Legislature(2003 - 2004)
03/16/2004 01:44 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
March 16, 2004
1:44 P.M.
TAPE HFC 04 - 56, Side A
TAPE HFC 04 - 56, Side B
TAPE HFC 04 - 57, Side A
TAPE HFC 04 - 57, Side B
TAPE HFC 04 - 58, Side A
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 1:44 P.M.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Bill Williams, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Mike Chenault
Representative Eric Croft
Representative Hugh Fate
Representative Richard Foster
Representative Mike Hawker
Representative Reggie Joule
Representative Carl Moses
Representative Bill Stoltze
MEMBERS ABSENT
None
ALSO PRESENT
Cheryl Frasca, Director, Division of Management & Budget,
Office of the Governor; Bruce Tangeman, Fiscal Analyst,
Legislative Finance Division; Robert D. Storer, Executive
Director, Alaska Permanent Fund Corporation, Department of
Revenue; Bob Bartholomew, Chief Operating Officer, Alaska
Permanent Fund Corporation, Department of Revenue; Laura
Achee, Research and Communications Liaison, Alaska Permanent
Fund Corporation; Roger Cremo, Anchorage.
PRESENT VIA TELECONFERENCE
None
SUMMARY
HJR 9 Proposing amendments to the Constitution of the
State of Alaska relating to an appropriation limit
and a spending limit.
HJR 9 was heard and HELD in Committee for further
consideration.
HJR 26 Proposing amendments to the Constitution of the
State of Alaska relating to and limiting
appropriations from and inflation proofing the
Alaska permanent fund by establishing a percent of
market value spending limit.
HJR 26 was heard and HELD in Committee for further
consideration.
HOUSE JOINT RESOLUTION NO. 26
Proposing amendments to the Constitution of the State
of Alaska relating to and limiting appropriations from
and inflation proofing the Alaska permanent fund by
establishing a percent of market value spending limit.
ROBERT D. STORER, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, DEPARTMENT OF REVENUE, introduced Bob
Bartholomew, Chief Operating Officer, and Laura Achee,
Research and Communications Liaison. He stated that Ms.
Achee would give a power point presentation (copy on file.)
and that Mr. Bartholomew would discuss the changes to HJR 26
in the Judiciary Committee Substitute.
Mr. Storer explained that from the time the Permanent Fund
was created it has been the prerogative of the Board of
Trustees to discuss inflation proofing and how the earnings
are used. The Board believes the purchasing power of the
Fund should be maintained for future generations. He said
that he Fund can be divided into principal and appreciation,
and realized income or the earnings reserve.
Mr. Storer said that the Board feels a 5% spending limit is
appropriate because it creates a discipline during the up
markets. He pointed out on the slide, "Permanent Fund market
value," that on June 30, 2000 the Fund was worth over $26
billion with $3 billion in income, while that amount
diminished during the following three years in the bear
market. He reminded the committee that the principal is
comprised of three things: mineral contributions, inflation-
proofing from legislative appropriations from the earnings
reserve into the principal, and special legislative
appropriations from the earnings reserve or the General
Fund, in the early 1980s, into the principal. The principal
is almost equally divided into thirds.
Referring to the above slide, Mr. Storer noted that having a
cushion and the discipline to not over-spend allowed the
Permanent Fund to distribute three years' worth of dividends
to Alaskans and also to inflation-proof the Fund.
Mr. Storer explained that after June 30, 2002, during the
last fiscal year the Fund turned negative due to
depreciation of the assets, but a strong fourth quarter
helped the Fund have a positive 3-1/2% rate of return.
Describing the asset allocation, Mr. Storer explained that
the current dividend or distribution formula is based on
realized income from dividends, interest, cash flow from
real estate, and realized gains from the sale of securities,
primarily stock. He stated that the formula made a lot of
sense in the late 1970s and early 1980s when the Fund
invested exclusively in fixed income securities or bonds
because most of the return on bonds came from the cash flow
or interest from the Fund. Over its history, the Legislature
has given the Permanent Fund greater latitude to make
investments. More than half of the Fund is now invested in
securities that gain not because of income on an annual
basis, but because of appreciation in the equity markets.
He said that the Fund has matured, but the payout
methodology has not kept pace with contemporary asset
management.
Mr. Storer explained that the Percent of Market Value (POMV)
concept was discussed in the early 1990s when Hugh Malone
was a trustee and again during a Board of Trustees retreat
four years ago. Inflation proofing now occurs after the
dividend distribution. The Board believes that inflation
proofing, which is in statute, should be memorialized in the
constitution to ensure equal treatment of all generations.
The Board recommends a limit to the amount of appropriation
of the Fund of no more than the real income in excess of
inflation. The Board looked back at historical allocations
and the assets of the Fund, as well as forward, and the
Board believes 5% is on the high end of what is possible.
No more than 5% could be appropriated in any given year, and
to smooth the payout the Board proposes using the five-year
average as of June 30.
Mr. Storer stated that this is consistent with modern payout
methodology, with 85% of university endowments using some
form of percent of market value. Over the long term, the
Board projects that the Fund will earn 8%, with inflation at
about 3%. The important number is the 5% real rate of
return, he said. The Board adopted an asset allocation last
week showing a projected rate of return of 7.6%. The
Board's consultant projects inflation at 2.6% over the next
five years.
Co-Chair Harris asked if the inflation proofing at 3%
includes the money automatically deposited from royalties
every year. Mr. Storer replied, no, the contribution from
royalties would increase the size of the Fund and would be
inflation-proofed along with the existing balance. Co-Chair
Harris asked if the average of 3% could be higher if the
rate of return was higher, with the inflation-proofing as
much as 15%. Mr. Storer said that would be true in the
near term, in a single year, but with market volatility the
Board believes it is important to look at a longer time
horizon. Co-Chair Harris asked if the deposit of 25% of oil
royalties is on top of the 3% inflation, and Mr. Storer
affirmed.
Mr. Storer noted that page 4, "Fund Performance," shows the
Fund returns for the past 10 years. The slide encompasses a
number of extreme periods, including when the stock market
was well above historical perspective and a period of bear
market when it was going down. The Fund earned a 5.3% real
rate of return because inflation was 2.5% during that
period.
The next slide presented showed a rolling 10-year real rate
of return. Mr. Storer explained that the average of the 10
years earned a return in excess of 5%.
Representative Croft asked if the graph shows the rate from
1994 looking back to 1984, rather than in a given year. Mr.
Storer replied that is correct, and agreed that there is
volatility in any given year. During two years of the bear
market, the Fund still earned in excess of 1% real rate of
return and up to 2%, but over shorter time horizons the
volatility of the bear market did not achieve the goal.
Mr. Storer discussed the next slide, "Realized income v.
market value" which shows the change in income from one year
to the next. In 1995, the realized income was 80% greater
than in the prior year. The slide indicates that the current
formula has significantly greater volatility on a year-to-
year basis than the proposed payout method limiting the
payout to no more than 5%.
Mr. Storer addressed the question, "Why do we need The
POMV?" The POMV ensures the option of an annual payout and
the evaluation of a payout of up to 5%. POMV makes the
payout more stable from year to year. The payout methodology
is consistent with the Fund's current investment strategy.
Under its current methodology, a security such as G.E. must
be sold in order to gain any benefit from owning the stock,
but with POMV the security could be held to gain the
benefits of its appreciation during the entire period. For
the future, POMV prevents overspending in the good years.
Mr. Storer discussed "behavioral finance," explaining that
this discussion five years ago at the end of the bull market
would have made 5% too conservative, and now the Board is
being challenged to consider if 5% is too optimistic in
reaction to a bear market. He stated that the POMV
maintains the purchasing power of the entire Fund.
Mr. Storer addressed the slide posing four questions "What
are Alaskans asking?" They have asked, "Will this change
leave the principal unprotected?" Mr. Storer explained that
this methodology doesn't need the term "principal" in the
Constitution because it leaves the entire Fund protected.
Decision-makers would have the option of dipping into the
"old concept" of principal, but it would be a policy
decision.
In reference to the next slide, "How will POMV affect my
dividend?" Mr. Storer said that it depends. Under the
existing formula, it probably doesn't affect the dividend
but the Board believes that there is a strong argument to
mirror the dividend formula in POMV. The market will affect
the dividend most, and asset allocation. If some of the
Permanent Fund is used for state government, it will earn
less interest on a smaller Fund and that would affect the
dividend either modestly or significantly.
Mr. Storer discussed, "Is POMV a raid on the Permanent
Fund?" The Board would be considering Percent of Market
Value if there weren't fiscal problems, and the Legislature
would be discussing how to resolve the fiscal problems if
there weren't the POMV. The Board of Trustees proposal is to
memorialize inflation proofing in the Constitution.
"Why fix the Permanent Fund if it isn't broken?" Mr. Storer
offered an editorial comment that it is broken. A fifteen-
year bull market has masked some of the problems with the
payout formula. Under the existing formula there is some
probability of no payout at all if an extreme bear market
hits, or hyperinflation.
Another question is "Has the Permanent Fund been double-
inflation-proofing?" Mr. Storer explained that the Fund
invests in equities that appreciate well in excess of
inflation. The answer is the Fund is not double-inflation-
proofing under current statutes. If stock is bought and the
managers decide to sell it and take a profit, the profit is
converted into realized income and distributed to the
citizens of Alaska. As long as the appreciation of that
asset can be converted into realized income, it can be
available for distribution.
Co-Chair Harris asked whether the dividend under the present
formula would be more or less than last year's dividend.
BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA PERMANENT
FUND CORPORATION, DEPARTMENT OF REVENUE, replied that the
October 2003 dividend was about $1100. For the next three
years the dividend is projected to be smaller than that,
given the five-year averaging and the continuing effect of
the bear market. A median case market for three years would
put the dividend below last year's amount, and then it would
start to climb again.
In response to a question by Co-Chair Harris, Mr.
Bartholomew explained that if the market increased very
dramatically, the dividend might catch up, but over a 5-year
average it would not catch up immediately.
Mr. Storer commented that the Fund earned in excess of 20%
over the past calendar year including realized income. He
said that even with that significantly higher return, we
would still be seeing a lower dividend in the next few
years.
BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA PERMANENT
FUND CORPORATION, DEPARTMENT OF REVENUE, explained the
changes in the latest version, CSHJR 26(Jud) reflecting the
Board of Trustees proposal. Page 1, line 10 adds a
reference to the new subparagraph (b) being added to the
constitution. Mr. Bartholomew explained it inserts one line
where a second paragraph will define the five percent
spending limit.
Page 1, line 11 removes the words "the principal of which"
from the Constitution. This change removes the distinction
between the principal and the earnings reserve. The Fund
becomes one pool of money versus two. Mr. Bartholomew
explained that under current statutes, there is a second set
of books accounting for the earnings reserve and the
principal. Currently the earnings reserve doesn't have the
protection and this proposes to combine and protect the
entire Fund.
Page 1, lines 13 & 14 deletes the guidance for where income
of the Fund should be deposited. The intent is for all
income to remain in the Fund until appropriated by the
Legislature. Mr. Bartholomew informed the committee that the
1976 Constitution stated that all income from the Permanent
Fund would be deposited directly into the General Fund. For
several years in the late 1970s and early 1980s, all
Permanent Fund earnings went directly into the General Fund
on an annual basis and were spent on general state
government.
Mr. Bartholomew continued, in 1982 the Legislature provided
that the Permanent Fund income would go into the Earnings
Reserve, which would be an account in the Permanent Fund.
For the past 22 years the earnings have stayed in the
Permanent Fund until appropriated by the Legislature. The
effect of this change is not by statute but in the
Constitution that all earnings would stay in the Permanent
Fund until appropriated, subject to the spending limit.
Page 2, lines 2-4 adds a new subparagraph (b) that
establishes an annual payout limit of 5% of the total market
value of the Fund. The market value will be based on a five-
year average. This is to protect the Fund from inflation and
preserve the real value over the long term. Additionally,
this provision allows the Legislature and the state
administration to know one year in advance the amount
available for appropriation. Mr. Bartholomew explained that
the annual 5% spending limit based on the total value of the
Fund would be computed on a five-year average to cover any
big spikes up or down.
Page 2, lines 7 - 10 adds a transitional provision that
clarifies that the balance in the Fund's earnings reserve
remains in the Permanent Fund. Some have argued that the
earnings reserve belongs in the General Fund.
Page 2, lines 11 - 13 states that if the constitutional
amendments pass the Legislature, they will be placed before
the voters at the next general election in November 2004.
Co-Chair Williams commented that the Mental Health Trust
Board has a Percent of Market Value plan that pays out 3-
1/2%, and asked Mr. Storer his thoughts on it. Mr. Storer
replied that the Permanent Fund manages a substantial
portion of the Mental Health Trust (MHT) assets, and MHT has
done a good job of creating the discipline being proposed
here. The Mental Health Trust has language in policy instead
of constitutional language. He said that his goal is to
create a variant and to memorialize it in the Constitution
rather than in policy.
In response to a question by Co-Chair Williams, Mr. Storer
said that the 3-1/2% is conservative to create an arbitrary
cushion. The Permanent Fund doesn't propose that all 5% be
appropriated, and anything beyond 5% would create
overspending for a period.
Mr. Bartholomew added that 5% was the statutory direction to
balance the benefits of the Fund between current and future
generations. Spending less than 5% in the near term equates
to less need now and future generations benefiting from a
larger Fund. Spending more than the 5% equates to a larger
need today that will lead to a smaller Fund in the future.
Co-Chair Williams commented that the Mental Health Board has
proposed 3-1/2% and he needs an argument against it. He
referred to the slide showing the June 30, 2003 realized
income of $100 million and asked how a dividend would be
paid out if it decreased. Mr. Storer replied that under the
existing formula, the Fund does run the risk of fewer funds
available for distribution. Under the POMV, the payout would
be more predictable. The Legislature could evaluate the
markets and the real income and determine an appropriate
payout.
Co-Chair Williams questioned whether the Mental Health Board
would have to take money out of the corpus of the Fund after
the bear years of 2001-2003 if the market goes up in 2004.
Mr. Storer explained that the Mental Health Trust manages
for a 5% real rate of return and takes a conservative
approach by only spending 2/3 of the real income. The
Permanent Fund proposal cushions for potential down years by
not overspending in the good years, and it suggests that 5%
is that balance.
Mr. Bartholomew added that the Mental Health Trust is
proposing to build up a reserve by spending 3-1/2%, but
under POMV that's inherent in the long-term average. The
Permanent Fund came out of a 3-year down market with barely
a cushion and it almost hit zero. People ask if three more
down years would eat into the principal. He pointed to
history, noting that to protect the Permanent Fund and make
it grow, the Legislature swept $5 billion out of the
earnings reserve account into principal in addition to what
was needed for inflation-proofing. Under the Constitution
and the statute, in the early 1980s and as late as 1999, the
Legislature swept away the reserve for the down years.
There is the risk of going to zero because the Legislature
made the principal bigger, which doesn't work under the
current rules. The real rate of return over the 20-year
history of the Fund has been well over 5%. Mr. Bartholomew
asserted that over time it is not an issue that 5% will
prove to be the sustainable yield. He expressed that good
intentions and rigid rules led to potential problems with
the Fund.
Representative Croft discussed the four-year reserve POMV
approach of the Mental Health Trust to ride out the bad
years and not have to invade principal. He expressed that
their approach has the advantage of not needing a
constitutional amendment, and that one of the criticisms of
POMV is the potential of invading principal. Mr. Storer
restated the original intent of Percent of Market Value to
memorialize inflation proofing in the Constitution. He said
that there are mechanical problems in creating reserve pools
that involve a statutory distinction to do what
Representative Croft proposed. He lauded the intent of the
Mental Health Trust Fund, but noted that their approach
makes it incumbent on future administrators and trustees to
share the present philosophy.
Mr. Bartholomew responded to Representative Croft that this
is one of the main policy questions before the Legislature.
It would be possible to begin creating a reserve out of the
future earnings of the Fund before spending. The reserve
would earn over the next few years and grow quickly if it
was not spent on dividends, but it would have to be left
intact to establish a 4-year cushion. The Board struggled
with removing the word "principal" because it's not under
their policy purview, but the trustees needed to make a
recommendation on how to manage the Fund. They recommended
5% balanced with a dividend or other payment into the
economy to buffer any shock to the economy of going to zero.
It is a policy question for the Legislature. The POMV works
whether "principal" is left in the Constitution or taken
out. He stated that he feels that in 5 or 7 years, it won't
matter and the Permanent Fund will grow a reserve as it has
done historically. The reserve was swept clean and
protected by being put back in the Fund.
TAPE HFC 04 - 56, Side B
Mr. Bartholomew continued, it's a policy call and both a
reserve and a payout could be possible if great earnings are
expected for the next three years, but he felt it would not
be realistic.
Mr. Storer clarified that the Mental Health Trust Board
adopts their spending plan instead of the Legislature, while
the Legislature adopts the spending plan of the Permanent
Fund. He said that it is natural to assume that the
Legislature would appropriate the entire 5% if that were the
limit.
Co-Chair Williams asked how the POMV five-year average would
protect the principal. Mr. Bartholomew explained that the
Board felt the current rules don't protect the principal.
He gave the example of the June 30, 2000 balance of over $3
billion or 15% available to be spent in the earnings reserve
after dividends and inflation proofing. He pointed out that
the principal was only protecting 85% of the Fund in 2000.
The trustees felt that 15% available for spending in one
year was too much, given how it was invested. They
questioned whether they were taking on too much risk as a
board, and they needed more assurance to stay in the
conservative fully invested asset allocation. The Board
feels that this policy balances the risks of the markets and
how to determine payouts. Principal can provide protection,
but POMV can provide more in the long term.
Co-Chair Harris asked if the enshrinement of the dividend in
the Constitution has concerned the trustees. Mr. Storer
stated his "mantra" is that how the funds are distributed is
the prerogative of the Legislature.
Co-Chair Williams questioned whether enshrining the dividend
in the Constitution with a subsequent erosion of principal
through payouts or a bear market would be a problem that
could be remedied. Mr. Bartholomew replied that enshrining
the dividend under the current rules would result in
conflicting provisions and the most restrictive one would
win. If one provision is not to spend below principal, and
another is to pay a dividend, the dividend wouldn't be paid
if you didn't have the earnings.
Co-Chair Williams asked for clarification of how to protect
the principal after several years of a bear market. Mr.
Storer said it's vague how the market will do. There would
be some risk over the near term of dipping into the current
principal, but over the long term, if no more than 5% were
paid out, the concept of principal would be protected.
Representative Hawker asked if the POMV concept that was
brought before the Legislature last year is a new response
to current fiscal situations or if it had been around
longer. Mr. Storer explained that the Board is not
reinventing anything. At a Board retreat in 2000, the
recommendation to ask the Legislature for a Constitutional
change was discussed. In 1984, Trustee Hugh Malone proposed
the POMV payout, and endowments and universities have been
using POMVs for some time. The Ford Foundation started
discussions in 1968, and Roger Cremo identified the issue in
1970.
Representative Stoltze asked if it was mandated by court
order that the Mental Health Trust couldn't invade the
principal. Mr. Storer was unsure how they define principal
and offered to get back to Representative Stoltze on the
question.
Representative Stoltze asked if there would be a problem
with adding a period after "market value" on line 3 of the
title in order to remove subjectivity. Mr. Bartholomew
replied that from a technical perspective it wouldn't affect
the constitutional amendment. The Board's intent is to show
why to adopt POMV and he offered to check with the trustees.
The trustees debated keeping the title as short and clean as
possible or to provide some explanation in it, and they
decided to provide explanation.
Representative Stoltze hoped he hadn't been unfair in
calling the title subjective but explained that he'd heard
debate on the best approach. Mr. Bartholomew replied that
the Board believes their proposal is the best way to protect
the Permanent Fund from inflation and to preserve its
purchasing power. The change in asset allocation from 25
years ago brought the Board to this proposed change. Six or
eight years of research led to their proposal but the Board
is aware of other perspectives.
Representative Croft suggested requiring inflation proofing
in the Constitution according to the Consumer Price Index
(CPI) last year, for the actual inflation. Mr. Storer asked
Representative Croft if he suggests the 5% limit plus CPI,
or only the CPI. He commented that last calendar year the
Fund earned over 20%, with an 18% real rate of return, and
asked how Representative Croft would envision that language.
Representative Croft suggested retaining the current system
and paying out of the accumulated annual earnings for the
actual inflation each year. He expressed concern that 7
years of predicted oil prices have always been incorrect and
he doubted that the numbers could be accurately predicted
over the long term. He commented that there likely would be
a different market structure that is more global and "high
tech" in the future. With the POMV formula and with
substantially higher inflation numbers, he felt that the
Fund would not be adequately protected.
Mr. Storer shared his perspective that from the Great
Depression through the hyperinflation of the 1970s,
purchasing power has been more of a problem than
hyperinflation. He said that purchasing power is at risk
with either the current method or the POMV, and lower real
rates of return can't be avoided. The late 1970s inflation
rate was 8% or 9%, and the 30-year Treasury bond yielded
over 14%. Given the price depreciation, the actual return
on fixed income securities like bonds was negative, and that
asset class was not covering inflation despite the high cash
flow. He stated that equities carry a greater risk than
bonds. In his opinion, it is reasonable to expect to achieve
a 5% real rate of return, with more options in the future
for achieving 5%.
Representative Croft noted that under the current
methodology, inflation proofing would be at the actual rate
rather than a created rate of 3% under POMV. Mr. Storer
commented that if the Fund is not achieving a real rate of
return under the existing system, it is a question of
whether the dividend or inflation-proofing the Fund comes
first. He questioned whether future elected officials would
make the same decisions as those of past officials.
Representative Croft commented on riding out a bear market,
and continuing to pay out of the Fund while eroding the
principal. Mr. Storer expressed that POMV is not about the
concept of principal, or the mineral wealth and
appropriations, but the purchasing power of the Fund. In
either the current method or POMV, elected officials must
decide whether to maintain the purchasing power or have a
distribution in a hyperinflation situation.
Mr. Bartholomew added that in either scenario during
hyperinflation, the Fund would not earn enough money to
cover the effects of inflation. Under POMV, the Legislature
would still have the option to make appropriations during
that period when the purchasing power of the Fund has not
been covered first. The first choice under the current
statute is to decide whether to spend out of the earnings to
pay the dividend. Under either scenario, there is the risk
of not making enough money during hyperinflation.
Representative Croft expressed concern over the tough
decision between inflation proofing or distributing the
dividend. He said that in a continued bear market under the
POMV, the Legislature would be unable to do either, because
it would dip into the "principal" and continue to spend 5%
when the Fund isn't realizing it.
Co-Chair Williams observed that the Legislature could decide
not to pay out a dividend in situations of hyperinflation,
but it couldn't if the dividend is enshrined in the
Constitution.
Mr. Storer stated that under the existing system, the
potential exists for no payout for several years. Under
Percent of Market Value, the decision-makers have the
option. He noted a distinction between the concept of
principal and maintaining the purchasing power of the
Permanent Fund.
Representative Croft suggested adding protection for the
principal in this resolution, and he provided an example
that in no case it could be lower than $25 billion. Mr.
Storer replied that guidance or benchmark language has been
requested, using the concept of principal existing in
statute.
Representative Croft also suggested protective language
stating that 5% may be appropriated if the average
performance over the past 5 or 10 years has netted a real
rate of return of at least 5%. Mr. Storer pointed out that
the Fund worked with language identifying the 10-year
rolling average. He said that he would prefer 20 years but
it is unreasonably long.
Representative Foster recalled the hyperinflation in April
1977 when the rate was 2-1/2% over prime and the prime was
24%.
Representative Stoltze asked if the Board formally
considered inflation proofing and whether to
constitutionally protect it. Mr. Storer replied that the
cornerstone of POMV is to maintain the Fund's long-term
purchasing power and to memorialize it in the Constitution.
By statute, it now occurs after the dividend distribution.
Inflation proofing was actually the motivation for the
Board's proposal. Board discussions did not go forward
regarding adding additional formulas such as CPI impact on a
year-to-year basis.
In response to the question by Representative Stoltze, Mr.
Bartholomew added that currently inflation-proofing is done
by statutory formula subject to legislative appropriation.
The Board wanted to prioritize inflation proofing over other
payouts and place it in the Constitution. Representative
Stoltze clarified that he asked whether the Board of
Trustees had discussed it. Mr. Bartholomew replied that the
Board's discussions involved moving the current option to
inflation-proof into the Constitution as a requirement. He
noted that some funds, including the Mental Health Trust,
had a lower spending limit than 5%, giving higher confidence
of more protection in the future against inflation. The
Board focused their discussions on the rate for POMV.
Mr. Storer stated that the Board did not discuss
perpetuating the existing formula with the CPI as the way to
inflation-proof.
Representative Stoltze doubted that the dividend
distribution would not have come up in Board discussions.
Mr. Bartholomew had thought Representative Stoltze had asked
about CPI. He clarified that when the Board discussed the
POMV effect on the dividend, it focused on investing and
generating earnings and stayed away from policies on the
dividend calculation. When the Board debated leaving in or
removing "principal", it discussed the option of making a
distribution from the Fund each year, either for a dividend
or other payout. The Board felt it was important to make the
dividend option available to the Legislature in good or bad
years.
Mr. Storer said that in early discussions, the Board
identified moving to POMV without changing the dividend
formula in statute. He asserted that the POMV would smooth
the dividend payout.
Representative Stoltze asked if the Board philosophically
supports the proposals to constitutionally dedicate the
dividend. Mr. Storer replied that the trustees are clearly
not taking a position on how the funds are used. If the
POMV and the enshrinement of the dividend are passed, the
Board's position will be evaluated in May. He said that it
would be a big policy issue.
Mr. Bartholomew added that six or eight years ago there were
proposals to constitutionalize the dividend, and in the past
the Board of Trustees weighed in on the issue.
TAPE HFC 04 - 57, Side A
Mr. Bartholomew continued, the new Board obtained an updated
legal analysis, and the opinion was that putting the
dividend in the Constitution would not affect the tax-
exempt status. The Board moved from historical opposition
to putting the dividend in the Constitution to a neutral
position. The Board felt that staff should not speak on the
use of the earnings, or about a combined proposal.
Representative Hawker commented on past legal theory that
enshrining the dividend in the Constitution would violate
the public purpose test and expose the Fund to federal
taxation. He asked for absolute assurance that enshrining
the dividend would not expose the Permanent Fund to
taxation. Mr. Bartholomew replied that the simple answer is
no, it would not, but he deferred to the Attorney General.
He doubted that this is an instance in which the Attorney
General could give absolute assurance.
Mr. Storer added that the old legal opinion was ambiguous
but there was reasonable probability that enshrining the
dividend would make the Fund taxable. Recently it appears
there is greater probability the Fund would not be taxable.
The IRS will not give an answer until it has happened, and
probably not until two years after enshrinement of the
dividend.
Representative Hawker asked if the Permanent Fund
Corporation had requested a private letter ruling from the
IRS. Mr. Storer replied that it had not. Representative
Hawker commented that the Legislature is currently presuming
that the lawyers are correct. Mr. Storer agreed.
Co-Chair Harris asked the percentage of the Fund outside of
the corpus in the past. Mr. Storer responded that in
February 2000, about $8 or $9 billion of Fund value was in
excess of the corpus. The current statement for February
2004 reflects $23.191 billion in principal, and Fund value
at $27.958. March of 2000 marked the beginning of the bear
market.
Co-Chair Harris asked if over 15% of the value of the Fund
was outside of corpus. Mr. Bartholomew said that it
approached 20% at its peak. Co-Chair Harris expounded that
if the state continues to deficit spend and not use earnings
of the Fund except for inflation proofing and the dividend,
it will deplete the Constitutional Budget Reserve and have
to tax the people. He discussed the break-even point with
taxation and asked how the state will ultimately fund health
care and education programs without a gas line or without
using the Permanent Fund. He asked if the concern is
protecting the value of the Fund, wouldn't it be better that
a maximum of 5% can be spent at any time instead of having
15-10% of its value available for appropriation.
Mr. Storer answered that he suspects sustainability and
predictability relate to taxes, the dividend or use of the
Permanent Fund. He asserted that having sustainability
embedded in the process would allow everyone to make better
informed decisions instead of waiting until there is an
urgent need to address expenditures.
Representative Joule asked for examples of other funds using
Percent of Market Value that have not been successful. Mr.
Storer said there have been a few that were in the bull
market and were caught overspending in excess of the real
rate of return. Retirement plans boosted their benefits
because of the bull market as well.
Representative Croft noted the legal opinion commissioned by
Attorney General Gregg Renkes on the tax issue. He urged
adding language that states that if there is an adverse tax
ruling, this provision falls out. He didn't think it's a
legal issue anymore, but noted there are mechanisms to
protect the dividend while protecting the tax-free status.
Representative Fate questioned whether in rolling the
earnings and income into the Fund there was extensive
discussion by the Board on the future needs of the State.
Mr. Storer replied that the Board of Trustees always has
made it a goal to assure the Fund's purchasing power for all
generations. Mr. Bartholomew added that the historical
intention was to grow the Fund. A public policy decision to
do more than that in any one year could not be done under
the present proposal. The public policy challenge is
balancing long-term protection with short-term flexibility.
The Board looked at it from the asset management standpoint,
to maintain the purchasing power of the existing asset
versus making more of it available.
ROGER CREMO, ANCHORAGE, provided an historical summary of
the POMV concept mentioned earlier, and the creation of the
Permanent Fund. He noted that he had written the proposed
constitutional amendment that included POMV, and added that
he has been interested in it since 1984. He recommended
looking at the constitutional provision that the amendment
would become part of. He stressed that he supported the
amendment and that 5% was not the correct number. He did
not think that the trailing average approach should be used.
Mr. Cremo continued, arguing for ending the year on December
st
31, instead of June 30, so the Legislature would know how
much Permanent Fund money would be available. Five years
does not encompass an investment cycle, and he recommended
six or seven years. The 5% is the real rate of return after
inflation and that is not the same as the rate of
withdrawal. He gave the formula for the rate of withdrawal
that would equal 4.31%. He asserted that 5% would cause an
eventual erosion of the fund.
Mr. Cremo suggested that before accepting the POMV, the
Legislature should look at the constitutional provision. He
said that it deserves extreme treatment and must be based on
sound analysis and good drafting. The state's track record
in the fiscal area in constitutional amendments is not good.
There have been two since 1965. The provision limiting
appropriations was so flawed that it never came into play.
The other amendment established the budget reserve fund,
which he feels has facilitated, if not promoted, deficit
spending in most of the years since 1990. The voting
requirements have resulted in special sessions costing
millions in deficit spending.
Mr. Cremo discussed endowments. According to the present
constitutional provision, 25% of royalties should go into
the Fund but Section 15 allows that provision to be
circumvented. Increasing the production tax diverts
billions of dollars from the Fund. It is a matter of
analysis. Mr. Cremo read from Section 15, "the Fund's
principal can be used only for those income-producing
investments specifically designated by law for permanent
fund investment." The Permanent Fund Corporation has
invested billions in stocks that don't pay dividends. The
Corporation does a very good job and has been forced to
resort to a liberal interpretation of the constitutional
provision. The income-producing requirement applies to the
principal, and the earnings reserve account is exempt from
the requirement of investment. Mr. Cremo stated that the
greatest fault with Section 15 is in not requiring all of
the oil money to go into the Fund.
Co-Chair Harris asked for clarification. Mr. Cremo
explained that the oil money comes from various incomes
including royalties, rents, severance taxes and bonuses
received from the oil.
Mr. Cremo added that endowments have two purposes. One
purpose is to perpetuate the flow of money going into it,
which would go into the operating entity if not perpetuated.
The other purpose is to smooth out the flow of money and to
keep it going after the original source of money has ended.
The Permanent Fund provides a good example of the endowment
with the perpetuation purpose. It will be producing revenue
in the long term.
Mr. Cremo discussed the university endowment in relation to
the Permanent Fund endowment. The university endowment
alleviates uncertainty and it will stabilize the flow. In
the case of Alaska, oil revenue is volatile. About 15% to
20% of the oil money goes into the Permanent Fund and the
rest goes to the General Fund. As a consequence, the State
has been fiscally unstable for many years. He suggested
that the state could stabilize the flow of that money by
routing it all through the Permanent Fund. The income
produced by conservative investment would be more stable
than the oil money. The constitutional amendment would
provide a new system for allocating to all government
services, including the dividend, according to the priority
assigned by the Legislature. The amendment would not
dictate how the money would be spent. A transitional period
is needed to lead into that system. Currently, the wealth
of the state is being spent in the 9% to 10% range. He
questioned what is sustainable. Currently, the principal is
being invaded at a great rate. The transition period rate of
withdrawal would be at 8% to 9% for several years until it
worked down to what is sustainable.
Mr. Cremo mentioned Section 17 of Article 9, and an
amendment that would transfer the bulk of the assets of the
budget reserve fund to the Permanent Fund while leaving a
balance. If excess were collected, that amount would go into
that fund. It would fund deficits and it would help in
meeting natural disasters. It could not be used as a bridge
for fiscal gaps or for borrowing.
Mr. Cremo reiterated that making any changes to Section 15
of Article 9 of the Constitution should be reconsidered
until the time comes that it can be done correctly.
Co-Chair Williams stated that the bill would be HELD in
Committee for further consideration.
HOUSE JOINT RESOLUTION NO. 9
Proposing amendments to the Constitution of the State
of Alaska relating to an appropriation limit and a
spending limit.
Representative Stoltze introduced HJR 9, commenting that
this may be the fifteenth hearing on the measure. He stated
that a constitutional spending limit is appropriate among
the other fiscal plan measures being advanced. He believes
that the public will support the measure, bringing an added
responsibility to make it especially well crafted. The
measure has evolved since he first introduced it and it
incorporates provisions requested by the Governor's Office.
He has tried to include enough exemptions, accompanied by
the limitation, to anticipate the needs of the state along
with the anticipated growth in population. He expressed his
hope that the measure would allow for the controlled growth
of government.
TAPE HFC 04 - 57, SIDE B
KELLY HUBER, STAFF TO REPRESENTATIVE STOLTZE, explained the
changes in the Judiciary Committee Substitute. Section 1
outlines (indisc. -tape change) Page 2, lines 2-5, state
"The total amount of appropriation under this subsection
made for a fiscal year may not exceed two percent of the
amount appropriated for the fiscal year two years preceding
the fiscal year for which the appropriations are made." Ms.
Huber noted the exclusions from the calculation of a
spending limit that follow on lines 7 through 29 of page 2.
Section 2 adds a new section stating that the spending limit
would go to the ballot in 2004, be applied to appropriations
in FY 06 and be reaffirmed by the voters every six years
thereafter. Ms. Huber stated that the constitutional
amendment is based on the two preceding fiscal years'
average, with the calculations set forward by the Governor's
Office.
CHERYL FRASCA, DIRECTOR, DIVISION OF MANAGEMENT & BUDGET,
OFFICE OF THE GOVERNOR, stated that spending limit
discussions have considered using inflation versus
population, instead of this proposal that includes change in
the personal income rate. The rationale for using personal
income rate as one indicator is that if citizens throughout
the state were doing well and their income went up each
year, it would be appropriate for the state to increase its
spending. Then, if citizens were going through a
retrenchment due to recession, the state should cut back as
well. Earlier discussions indicated that when the state is
in a recession, ironically some of the state costs go up for
public assistance and other responsibilities. Ms. Frasca
said it's a toss up which indices to use. Costs and revenues
don't always go up at the rate of inflation. This measure
puts forth using 50% of the rate of change in personal
income for three calendar years averaged out, and the
percentage equal to the percent of change in the state's
population, linking it to the demand for services.
Ms. Frasca commented on lines 1-2, page 2, and she
encouraged the committee to think seriously about continuing
to use a three-fourths vote threshold because no other state
requires such a high threshold to exceed a spending limit.
In terms of setting 2% spending cap, Ms. Frasca mentioned
there might be extraordinary unanticipated events requiring
additional spending by the state. Ms. Frasca felt that
setting the 2% threshold would bind future legislatures when
looking forward to events such as the buildup for a gas
pipeline. She questioned whether the Legislature wants to
lock that in.
Ms. Frasca encouraged selectivity regarding what is excluded
from the limit because it sets up an incentive to categorize
spending under things that are excluded from the limit.
Instead of being considered off budget, items will be
considered off limit. One addition in the Judiciary version
first excluded University receipts and then narrowed it down
to University tuition. She concluded that it is an excellent
idea to have re-ratification of the provision in the future
to allow the revisiting of concerns.
Vice-Chair Meyer asked why six years was chosen for bringing
it to a vote again. Representative Stoltze explained that it
was a subjective judgment based on a bill before the Senate
in 2000 with a provision allowing safety valves. It would
give the voters a chance to reaffirm their support or back
out of it.
Ms. Huber clarified that the current spending limit in the
Constitution has only one re-approval by the voters after
four years.
Vice-Chair Meyer expressed his support for HJR 9. He agreed
with Ms. Frasca that a three-fourths vote in each house is a
"high hurdle" and asked the sponsor if he intended that.
Representative Stoltze replied that it is arbitrary, and he
acknowledged that he is cognizant of unintended
consequences.
Co-Chair Harris asked whether the appropriations to pay
general obligation and revenue bonds are included in the
spending cap. Representative Stoltze replied it is exempted
under (c)(6) on page 2, lines 17-18.
Representative Stoltze commented on the 2% limit under the
three-fourths vote, and expressed concern about setting any
percentage limit. He suggested that it should be part of
the committee's discussion whether the 2% becomes a cap or a
floor.
Ms. Huber noted that debt service may not be excluded under
the Judiciary version, but it was excluded in a previous
version. In response to a question by Co-Chair Harris, Ms.
Frasca clarified that (c)(6) excludes the revenue bond
proceeds. One consideration for discussion is that this does
exclude the proceeds from the bonds. She advised that
increased costs of debt service don't mean increased
revenues to the state. Under the spending limit, debt
service would still need to be paid, which competes with
everything else for the same dollars.
Co-Chair Harris expressed that the public has voted for a
revenue bond appropriation in an election that authorizes
the incurrence of this debt, and he asserted that it should
be placed outside of a spending cap imposed on the
Legislature. Ms. Frasca replied that it would create the
incentive to incur debt to pay for costs because it's
outside the spending limit, as opposed to paying cash. Co-
Chair Harris argued that the public has voted to do that,
and should understand that whenever it votes on general
obligation bonds.
Representative Croft agreed with Ms. Frasca that the
proceeds in general obligation and revenue bonds are
excluded, but it is only the revenue bond appropriation that
is excluded. He felt that general obligation (GO) debt
service makes more sense than revenue bond debt service. He
asked why the appropriation to pay GO bonds is not excluded
along with the appropriation for revenue bonds. Ms. Frasca
explained that revenue bond proceeds are excluded from the
spending limit because an outside entity, such as an
airport, would be collecting the revenues to pay for that
debt.
Co-Chair Harris expressed concern with the spending cap and
how to keep under control the costs of services that lack a
continuous source of income. He noted that a revenue bond
generates its own revenue by charging fees. If there is no
payment of fees, there is no service. He reiterated that if
the public votes to incur debt service, they have informed
the Legislature of their wishes.
Representative Stoltze commented that the Anchorage tax cap
exempts debt service. Ms. Frasca agreed, but explained that
the voters are approving additional taxes to be collected
from them to pay the debt service.
Representative Croft asked if the tobacco settlement
involved revenue bonds. Ms. Frasca affirmed. He then asked
if the student loan that was recently sold would be
considered a revenue bond under this measure. Ms. Frasca
affirmed. Representative Croft noted that he understands
revenue bond exemptions for airports, but questioned the
tobacco settlement and student loans being under this
exemption. Ms. Frasca explained that the tobacco bond debt
service is being paid by the tobacco settlement. The
repayments of student loans are paying the student loan
corporation bond debt service. She made the distinction that
in each case, an external entity is providing the revenues
to pay the debt service, as contrasted with GO bonds or
school reimbursement bonds where the state comes up with
general revenues or a mix of other sources, including
corporate receipts or dividends.
Representative Croft questioned exempting AHFC, AIDA, or the
student loan corporation, which he feels are almost an
interchangeable source of General Funds. He asked if
exempting them creates an incentive, pointing out that that
the student loan corporation can either pay a dividend
included in the spending limit, or it can bond on that
revenue stream and it won't be included in the appropriation
limit. He asked if it doesn't create a way around the
spending limit.
Ms. Frasca replied it is important to distinguish that this
proposal is an appropriation limit on the spending side. A
corporate dividend from AHFC is a fund source, while revenue
bonds and the federal government are distinct revenues from
external sources. It is prescribed how they can be spent
and these are excluded from the spending limit.
Representative Croft noted that in (c)(5) the proceeds are
exempt, and in (c)(6) the appropriations made each year to
pay for the bonding are exempt. He questioned if this isn't
a way around the spending limit itself. Ms. Frasca said
that he was correct, that in this measure, the tobacco
settlement in the future would be a way to circumvent the
spending limit. She said that AHFC is different, in terms
of revenues generated for general government purposes that
are fungible.
Representative Croft asked why AHFC is different. Ms.
Frasca clarified that (c)(5) relates to revenue bonds, and
the mechanism by which you raise the money and repay the
cost. The annual AHFC dividend is calculated on a statutory
formula, and it's not tied to selling bonds. The state ends
up paying AHFC's debt service on their bonds out of the
dividends. This governs the appropriation. Revenue bonds
where a third party pays debt service are excluded under
this. The chairman has indicated that he also wants to
exclude the state paying the debt service.
Representative Croft reiterated his concerns about AHFC
using revenue bond proceeds on the capital budget, which
would be excluded from the limit. He questioned whether
always revenue or GO bonding the capital would circumvent
the appropriation limit. Ms. Frasca indicated that she
couldn't track his scenario, but explained there are rules
governing revenue bonds. There must be a source to repay the
bonds, and GO bonds can only be used for certain purposes.
She couldn't say if the AHFC dividend, which is a fund
source, would be excluded from the appropriation limit.
Representative Croft brought up a past proposal to borrow
against future federal transportation money in order to fund
big projects. He asked if that was a revenue bond. Ms.
Frasca explained that it was the GARVEES and that the debt
service was paid by the state. She was unsure if the
Department of Revenue categorized it as a revenue bond. She
commented that voters approved it on the ballot, and there
were competing opinions by the attorneys general.
A discussion ensued between Representatives Stoltze and Fate
and Co-Chair Harris. Ms. Frasca noted that it was the kind
of debt service that concerns the chairman.
Co-Chair Harris walked through the spending limit, noting
that an increase in the appropriation would require a three-
fourths vote of both bodies to increase it by 2%. He asked
if it is 2% above the amount appropriated two years
previously plus 2%. [Answer indisc.]
Co-Chair Harris asked the sponsor if he had considered a
stair-step provision, noting that a three-fourths vote is a
high threshold. He suggested having one spending increase
requiring a two-thirds vote and a higher benchmark at three-
fourths. Representative Stoltze asked Representative Hawker
if he had explored it in a Ways and Means Committee version
of the proposal.
Representative Hawker stated that Ways & Means reported out
a version with a stair-step mechanism of a fixed 2% at a
fifty percent vote, another 2% increase at a two-thirds
vote, and an additional 2% increase at a three-fourths vote.
Co-Chair Harris asked how much a 2% increase would total
today, and then noted that it would be $40 million of $2
billion dollars. He asked if it is cumulative.
Representative Stoltze replied that it is.
Representative Hawker advised that this draft has changed
substantially since last session. He explained that it would
be cumulative only on the amount of increase that actually
occurred. It would be cumulative but not compounding.
Representative Croft asked in Section 16(a) if the numbers
were negative in both the population growth and personal
income, would it bring the appropriation limit down. He
discussed a scenario of a net increase of zero if population
and personal income zero each other out, resulting in a zero
increase appropriation.
Representative Stoltze commented that the limit must also
counterbalance where the money is coming from.
Co-Chair Harris expressed that there is no negative downside
in the amount of money that could be spent. He quoted
"Appropriations made for a current fiscal year shall not
exceed the amount appropriated for the fiscal year two years
immediately preceding by more than fifty percent," --of
those two factors. He stated that there would be a "ceiling"
that you couldn't go above, but you wouldn't have to go
below it either.
Representative Croft asked for a technical explanation when
there are negative numbers for population or income in (1)
or (2). Co-Chair Harris responded that it means the
appropriation can't be more than in the previous year.
BRUCE TANGEMAN, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION
responded to Representative Croft that based on his
scenario, the appropriation could go down.
Representative Croft asked for clarification on whether
negative numbers in (1) and (2) would reduce the base. Mr.
Tangeman replied yes, it is possible that the appropriation
limit would go down if both income and population are going
down, and the previous three-year average is added together
and halved.
Representative Croft commented that this could mean the
appropriations have to be reduced from the base year. Mr.
Tangeman briefly noted that 37 states have spending limits.
Their revenue sources are income or sales taxes, or both. If
their population or personal incomes decrease, the states
generate less tax, or revenue, and the spending limits would
need to go down. He said that Alaska is unique because it is
not linking the spending limit to revenue, although this
measure is using similar scenarios.
Representative Croft noted that the University of Alaska
federal research grants are excluded, and asked if research
grants from nonprofits are also excluded. Representative
Stoltze replied (c)(10) probably addresses it. Ms. Frasca
recalled that the example she had discussed with
Representative Stoltze was the University Foundation, not
research grants from nonprofits. She confirmed that federal
grants are excluded but was unsure how nonprofit research
grants are categorized.
Representative Hawker questioned (c)(11) exempting tuition.
The University of Alaska creates receipt authority and
appropriates money in excess of what they expect to receive,
and not just federal receipt authority but in the area of
private contributions and funding. He recalled that it is
more than $65 million. He said it would seem that receipt
authority is subject to the spending limit, and it might be
one of the first to go, setting the University up with the
inability to receive private grant monies.
Ms. Frasca explained that the assumption is that the $65
million in "empty receipt authority" would be the base for
the future spending limit. Only when the University got up
to $65 million in actual receipts would it be limited by the
percentage change in the spending limit in the future. In
previous versions, University receipts were excluded. She
predicted that in the future, new expenditures would get
categorized as University receipts. She advised that any
time an off-limit category is set up, there is an incentive
to recategorize spending, and she urged caution in deciding
what is excluded from the limit.
Representative Hawker posed a hypothetical dilemma, asking
whether the Legislature would increase Medicaid or keep this
empty receipt authority at the University, and he suggested
that the Legislature would sacrifice the empty receipt
authority. It would pump up the Medicaid appropriation in
the current budget by $65 million but in the following year,
there would no receipt authority. He advised using extreme
caution
Representative Hawker noted that (c)(10) is extremely vague
and asked what is money held in trust. Ms. Frasca gave the
example of the public school trust fund, which has a
dedicated stream. She said there aren't a lot of trust
funds. Representative Hawker observed that the Mental Health
Trust is a true trust fund. He asked if "money held in trust
by the state" isn't much broader language. He suggested that
designated funds are also monies held in trust. Ms. Frasca
offered to check with the Department of Revenue, but she
didn't expect that designated fund sources would fall into
that category. In response to a question by Representative
Hawker, Ms. Frasca concurred that the legal intent of the
language in (c)(10) is to tie down specific trusts.
Representative Hawker pointed out that money held by debt
covenant or by other legal covenants of the state would
clearly be money held in trust.
Representative Hawker brought up the base formula in Section
16(a)(1) and (2) on page 1, and agreed with Representative
Croft that with mathematical logic, it has the potential to
go negative. He asked the number for this year and the
projections for the next two years. Ms. Frasca stated that
it was calculated for FY 06 at a 3.47% increase.
Representative Croft asked who estimated personal income.
Ms. Frasca replied the source is the U.S. Bureau of Economic
Analysis. The data for 2003 will not be available until this
April.
Representative Hawker requested a hypothetical projection
using the numbers through 2002, with 3.47% for FY 06 and
extrapolating on the presumption that would remain steady.
He asked if there have been any attempts to contrast it to
increasing state expenditures that are known and
quantifiable. He noted that there is a footnote on all the
projections stating, "this projection is based on level
General Fund spending of $2.3 billion dollars a year." He
argued that there is a fallacy in that presumption, with 15%
compounding increases in Medicaid and the issue of the
public retirement systems.
TAPE HFC 04 - 58, Side A
Representative Hawker continued. He asked if the State would
be "setting itself up" with the budget spending limit to
have to close schools because there isn't money to meet the
State's contractual obligations.
Mr. Tangeman explained that he had gone backward to 1996 to
determine the projection. Representative Hawker argued that
there were forward projections the last time this measure
was discussed.
Representative Fate brought up the University of Alaska
research grants and pointed out that the Board of Regents
has broad constitutional powers to determine how the
accounting is done. He thought it was problematic to place
it in a spending limit because of those constitutional
powers, absent any statutory language demanding the
University do that. If the language exists, then the
University must comply, but he was not aware of any existing
language.
Co-Chair Harris thought the concern was that the Legislature
provides yearly authorization to the University to spend and
receive. All monies the University receives must come
through the Legislature. He voiced concern with the amount
of general funds authorized from year to year without
knowing what the recurring revenue sources will be, saying
some revenues are a one-time occurrence that shouldn't be
built into the base.
Ms. Frasca stated that she had misspoken regarding the funds
held in trust, clarifying that those are retirement
appropriations for the administration of retirement programs
for FICA, PERS and TRS, JRS, National Guard retirement
system, and the Mental Health Trust.
Representative Croft asked if the Marine Highway Fund and
oil spill contingency are held in trust. Ms. Frasca did not
think that any of those would apply. Representative Hawker
stated that it is a definition issue of "trust and agency
funds."
Co-Chair Harris stated that if the funds are spent, they are
not recurring sources of revenue. Representative Croft asked
if appropriations into the trust would still be within the
appropriation limit.
Ms. Frasca replied that deposits into the endowment would
also count in the limit, but not the endowment balance
itself. Representative Croft asked if there was a firmer
definition of "trust," because he was curious about Power
Cost Equalization (PCE) and the Marine Highways.
Representative Croft noted excess authority in the Kodiak
Launch Facility. He asked if it would be exempt. Ms. Frasca
replied that they are primarily federally funded and
statutorily designated. Representative Croft thought that
the Facility could be increasing the civilian satellite
launches from a base of 5 launches per year. He expressed
concern that with the constitutional amendment, $50 million
would need to cut from other areas because Kodiak received
$50 million in business. Ms. Frasca stated that it does not
appear that Kodiak would be excluded. Representative Croft
thought that it did not make much sense.
Co-Chair Harris expressed concern with the definition of
general funds. He stressed that when there is not a known
source of revenue, the Legislature should not depend on it.
He suggested that the revenue sources should be defined.
Representative Stoltze interjected that when the measure was
conceived, it attempted to grasp actual funding. There are
drafting challenges and the original version addresses the
general fund spending.
Co-Chair Harris asked if this is an attempt to address
annual spending when there is not the backup for the money.
He thought that grants and business charges should be
encouraged. He noted that the Kodiak Launch Facility
operates on the amount of business it can generate even
though it receives authority to spend money. A parallel
example is the receipt authority given to the University for
general funds while being expected to raise tuition and
apply for grants. He did not want to discourage that.
Ms. Frasca stated that the challenge is to determine if the
Legislature wants to limit the growth of government, which
HJR 9 addresses, or to limit how much the spending from
certain revenue sources can increase from one year to the
next. She gave the example of the tax limit in Anchorage,
which limits how much taxes can go up from one year to the
next. It is a limit on a fund source. She cautioned that the
proliferation of designated fund sources over the past
decade has eroded the General Fund and set up gross in non-
General Fund areas. Those monies go to particular programs.
The pure general funds tend to be spent on the traditional
responsibilities of government that include education,
transportation maintenance and operation, corrections,
public safety, the Legislature, the Governor's Office, and
the court system. The challenge, she said, is whether to
apply the limit to only the general fund portion, and allow
the non-general fund activity to go unchecked. It would
create an incentive to re-categorize funding.
Co-Chair Harris noted that the difference is that the
Legislature has the appropriation authority to determine
where the money will be spent. He commented on the small
cost of operating the Division of Motor Vehicles while the
receipts charged to the public are relatively large. It is
general funds, but annual revenue that is counted on. He
questioned how to control the costs but not penalize the
agencies.
Mr. Tangeman commented that it is Alaska's dilemma compared
to other states whose appropriation is directly connected to
their revenue source. Other states generate new revenues.
Representative Stoltze agreed to continue discussion of the
measure with Representative Hawker and other committee
members. Co-Chair Harris stated that he is supportive of
the concept of containment of government growth but
expressed that it is a difficult concept to address.
Representative Fate noted that there had been discussion
regarding revenues rather than expenditures. He voiced
appreciation of the revenue approach discussion, and
applauded Representative Stoltze's work on the bill.
Representative Croft asked if the bills would be moved at
the next meeting. Co-Chair Harris stated that they each
measure needs a fair amount of work before being reported
out of Committee. Co-Chair Williams asked Representative
Croft for his changes before the next meeting.
Co-Chair Williams stated that HJR 9 would be HELD in
Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 5:17 P.M.
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