Legislature(2017 - 2018)BUTROVICH 205
02/09/2017 03:30 PM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB5 | |
| SJR1 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 5 | TELECONFERENCED | |
| *+ | SJR 1 | TELECONFERENCED | |
| + | TELECONFERENCED |
SJR 1-CONST AM: GUARANTEE PERM FUND DIVIDEND
3:42:05 PM
CHAIR DUNLEAVY called the committee back to order and announced
the consideration of SJR 1.
3:42:28 PM
SENATOR BILL WIELECHOWSKI, Alaska State Legislature, Juneau,
Alaska, sponsor of SJR 1, provided an overview of the resolution
as follows:
This resolution would put a vote to the people of
Alaska asking whether to put the permanent fund
dividend (PFD) and inflation proofing into the Alaska
Constitution.
Why put the PFD into the Constitution? I think
fundamentally this is the only way to truly protect
the dividend and the corpus. We've heard for the last
year that we need to restructure the permanent fund in
order to protect the dividend; I'm not going into the
merits of that, but I'll just say a few things about
that.
What we've learned recently is the only way to truly
protect the dividend is to put it into the
constitution. I think many Alaskans were shocked when
the governor cut everyone's PFD by over a thousand
dollars last year with a stroke of his pen; this veto
is the subject of a lawsuit, but the reality remains
that if the Supreme Court upholds the superior court
decision, then any future governor can veto the
permanent fund dividend down to whatever level he or
she chooses.
The governor has proposed a bill known as the
Permanent Fund Protection Act, that bill would
restructure the permanent fund and permanently reduce
the PFD amount to roughly a thousand dollars; but,
contrary to the name of the bill, there's absolutely
no protection for the dividend.
If the court accepts the governor's interpretation of
the law, the Legislature could pass the Permanent Fund
Protection Act in April of this year and the governor
could veto that amount, the promised amount, from a
thousand dollars down to five-hundred dollars a month
later if he chooses, or even to zero if he chooses; in
fact, under the Permanent Fund Protection Act under
the governor's interpretation of the law, any future
governor could veto the permanent fund dividend down
to whatever level he or she chooses, there' absolutely
no protection for the permanent fund dividend under
this bill or any other bill that's currently going
through this building.
Even assuming the Supreme Court reverses the Superior
Court decision and says the governor cannot veto the
PFD, the PFD is still subject to the whim of the
Legislature and future legislatures who can currently
legally change the amount of the PFD or eliminate the
PFD at any time, I don't think many Alaskans realize
that. So the absolute only way to protect the
permanent fund dividend is to put it in the
constitution and that is what this resolution
provides.
It's important to remember that the PFD reflects
Alaskans' ownership share in our oil wealth. While the
current value of the Alaska Permanent Fund is $56.4
billion as of yesterday, it's important to put this
amount into perspective. Article IX, section 15 of the
Alaska Constitution requires that at least 25 percent
of mineral-lease rentals, royalties, royalty-sale
proceeds, and federal-mineral revenue sharing payments
and bonuses received by the state go into the
permanent fund. We have passed a statute that says 50
percent of royalties for certain fields after a
certain year go into the permanent fund, but this is a
relatively small amount.
In the whole scheme of revenue received by the state,
the amount of revenue into the permanent fund is a
very small amount, and I'll just give you some numbers
to reflect this:
· 100 percent of state property taxes go to the
government.
· 100 percent of corporate income taxes go to the
government.
· 100 percent of production taxes go to the
government.
· The state typically gets 12.5 percent ownership
share or royalty for our oil, of that 75 percent
goes to government.
· 3.125 percent ownership share goes to Alaskans
from all of the revenue that is generated from:
taxes, corporate income taxes, severance taxes,
and royalties.
· Of the roughly $527 billion in oil that has
flowed down the pipeline, approximately 5 percent
has gone into the Alaska Permanent Fund.
Much has been said about the impact of the PFD on
individuals, businesses, and our economy, but I'll
mention a couple of points that I think are really
critical. According to the Institute of Social and
Economic Research-University of Alaska Anchorage's
(ISER) recent study that they did, tens of thousands
of Alaskans are removed from poverty because of the
PFD. Alaska has the lowest income inequality in the
United States because of the PFD and according to ISER
the PFD creates thousands of jobs in Alaska.
Very briefly on inflation proofing, one of the people
who were very instrumental in the creation of the
permanent fund and dividend program was Elmer Rasmuson
and he referred to inflation as, "That thief in the
night." Inflation proofing is responsible for a large
portion of the current value of the permanent fund. I
believe we should continue to protect the corpus by
inflation proofing.
There are three-essential statutes that create the
permanent fund dividend program: AS 37.13.145, AS
37.13.140, and AS 43.23.025; under this resolution
these statutes are essentially put into the
constitution to constitutionally require the PFD be
paid at its current formula and inflation proofing
continue.
3:48:05 PM
SENATOR COGHILL remarked that the resolution will break new
ground in that a constitutional right is established rather than
a statutory entitlement. He asked that Senator Wielechowski
address the topic of inflation proofing the fund as well.
SENATOR WIELECHOWSKI replied that the resolution does nothing
other than what is currently being done statutorily by placing
the formula into the constitution. He noted that the way
inflation proofing is done is rather than include the current
statutes that are lengthy, the constitutional amendment simply
states that the Legislature shall provide for inflation
proofing. He asserted that the Legislature would still have the
discretion to determine what the level of inflation proofing
would be. He added that the earnings reserve account would be
placed into the constitution, but the Legislature would still
have the ability to use the excess revenue that is in the
earning reserve.
He provided the committee with calculations that support the
affordability of a payout from the permanent fund as follows:
· Assumes a rate of return of 6.75 percent.
· Assumes a rate of inflation of 2.2 percent.
· $1 billion can be used per year to provide for government
services.
· Inflation proofing is still provided for at the same level.
· Earnings reserve account would actually rise slightly.
SENATOR COGHILL noted that a tension exists in the use of
earnings from the permanent fund and its impact on what is
available for payout. He said the tension is going to be between
the right of a dividend and what is formulaically available.
SENATOR WIELECHOWSKI explained that the intent was to track the
constitutional provision as closely as possible to the current
statutory formula. He detailed that a provision in section 2,
page 2, line 10, says:
On the last day of each fiscal year, 50 percent of the
income available for distribution calculated under
this subsection, or the balance in the account,
whichever is less.
SENATOR WIELECHOWSKI said the words in the provision are
actually new words and are not currently in the statute. He
specified that the wording clarifies ambiguous language in the
current statute in order to say that if funds are not available
to provide a dividend, then available funds can only be
provided. He said fortunately there never has been a problem
with the state not being able to pay out a dividend and
inflation proof the fund.
He detailed that current projections by the Permanent Fund
Corporation are that the $57 billion fund will continue to earn
6.75 to 7.0 percent per year with the earnings reserve balance
growing to $10 billion or $11 billion if inflation is 2.2
percent and the government annually draws $1 billion. He set
forth that the projection results in maintaining a significant
"four times cushion," an amount preferred by the Permanent Fund
Corporation and the governor. He said the question becomes
determining what the government's draw will be. He admitted that
a government draw that exceeds $1 billion may result in a
reduction of the earnings reserve account.
3:55:16 PM
SENATOR COGHILL remarked that taking any draw from the earnings
reserve would impact the following year. He inquired what the
impact would be if there was a constitutional right to a
dividend.
SENATOR WIELECHOWSKI acknowledged that any draw from the
earnings reserve will decrease the future dividends.
SENATOR COGHILL commented that he is pondering the impact from
establishing a constitutional right and how the change to the
earnings reserve will be dealt with.
SENATOR WIELECHOWSKI remarked that the purpose of the bill is
not to advocate using the earnings reserve, but to establish
trust with the Alaskan people. He asserted that Alaskans have a
fear that after restructuring the permanent fund that the
Legislature will come back for the rest in a few years. He added
that the other fear is the dividend is subject to veto and
legislative change. He set forth that constitutionally
protecting the dividend will establish trust with the people of
Alaska.
SENATOR COGHILL commented that establishing a constitutional
right for an individual benefit will be highly targeted and
wondered how the IRS will see that. He inquired what the state's
tax liability becomes if the dividend is established as a
constitutional right.
SENATOR WIELECHOWSKI replied that he has considered what Senator
Coghill posed. He noted that he has a legal opinion that was
provided by Greg Renkes, former Alaska attorney general, and the
law firm of Steptoe and Johnson. He summarized that the opinion
says that a constitutionally-protected dividend would not have
any impact on the state's IRS tax-free status and added that he
has not seen an opinion that says otherwise.
3:59:09 PM
CHAIR DUNLEAVY asked to confirm that SJR 1 would
constitutionalize the decades-old calculations.
SENATOR WIELECHOWSKI answered yes.
CHAIR DUNLEAVY commented that there was an understanding that
the decades-old calculation would be left alone and last year
the calculation was interrupted. He said as a result of the
interruption there is question as to whether the dividend and
the fund itself are now protected. He summarized that Senator
Wielechowkski is trying to protect the dividend through
constitutionalizing.
SENATOR WIELECHOWSKI replied as follows:
I've thought about other ways that you could possibly
do it, I can't think of any other way you can "lock,
stock, and barrel" protect the dividend other than
putting it in the constitution. You can't pass a
statute because you can't bind future legislatures
from changing it; I certainly had thought all along
that this was when they created the permanent fund
they were creating a dedicated fund which allowed for
a dedicated stream of income which means that the
governor couldn't veto it.
There's a Supreme Court case we think that is directly
on point, Hickel v. Cowper, that will be decided in
some time which says this is not an appropriation,
that the transfer of funds from the earnings reserve
account to the dividend fund is not an appropriation,
the transfer of the funds from the earning reserve
account for inflation proofing is not an
appropriation, it's what the court has previously held
and if it's not an appropriation it cannot be vetoed
by the governor. We feel pretty strongly about that,
but you never know what the court will do and this is
the only way. If you want to truly protect it, if
truly protecting the permanent fund is where the
Legislature wants to go, this is the only way that you
can do it.
CHAIR DUNLEAVY noted that for years the dividend would vary
based upon the market conditions and the dividend calculation.
He remarked that he cannot recall a time when the people of
Alaska complained about the dividend because the calculation was
just accepted. He opined that the people got upset when
government put their hands inside the process.
4:02:09 PM
CHAIR DUNLEAVY opened invited testimony.
4:02:25 PM
RICK HALFORD, representing himself, Chugiak, Alaska, testified
in support of SJR 1. He disclosed that he served in the
Legislature and was the House majority leader in 1982 when the
permanent fund dividend (PFD) passed. He noted that he made the
procedural motions and supported the PFD. He detailed the
history of the PFD as follows:
As soon as the Hammond administration was over, the
Sheffield administration came in and there became a
lot of questions. There was an effort through the
Sheffield campaign to repeal the dividend and Governor
Sheffield had second thoughts about that before he
instituted it, but he did start the process of
appropriating for the dividend. The only dividend that
needed to be appropriated of course was the first
dividend because it came from the general fund, the
permanent fund hadn't made any money yet and that
first dividend was $1000, or probably $2500 or $3000
at today's dollars. Following Governor Sheffield,
Governor Cooper proposed cutting the permanent fund in
half for an education endowment and its value today of
course would have been about half. Then Governor
Hickel and Governor Knowles both came in with interest
in alternative uses of the permanent fund, but they
had both made commitments to former governor Hammond
that they would put any question like that on the
ballot and of course Governor Knowles did
unsuccessfully. Senator Murkowski became governor and
he held the citizens' meeting in Fairbanks on what to
do with the permanent fund and the question at the
time was should excess earnings of the permanent fund
be used for government. After a pretty lengthy set of
meetings with some very well-chosen people, they came
up with a proposal for a constitutional change that
would have been putting the dividend in the
constitution as well as changing to a permutation of a
percent of market value; but, until this last year
when the dividend was severed from the fund by veto,
no one had ever thought that that was even a question.
Those of us who were involved originally didn't care
if the budget showed the permanent fund amount, but we
always knew it was a dedication specifically provided
for by the last five or six words constitutional
amendment that created the permanent fund which said,
"The income of the fund shall be deposited in the
general fund 'unless otherwise provided by law.'"
Unlike the other dedications or the other
appropriations actions you take such as tax credits
where it says "subject to appropriation," there's
nothing in the inflation proofing or the dividend that
requires appropriation and that is the court case we
are in, but in terms of how you get there, and I
thought Senator Coghill asked some good questions, I'd
be interested in responding if he wanted to repeat
them because I think those are real questions and I
think there are ways to deal with that, but the bottom
line is the dividend connects individual Alaskans to
the performance of their permanent fund with a sense
of pride, empowerment, and responsibility.
The permanent fund is unique in all the world for its
success in terms of resource-rich countries; the World
Bank, top economists, authors and many examples cited
as the best way that a region has dealt with short-
term resources. There were lots and lots of opponents
to the creation of the permanent fund, it passed with
a third of the people against it, it had a lot of
political leadership against it, and through the
entire time it's been under attack whenever we've been
short of money; but, one of the things that is the
most important, probably the most important to the
success of the fund has been the connection between
the permanent fund dividend and the fund. It's through
the dividend that you individualize the impact of
public choices to make it a loan package, to make it a
mega-project fund, to reduce this or change that, and
authorities all the way up to the CIA's World Fact
Book say that people in Alaska know more about their
fund than anybody else in the world. Dave Rose, the
first executive director in his book, "Savings from
the Future" said, "The goal of truly permanent savings
of resource wealth is just short of impossible." He
wrote of vaults within vaults and said it required
layers of protection to block the intense temptations
of very powerful people," and he went on to say that
the strongest defense of all for the Alaska Permanent
Fund is the Alaska Permanent Fund Dividend.
I think you have a difficult task, but I think a
constitutional amendment is the format to go forward
with any changes to this, so that you bring the public
with you and we have a solution that will last and not
be a source of continuous conflict. The system is the
one thing in state government that is held out by
virtually everywhere else as a great success.
4:08:20 PM
SENATOR COGHILL stated that establishing a constitutional right
had gotten his attention. He said the resolution would juxtapose
the first article in Alaska's constitution where the government
is the people versus the creation of an individual right to an
income stream.
MR. HALFORD replied that the creation of an individual right to
a specific formula has some difficulties in at least raising
some tax questions. He suggested that the real income that is
over inflation could be divided and equally distributed between
government and Alaskan citizens. He proposed that the
Legislature could say that no more may be drawn from the reserve
account for government operations than is equal to the amount
that is paid out in dividends; that does not make the dividend
an individual entitlement. He added that if a decision is made
not to draw anything and not to have a dividend, then the
permanent fund would increase. He stated that the key is some
semblance of control is maintained. He said the incentive to
make the system work is to have equal amounts come out for both
state operations and for the dividend after inflation is taken
care of by a real-income standard.
SENATOR COGHILL commented that Mr. Halford brought up some good
points that he will ponder. He opined the resolution enters a
constitutional area that the state has not gone before. He
asserted that having a constitutional right is very different
from having a statutory entitlement.
CHAIR DUNLEAVY remarked that his historical view is the fund was
set up to save wealth for future generations in perpetuity and
the dividend came along a little later, but was a good idea. He
asked Mr. Halford if he believes the government still has a
right to a portion of the earnings.
MR. HALFORD opined that government has whatever rights it takes,
rights that are a compact between those elected and the people.
He pointed out that the state of Alaska spent nine-tenths of the
greatest resource wealth in North American history on a very
small population in a very short time period, one generation. He
said he viewed the permanent fund as a trust for the future. He
noted that huge arguments ensued on what the purpose of the
permanent fund should be, but ultimately an agreement was made
to take the money "off of the table" because of the perception
of excess spending.
CHAIR DUNLEAVY asked Mr. Halford what he thought the value of
the fund would be today if there was never a dividend.
MR. HALFORD opined that the fund would be zero if there had not
been a dividend. He asserted that the dividend was the strongest
protection for the fund.
CHAIR DUNLEAVY asked if he was surprised by the governor's
recent veto of the permanent fund dividend.
MR. HALFORD replied that he was surprised by the governor's veto
because he thought it was impossible. He noted that he is a
plaintiff in the pending case regarding the governor's veto. He
pointed out that there is no language in the dividend law that
says, "subject to appropriation." He set forth that the dividend
is a dedication specifically allowed for in the constitutional
amendment that created the permanent fund. He detailed the
debate when the dividend was enacted as follows:
The debate in committee they actually changed the
proposal and added the language "unless otherwise
provided by law" because they wanted to be able to use
permanent fund income to dedicate to a loan package or
to financing package for big-industrial development,
or other things, they wanted flexibility that no other
money through the general fund has.
CHAIR DUNLEAVY asked Mr. Halford if Senator Wielechowski's
attempt to constitutionalize the dividend is a concept that
addresses unfinished business.
MR. HALFORD agreed that constitutionalizing the dividend is
unfinished business. He admitted that a lot has been learned in
the last forty years of what it takes to defend a system. He
asserted that the dividend is a complete system that combines
management structure, investment rules, and inflation proofing.
He pointed out that other huge funds spend their principle at
low oil prices.
CHAIR DUNLEAVY asked Mr. Halford what the outcome would be if
the resolution is allowed to go to the people.
4:18:46 PM
MR. HALFORD opined that the result would depend on what the
resolution says. He predicted that people will accept a little
different formula if the dividend is secured constitutionally in
a way that does not endanger the tax status or anything else. He
remarked that the he would support something that had the
constitutional certainty and could contribute something to state
government. He summarized as follows:
You can't get the whole solution from one of the
sources, but you can get a big piece of it, that's why
the permanent fund has such a big reserve because it
makes more than it uses even if the dividend were
fully paid and inflation were fully handled.
4:20:20 PM
CHAIR DUNLEAVY held SJR 1 in committee for future consideration.