCH: I was almost finished.                                                                                          
                                                                                                                                
CHAIR SEEKINS: Go ahead.                                                                                                        
                                                                                                                                
SENATOR FRENCH:  So I guess  the point I  was trying to  make was                                                               
that there's some  real good value in  maintaining something very                                                               
much like  the current  statutes because of  the degree  to which                                                               
the public  understands that  sometimes there  [are] going  to be                                                               
years when you just don't get  a dividend because the market just                                                               
didn't  provide one.  So I  think that's  - I  just think  that's                                                               
worthy of making note of.                                                                                                       
                                                                                                                                
CHAIR SEEKINS: I  have no problem with  that but we did  - in our                                                               
current  system,  we did,  I  would  call it,  hyper-inflate  the                                                               
dividend in 1996. The decision was  made by the Board of Trustees                                                               
that the current  generation should, this was  the rationale, the                                                               
current generation  needed to  get more  from the  permanent fund                                                               
than it was getting through  the regular distribution system, the                                                               
dividend system.  So, investment  management companies  were told                                                               
to go sell stocks  to bring in realized income to  be able to put                                                               
more  cash into  the  dividend for  the  current generation.  Now                                                               
whether that  was the real reason  or not is debatable,  but that                                                               
was the rationale  that was used. It was done.  We had additional                                                               
income  that came  in that  peaked and  then went  right back  in                                                               
terms of realized income and  so, sometimes, it isn't just market                                                               
variability that  affects the dividend under  the current system,                                                               
Senator   French,  it's   also  political   variability.  Senator                                                               
Therriault?                                                                                                                     
                                                                                                                                
SENATOR  THERRIAULT:  Mr.  Chairman,  I  need  to  disagree  with                                                               
earlier  comments here  about  people  understanding the  current                                                               
system and the value of that.  Certainly last year when there was                                                               
the real  potential that  there would be  no dividend,  there was                                                               
enough of  a concern in this  building of, number one,  the shock                                                               
to  the  citizen,  the  shock  to the  economy  that  there  were                                                               
proposals  to pay  it out  of the  general state  treasury. So  I                                                               
don't think  the general  public has  any level  of understanding                                                               
that really, in the current  system, that there's the chance that                                                               
there is  a zero  dividend year.  And certainly  for those  of us                                                               
that know the potential impact  to the state treasury, that's not                                                               
something that we  would invite so I'm  not going to -  I guess I                                                               
can't  agree with  that line  of  thinking when  there are  other                                                               
alternatives that  make sure that  that stream of cash  that goes                                                               
out into the Alaska economy is  smooth and you get the by-product                                                               
of guaranteeing  that inflation proofing  of some degree  is made                                                               
automatically independent  of action of the  legislature. I don't                                                               
think that  the general  public understands that  they can  get a                                                               
zero dividend year in the current system.                                                                                       
                                                                                                                                
CHAIR SEEKINS:  Right. I think  that's true,  too. When I  was on                                                               
the Board of  Trustees it didn't take me very  long to figure out                                                               
that the Board  of Trustees can play God with  the permanent fund                                                               
and what  the dividend's  going to  be. And in  a year  where the                                                               
earnings  reserve  was  very  low   and  you're  faced  with  the                                                               
possibility of  not having the cash  to inflation proof or  pay a                                                               
dividend,  there  will  certainly   be  a  tremendous  amount  of                                                               
political  pressure to  maybe pick  some fruit  that isn't  quite                                                               
ripe yet in  order to get the cash from  realized earnings to put                                                               
into  the  earnings  reserve  account  when  a  more  disciplined                                                               
investment strategy  would say it's  not time to pick  this fruit                                                               
yet  but we  need the  money. So,  you know,  I can  see how  the                                                               
current  system  lends itself  to  all  kinds of  abuse.  Senator                                                               
Therriault?                                                                                                                     
                                                                                                                                
SENATOR  THERRIAULT:   The  section,   for  either  one   of  the                                                               
gentlemen,  that  allows  for an  appropriation  for  other  than                                                               
inflation   proofing   and   dividends  -   was   that   language                                                               
specifically left  or put in  here so  that you could  answer the                                                               
legal question of whether you've still got a public purpose?                                                                    
                                                                                                                                
REPRESENTATIVE CROFT: Through the  Chair, Senator Therriault, no,                                                               
my purpose  for putting  it in, and  I believe  Senator Lincoln's                                                               
was  to provide  another  check on  government  getting into  the                                                               
earnings reserve. I think that  the legal matter of whether we're                                                               
a  tax free  status has  been  at least  in my  mind fairly  well                                                               
settled.  The  recent opinion  by  Attorney  General Renkes  that                                                               
constitutionally  protecting  the  dividend didn't  threaten  the                                                               
tax-exempt status  of the fund  - in effect,  if it was  a public                                                               
purpose when you  did it statutorily, it's a  public purpose when                                                               
you do  it constitutionally. And a  lot of the case  law that has                                                               
come  down  over  the  last   five  years  that  buttresses  that                                                               
agreement  or that  understanding, particularly  in the  areas of                                                               
educational trusts,  where private money  comes in and  the state                                                               
holds it  and gives it out  to go to the  state university, those                                                               
sorts of  cases have really taken  that from what was  a question                                                               
mark and  a worry for  a long time -  nothing is certain  in life                                                               
but much more of a certainty that that's not a serious question.                                                                
                                                                                                                                
SENATOR THERRIAULT: Okay,  well I just know from  the debate over                                                               
the years,  it seems  like if  you can  still point  to something                                                               
where there is a general  public access, you have some protection                                                               
from  the federal  court because  they can  say well,  you're not                                                               
using  the money  for that  purpose  right now  but there's  that                                                               
possibility so it  gives you a little bit of  extra protection so                                                               
I just wondered if that was part  of the reason that you put that                                                               
in there because you've got this  whole Section 3 here that talks                                                               
about oops, if  there's an adverse tax consequence,  we want this                                                               
whole  thing to  go away.  So you  must feel  like there  is some                                                               
possibility of that, otherwise you wouldn't have Section 3.                                                                     
                                                                                                                                
REPRESENTATIVE  CROFT:  True  enough.   And  through  the  Chair,                                                               
Senator Therriault,  the House  version we took  it out  over the                                                               
last couple  of months,  after those opinions  came down.  When I                                                               
talked to Senator  Lincoln about it, she said that  that would be                                                               
a  perfect question  for the  Judiciary Committee  and up  to you                                                               
guys  to decide.  I do  think  the case  law has  come down  much                                                               
cleaner on  the point  that it  is not  needed. If  the Judiciary                                                               
Committee felt  like that was  their opinion, they could  take it                                                               
out. If  they still  wanted the protection,  they could  leave it                                                               
in.                                                                                                                             
                                                                                                                                
SENATOR THERRIAULT: Do you yourself  think that would be prudent?                                                               
I mean  with the uncertainty of  getting a tax ruling  out of the                                                               
federal  courts and  then us  being  stuck with  language in  the                                                               
Constitution and we  know it's a high hurdle to  change it, would                                                               
it be prudent not - to go without this protection?                                                                              
                                                                                                                                
REPRESENTATIVE CROFT: I  was convinced enough that  in my version                                                               
of the  bill I  was comfortable pulling  it out but  it is  a low                                                               
risk, but a risk, and I really  do feel like you guys can decide.                                                               
As for me,  after reading and re-reading the cases,  not just the                                                               
memo  that  was   sent  to  Attorney  General   Renkes,  but  the                                                               
underlying  cases, I  felt very  confident that  it was  a public                                                               
purpose and would not be taxable. But,  we had it in there to fit                                                               
your comfort level.                                                                                                             
                                                                                                                                
SENATOR THERRIAULT: Thank you.                                                                                                  
                                                                                                                                
CHAIR  SEEKINS: Other  questions?  Senator French,  did you  have                                                               
anything?  Senator Therriault?  Thank  you  gentlemen, if  you'll                                                               
stand by  I do  have one  person who  has indicated  on-line that                                                               
he'd like  to testify  and, if  you don't mind,  if you  can just                                                               
hang tough  where you are so  we can go  into this. Is Mr.  Gay -                                                               
Roger Gay, at  the Mat-Su LIO -  Mr. Gay, are you  on-line? Do we                                                               
have him on-line still?                                                                                                         
                                                                                                                                
MR. ROGER GAY: Hello. Can you hear me?                                                                                          
                                                                                                                                
CHAIR  SEEKINS:  Please,  if you'll  identify  yourself  for  the                                                               
record?  Welcome to  the Judiciary  Committee and  please proceed                                                               
with your testimony.                                                                                                            
                                                                                                                                
MR. GAY: My  name is Roger Gay.  I live in Big Lake  and I'd like                                                               
to  say  a  little  something about  inflation  proofing.  In  my                                                               
opinion, inflation  proofing does  not protect  the value  of the                                                               
fund. It merely subjects more  money to the ravages of inflation.                                                               
Inflation is  the result of  the devaluation of our  money. Every                                                               
year our money is worth less, and  that is why the price of goods                                                               
goes up. A loaf  of bread is a loaf of bread. A  gallon of gas is                                                               
a gallon of  gas. We can make  bread and gas cheaper  now than at                                                               
any point  in history. Only  the money has become  less valuable.                                                               
Because of  the Federal Reserve System  and the way our  money is                                                               
handled, our money  has no intrinsic value. When you  have a huge                                                               
permanent fund  being subjected  to I  don't know  how much  of a                                                               
loss due to  inflation, if you take that amount  and dump it back                                                               
into the  fund, that  amount then  becomes subject  to inflation.                                                               
I'm  not suggesting  that we  spend everything  today at  today's                                                               
prices, which would be the best way  to get the full value of our                                                               
money.  But  the idea  of  taking  money  that  has been  hit  by                                                               
inflation  and  fooling yourselves  into  thinking  that you  can                                                               
protect  it by  dumping  more  money into  it  to  be ravaged  by                                                               
inflation just  doesn't make sense.  You know we're losing  a lot                                                               
of money to inflation because our  money is not stable and if you                                                               
want  to inflation  proof, you  have to  work at  stabilizing the                                                               
value of our money.                                                                                                             
                                                                                                                                
CHAIR SEEKINS: Senator Therriault?                                                                                              
                                                                                                                                
SENATOR  THERRIAULT:   I  understand  your  point.   However,  to                                                               
stabilize the  value of  our money is  a national  economic issue                                                               
that  I don't  know that  the State  of Alaska  has the  power to                                                               
control.  But if  that's a  given, then  that's something  that's                                                               
largely outside  of our individual  legislative control.  [END OF                                                               
TAPE.]                                                                                                                          
                                                                                                                                
TAPE 04-5, SIDE A                                                                                                             
                                                                                                                                
SENATOR THERRIAULT: So should we not do that?                                                                                   
                                                                                                                                
MR.  GAY: You're  not having  any effect  on inflation  by taking                                                               
more money  out of the hands  of whoever, whether it's  the state                                                               
or  the  people.  You're  not having  any  affect  whatsoever  on                                                               
inflation by throwing more money into  the fund under the name of                                                               
inflation proofing. Inflation proofing is an oxymoron.                                                                          
                                                                                                                                
SENATOR THERRIAULT: Thank you.                                                                                                  
                                                                                                                                
CHAIR SEEKINS:  Other questions? Seeing  none, thank you  Mr. Gay                                                               
for being with  us this morning and providing  your testimony. Is                                                               
anyone else on  line that wishes to testify this  morning? No one                                                               
else?  Anyone in  the audience  that  wishes to  testify on  this                                                               
matter this morning?                                                                                                            
                                                                                                                                
MR. GAY: I have a friend of mine  that would like to make a brief                                                               
comment and his name is Gary Hanthorn.                                                                                          
                                                                                                                                
CHAIR SEEKINS: Is Gary there?                                                                                                   
                                                                                                                                
MR. GAY: Yes he  is and he has a mental  disability but he'd like                                                               
to say a short word.                                                                                                            
                                                                                                                                
CHAIR SEEKINS:  If he'll identify  himself for the  record, we'll                                                               
be pleased  to take  his testimony and  Mr. Hanthorn,  welcome to                                                               
the Judiciary Committee.                                                                                                        
                                                                                                                                
MR. HANTHORN: I'm Gary. Could  you leave my permanent fund alone?                                                               
It's mine.                                                                                                                      
                                                                                                                                
CHAIR SEEKINS: Thank you very much, Gary. Any questions?                                                                        
                                                                                                                                
MR. HANTHORN:  Could you  tell Mr.  Kohring to  give me  a letter                                                               
because  [indisc.]  and he's  supposed  to  get  back to  me  for                                                               
something about my permanent fund being left alone.                                                                             
                                                                                                                                
CHAIR SEEKINS:  Well we  can't answer for  Mr. Kohring  here, but                                                               
you're  certainly  welcome to  call  his  office. They  have  the                                                               
number there in the LIO and I would encourage you to do that.                                                                   
                                                                                                                                
MR. HANTHORN: Thank you.                                                                                                        
                                                                                                                                
CHAIR SEEKINS: Thank you for  testifying this morning. With that,                                                               
hearing no  one wishing to  testify, we're going to  close public                                                               
testimony  on  SJR  19.  Are there  any  discussion  points  with                                                               
members of  the committee?   None? Seeing  none, we'll  hold this                                                               
over  for a  time  when  the entire  committee  can  be here  for                                                               
discussion. I want to thank you  gentlemen for being with us this                                                               
morning. We  appreciate your testimony and  the lively discussion                                                               
and look forward to getting in  this in the next - sometime soon.                                                               
With  that,  we  have  no other  business  before  the  Judiciary                                                               
Committee  this  morning  and  so  we'll  adjourn  the  Judiciary                                                               
Committee at this time [9:51 a.m.].                                                                                             

Document Name Date/Time Subjects