Legislature(2003 - 2004)
03/25/2004 01:50 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 25, 2004
1:50 P.M.
TAPE HFC 04 - 67, Side A
TAPE HFC 04 - 67, Side B
TAPE HFC 04 - 68, Side A
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 1:50 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
Pete Ecklund, Staff, Representative Bill Williams; Bob
Bartholomew, Chief Operating Officer, Alaska Permanent Fund
Corporation, Department of Revenue; Robert D. Storer,
Executive Director, Alaska Permanent Fund Corporation,
Department of Revenue; Tamara Cook, Director, Legislative
Legal and Research Services, Legislative Affairs Agency; Joe
Balash, Staff, Senator Gene Therriault
PRESENT VIA TELECONFERENCE
Mike Williams, Tax Division, Department of Revenue,
Anchorage
SUMMARY
HB 236 An Act imposing a tax on employment; and providing
for an effective date.
CS HB 236 (FIN) was reported out of Committee with
"individual recommendations" and with a new fiscal
note by the Department of Revenue and
indeterminate note #1 by the Department of Labor &
Workforce Development.
HB 298 An Act relating to the distribution of
appropriations from the Alaska permanent fund
under art. IX, sec. 15(b), Constitution of the
State of Alaska, and making conforming amendments;
and providing for an effective date.
HB 298 was HEARD and HELD in Committee for further
consideration.
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.
SB 291 An Act extending the transition period for
activities involving unstamped cigarettes; and
providing for an effective date.
SB 291 was reported out of Committee with a "do
pass" recommendation and with fiscal note #1 by
the Department of Revenue.
SENATE BILL NO. 291
An Act extending the transition period for activities
involving unstamped cigarettes; and providing for an
effective date.
Vice Chair Meyer commented that his questions had been
answered on the bill. He MOVED to report SB 291 out of
Committee with individual recommendations and with the
accompanying fiscal note. There being NO OBJECTION, it was
so ordered.
SB 291 was reported out of Committee with a "do pass"
recommendation and with fiscal note #1 by the Department of
Revenue.
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.
Co-Chair Williams introduced Amendment #3, #23-LS1006\V,
Cook, 3/22/04. (Copy on File). He noted that the amendment
would completely change the bill. His intent was to take
testimony on Amendment #3 and take no action at this
meeting.
Representative Hawker MOVED to DIVIDE the question proposed
in Amendment #3, pointing out there are two distinct
considerations proposed in the amendment.
Co-Chair Williams reiterated that no official action would
be taken on Amendment #3 at this time.
ROBERT D. STORER, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, DEPARTMENT OF REVENUE, acknowledged that there
are two components to the amendment. He offered to address
the first component, which would in effect memorialize the
principal in the Alaska Constitution by identifying the
Earnings Reserve Account.
Mr. Storer provided a "history lesson" on how the Board came
to the conclusion that a Percent of Market Value (POMV)
without principal would be a better approach. There is no
question that the Board recognizes the merit and would not
be opposed to the proposed amendment, which puts principal
into the Constitution. Three years ago when identified, the
Board did opt to leave the principal in the Constitution.
He emphasized that the key is the 5% spending limit.
Principal puts a floor on what might be appropriated.
Following a lengthy discussion with the Permanent Fund Board
of Trustees, discussing the merits of continuing principal
versus the 5% limitation, the Board concluded that having
the percentage of market value payout with 5%, the principal
would be their preferred approach. The Board believes that
the 5% does memorialize inflation proofing in the
Constitution and would not need a floor. It recognizes that
on some occasions, there will be up and down markets, but
over the long term, the purchasing power of the fund would
be maintained. He noted that there is companion language,
which gives the Legislature direction of when they would be
moving below the 5% real rate of return.
Mr. Storer continued, if that language was maintained, there
is a limited chance that there could be a small or no pay
out at all, in a bear market. That could potentially limit
how much is available for payout. At this time, there is a
cushion in the fund. The principal is about $23 billion
dollars and the Permanent Fund is approximately $27 billion
dollars. As the market progress and the appreciation fund
grows significantly greater than this concept of principal,
then that would become less of an issue because the cushion
would become greater over time. He observed that including
the principal, will give decision makers a little more
latitude in terms of the pay out, no more than 5% in the
down markets. Also, by paying out the 5% in down & high
markets, will treat all generations equally.
Mr. Storer concluded, it is important to note, but not as it
applies to the proposed statute, there are proposals that
would memorialize the dividend in the Constitution at a
fixed rate. If the Legislature is contemplating putting
principal back into the Permanent Fund that would create a
limit on how much could be paid out. If there is a proposal
for a fixed payout, there would then be competing formulas.
He commented that could be worked with, however, it should
be evaluated with other proposals.
BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA PERMANENT
FUND CORPORATION, DEPARTMENT OF REVENUE, added, that he did
not have anything additional to add to the concept of
leaving in the principal and the protection of the
principal. He observed that another change that the
amendment proposes is to Section 2, where it actually
provides for the dividend and public education as two of the
uses for the money from the Permanent Fund. That was not in
the previous version.
Co-Chair Harris clarified that Section 1 basically
establishes an Earnings Reserve Account in the corpus and
under the umbrella of the Constitution. It also establishes
the fact that the only pot of money that can be used under
constitutional protection is the Earnings Reserve Account.
The second section then would establish in Constitution:
· The 5%,
· A dividend, and
· Allows the use of that 5% for public education and
the administration process.
Co-Chair Harris added that if the public was asking for some
sort of protection for a dividend, the amendment would
provide that and protects it from going into the principal
of the fund. He knew that was the public's highest
priorities.
Mr. Storer agreed that there is interest in those subjects.
He pointed out that it would also memorialize the concept of
the dividend. The public definitely understands the concept
of principal protection, which he thought was a good thing.
He urged members to keep in mind the concept of the worse
case scenario and that the amendment memorializes the
concept of the dividend but does not say that a dividend
would not be paid, but if the market value was eroded, the
floor would disappear. He emphasized that the language
creates both a discipline and a floor. There is a limited
chance that there could be a small or no dividend.
Mr. Bartholomew added that under the Board of Trustees
proposal, they merged principal and Earnings Reserve into
one account. From the administrative perspective, part of
the benefit from that action would be only the records from
the generally accepted accounting principals would tell the
Legislature the size of the fund and the market value times
5%. Into the future, the Permanent Fund Corporation would
continue to report as they are at this time. There are two
sets of accounting records used, the generally accepted
accounting principal and the accounting for the realized
income. He assumed that was a difficult piece to
understand. The existing process will remain in place. The
protection of principal is out-weighing some of the other
benefits.
Co-Chair Williams agreed that it is difficult to understand
these concepts. He asked if the proposed legislation would
put that language into the Constitution. Mr. Bartholomew
acknowledged that it would and that the principal is
included in the Constitution at this time. Co-Chair
Williams questioned why the Legislature would want to place
that language into the Constitution.
JOE BALASH, STAFF, SENATOR GENE THERRIAULT, presented a
history on the proposal, which dates back to 2001. At that
time, Senator Therriault was Chairman of the Legislative
Budget and Audit (LBA) Committee, which has oversight of the
Permanent Fund, and was responsible for introducing the
first proposal by the Trustees to switch to the percent of
market value (POMV) methodology. Then Senate President
Halford rewarded Senator Therriault for that introduction by
referring it to his Committee in Senate State Affairs.
During the next fourteen months, public hearings were held
statewide. During subsequent and current legislatures have
spent much of the interim taking public testimony on current
POMV language. The concept of principal keeps coming around
to "haunt" the notion of POMV and why it is not the public's
first choice as a way to preserve the fund. In order to
preserve the notion of principal, the rest of the fund must
be accounted for in some manner. By doing so, the decision
was to create an Earnings Reserve Account similar to what is
around today. He added that realized versus unrealized
income has not been distinguished in the bill.
Co-Chair Williams recommended that Senator Therriault be
th
present at the next scheduled meeting for Monday, March 29
at 9 a.m. Mr. Balash indicated that he could arrange that.
Representative Hawker asked if the amendment was attempting
to create two buckets of money within the Permanent Fund.
Mr. Bartholomew responded that there have been many legal
discussions over how many buckets of money there are.
Currently, the Permanent Fund is accounted for in three
separate pools. The principal pool, the unrealized
earnings, and the realized earnings. Language on Line 13,
of the proposed amendment addresses depositing earnings into
the reserve. He understood that language would require them
to continue as presently done and account for the Permanent
Fund in the three buckets. The spending is driven by what
is available in the realized earnings account.
Representative Hawker inquired why new language was needed
to accomplish something already being done. Mr. Bartholomew
stated that the constitutional amendment does achieve the 5%
spending limit, which is the most significant action being
taken by using the 5% spending limit, which protects
purchasing power into the future. However, the manner in
which it is accounted for will change.
Representative Hawker voiced his confusion regarding placing
the 5% limit into constitutional language. Mr. Bartholomew
reiterated that it was in original bill. He explained that
on Line 10, leaves the word "principal" in the Constitution
and requires that the principal not be spent. Mr. Storer
added that it was true that the 5% limit existed before. It
is consistent with the Permanent Fund's objective, putting a
limit on how much could be appropriated at any given time.
The amendment creates a floor, and if the value of the fund
falls below that floor, no money could be used below the
principal floor. Over time, as the profits of the fund grow
and the difference between the value of the fund and the
principal become wider and wider, then the point of
principal becomes less important because the cushion becomes
greater.
Representative Hawker understood that the 5% does not change
and would only apply to a portion of the money in the fund.
Mr. Storer replied that the 5% limit would apply to the
entire fund. The definition of how much could be used,
would be 5% of the 5-year moving average of the entire fund.
The next step would be how much would be available above the
floor, which is the second message clarifying if there are
sufficient funds in order to reach the 5% requirement in
excess of that floor. If not, then they cannot take more
than the floor.
Representative Hawker thought that the policy call would be
the 5% of the entire value of the fund but only making a
portion available to draw the 5%. He believed that language
was inconsistent. Mr. Bartholomew agreed. Representative
Hawker questioned limiting the source of that fund. Mr.
Storer advised there are ways to provide insight when the
fund does not earn the 5%. He pointed out that the
Permanent Fund has been working with a number of elected
officials, who could evaluate whether or not to use the
entire 5% or instead make less of a policy decision.
Representative Hawker thought if there was inadequate money
in the bucket, then nothing could be drawn. He questioned
if that would be the same effect as using the "sidebar".
Mr. Bartholomew explained that if the sidebars or guardrails
were placed into statute, there would always be the option
of the Legislature to not follow them. If the extra
protection were placed into the Constitution, there would
never be the option of not following it.
Representative Hawker suggested that was an "all or none"
attitude. Mr. Bartholomew attempted to clarify, noting that
had been the debate the Board went through when making their
decision. As the Constitution is written today, there are
market scenarios, where there can be short-term declines in
the financial markets, which reduce the value of the
earnings reserve. If that scenario was to repeat itself,
when there is a principal limitation, which is hard and
fast, there is a line or value of the Permanent Fund that
can not be spent below, and is how it currently is and would
continue with the amendment. He reiterated that there is a
hard and fast line, which the Legislature cannot spend
below. When the Trustees evaluated whether to remove
principal or not, they recommended that the benefits must be
evaluated from having a predictable, sustainable pay out
from the Permanent Fund versus the risk taken by removing
the principal protection and saying that there are near turn
down markets, spending down into the Permanent Fund with the
intention that it would be paid back in the future good
years. That was the discussion. From the sponsor of the
amendment and what the public wants, the Board is
comfortable using the word principal. The experience of the
Permanent Fund is that with time to educate and work with
the public, the public then tends to support the concept of
a sustainable and predictable payout.
Representative Hawker understood that the amendment was a
trade off and would provide some inherent predictability and
stability to the previous version of the bill for
preservation of the notion of principal. He commented that
the word "notion" troubled him and that he did not think
that the State really wanted to trade predictability and
sustainability for such a vague thought.
Co-Chair Harris stressed that the reality is that the
amendment would protect a value of the principal set at a
certain period of time when it is voted on. That value
could never be taken away. Any earnings of the Permanent
Fund above and beyond that time would be deposited into the
second account called the Earnings Reserve Account. Today,
that account is not protected at all. Under the amendment,
it would be entirely protected under the Constitution. The
Earnings Reserve Account is the only pot of money that the
5% could be taken from. If there were a down market for a
considerable period of time, it would not prohibit taking 5%
of the fund. However, if the Earnings Reserve Account was
depleted, then no more could be drawn from the Permanent
Fund, as it would be constitutionally protected as the
principal. He emphasized that there is no "notion" involved
at all in the proposed language and emphasized that there is
absolute value protected. He asked Mr. Storer if that was a
correct interpretation. Mr. Storer responded that the only
distinction would be when that point is hit, and then the
citizens of Alaska would have to vote.
Co-Chair Harris pointed out that they would only have to
vote on the constitutional question, which would require
two-thirds of both Bodies's in order to place the question
before the voters.
Co-Chair Harris noted that two concerns were being
addressed. One is the constitutional protection of the
corpus or principal value at a certain point. The Permanent
Fund will have to determine whatever that number is at that
point in time. Any amount above and beyond that is Earnings
Reserve Account money. Mr. Bartholomew indicated that the
question needing to be answered is how to address the
State's on-going receipt of oil deposits. The Permanent
Fund understands that the principal would have to grow from
the on-going oil deposits; however, all the earnings of the
fund would be what is placed into the Earnings Reserve
Account.
Co-Chair Harris pointed out that that the Constitution
already clarifies that 25% goes into the principal of the
fund. That value is what is created by the investments and
would become part of the Earnings Reserve Account. That is
the pot of money that is constitutionally protected by the
5%. Mr. Storer stated that there is approximately $4.7
billion dollars of realized and unrealized money in the
account at this time.
Co-Chair Harris added that the Legislature still must
determine how much of that 5% comes out of the Earnings
Reserve Account that could be used for dividends, general
operations of the departments and education. Mr. Storer
agreed. Co-Chair Harris added that the Legislature could
adopt 100% for dividends and could be changed at any period
in time by the Legislature if they wanted to face public
scrutiny. He noted that the public is concerned about the
erosion of the principal. They need assurance that the
principal is not going away. The only way that they will
get that assurance is if it is constitutionally protected.
Under the proposed amendment, the Legislature would have no
power, only the public would have that authority. Mr.
Storer agreed.
Vice Chair Meyer asked the highest and lowest amount earned
by the fund over the past twenty-five years. Mr. Storer
stated that in March 2000, the principal was between $19 &
$20 billion dollars and now the principal is $23 billion
dollars. Mr. Bartholomew responded that there is a return
that the fund has earned under the generally accepted
accounting principals. It is important to consider what the
fund has earned under the realized earnings approach.
Vice Chair Meyer thought that 8% had been the average over
that period. Mr. Storer commented that the fund has been
through a substantial bull market for about fifteen years.
The real rate of return for nineteen years is 6.9%, and is
not sustainable. In the last ten years, there has been both
bull markets and a severe down market. Over that period of
time, the fund earned a return of 7.8% with inflation at
2.5%, which makes a 5.3% real rate of return.
Vice Chair Meyer understood Co-Chair Harris' concerns of
eroding into the principal, however, pointed out that it had
gone up to 5%. With inclusion of the proposed safeguards,
it would not go up to the full 5%. Given the POMV concept,
it is anticipated that during the next 50 to 100 years, the
average earnings would be 8%. Mr. Storer interjected that a
5% real rate of return could be anticipated. That is how
the 5% has been determined on what should be appropriated.
Vice Chair Meyer asked if the Permanent Fund supports the
amendment. Mr. Storer responded that historically, the
Permanent Fund supported the constitutional amendment with
principal remaining in. After a long study, it was
determined that there could be a better way to approach it.
The Board has concluded that the percentage of market value
pay out, as it now stands, is the recommended way, and will
allow the Legislature to determine whether or not it is in
the best interest to sustain the full 5% pay out or less
depending on the market. At no time, has the Permanent Fund
claimed that leaving the principal in would be inherently
bad. That approach is considered to be second best and is
viable.
Representative Hawker commented on the statement regarding
the principal in as being the second best approach. He
asked if that was a decision made from a financial policy
point of view or a political perspective. Mr. Storer
responded that he hoped it was a decision made from his
financial hat perspective so as to insure the long-term
viability. Discipline must be created to provide a cushion
for both the good and bad times, which has been consistent
for the Permanent Fund. They do recognize the importance of
the principal to the citizens of Alaska.
Representative Hawker heard that the bill as originally
presented was the first best approach, however, the
Legislature wears a more political hat first. The political
debate is one of preserving the notion of the principal. He
recommended exploring how to manage it, while continuing to
accomplish distribution of the wealth to all Alaskans. He
asked if the Permanent Fund considered using the old three-
column trust account system.
TAPE HFC 04 - 67, Side B
Representative Hawker continued, that system consists of
three columns, principal, earnings and expenses. The
realized earnings would be shifted between the three
columns. He acknowledged that the methods of accounting
have evolved and changed. He pointed out that the fund has
gone from the notion of principal to an accounting standard
that measures funds by value instead of principal. Mr.
Bartholomew explained that in 1997, the accounting standards
that oversee all generally accepted accounting principals
require the Permanent Fund to mark all of its assets to
current daily price to guarantee knowing if value was being
gained or lost. At the end of each month, a report is made
available to the Legislature from the Permanent Fund.
Representative Hawker knew that accounting changes have
evolved during the 1990's. In 1997, pronouncements mandated
to take a new approach to the fund. He asked if that was
the basis of the first best value based approach. He
thought that the second best approach appears to be more
outdated and does not reflect these flucuations. Mr.
Bartholomew agreed. He added that under the concept of
principal, the Permanent Fund will maintain two sets of
accounting records. That is what is done today. That
methodology would have gone away under a pure market
approach. Representative Hawker commented that would put
the burden back on the Legislature.
Co-Chair Williams stated that HJR 26 would be HELD in
Committee.
HOUSE BILL NO. 298
An Act relating to the distribution of appropriations
from the Alaska permanent fund under art. IX, sec.
15(b), Constitution of the State of Alaska, and making
conforming amendments; and providing for an effective
date.
Representative Hawker explained that HB 298 was the
companion legislation to HJR 26. He requested that the bill
be HELD in Committee until the final form of HJR 26 was
determined.
Co-Chair Williams stated that HJR 26 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.
Co-Chair Harris MOVED to ADOPT work draft #23-LS0435\E,
Cook, 3/25/04, as the version of the legislation before the
Committee. There being NO OBJECTION, it was adopted.
PETE ECKLUND, STAFF, REPRESENTATIVE BILL WILLIAMS, explained
the changes made to the work draft. Page 2, Line 19,
incorporates Amendment #1, passed at a previous hearing.
Page 2, Line 23, the previous version had the appropriation
going to the Constitutional Budget Reserve (CBR) and being
exempt, whereas, the current version places it in a reserve
fund established by law. Mr. Ecklund pointed out that there
is a legislative obligation to repay $5.5 billion dollars to
the Constitutional Budget Reserve (CBR), and cannot be
satisfied through direct appropriations but rather through
sweeps. If the Legislature chooses to appropriate that
amount at this time, it will not go to satisfying the debt
obligation. New language would be in place for a future
date at which time the legislature would repay the CBR.
There are on-going revenue surpluses to the State and any
appropriations to the CBR would not be subject to an
appropriation limit.
Co-Chair Harris asked if it was constitutional, not be able
to place money from the general fund back into the CBR. Mr.
Ecklund responded that an appropriation to the CBR would not
count as a repayment of that obligation. If the money was
left in the CBR and was swept, that would count toward the
debt. Co-Chair Harris inquired why it would not count
toward repayment. Mr. Ecklund explained that was the manner
in which the constitutional provision had been constructed.
TAMARA COOK, DIRECTOR, LEGISLATIVE LEGAL AND RESEARCH
SERVICES, LEGISLATIVE AFFAIRS AGENCY, advised that Section
17, Article 9, establishes the amount available should be
deposited into the general reserve fund. Subsection (D)
contains that sweep language. If an appropriation is made
from the Budget Reserve Fund, until the amount appropriated
is repaid, the amount in the general fund available for
appropriation at the end of each fiscal year, shall be
deposited into the General Reserve Fund. She noted the
language used: "Until the amount is repaid". It does
stipulate that the repayment comes from a separate
appropriation or whether the source of money coming into the
sweep may be construed as a growing Budget Reserve Fund.
None of Section 17 was drafted in contemplation that there
would be appropriations into the Budget Reserve Fund nor
does that section specifically prohibit appropriations into
that fund.
Ms. Cook advised that the question is whether the
appropriation is considered to be a repayment or simply a
decision made by the Legislature to add more money to the
Budget Reserve Fund. The repayment structure suggests that
a Court might find that the repayment occurs through a
sweep. There is no obligation to repay it and becomes
automatic. If money is appropriated out, then money flows
back in as it is available.
Co-Chair Williams understood that is why there is a reverse
sweep.
Co-Chair Harris pointed out the information indicates it
would be until the amount was repaid, but does not indicate
how. If the amount is repaid and satisfied, then the
Legislature would not have to do a sweep. Ms. Cook
responded that was plausible but she did not know if the
Court would accept that.
Co-Chair Harris questioned the point made by Ms. Cook that
the Legislature would not be allowed to replenish the CBR
with general funds. Ms. Cook replied that the Legislature
certainly would be allowed to if there were general funds
sitting there. There is no question that anything left in
the general fund on the last day of the fiscal year, could
be swept. The legal question is, if the Legislature does
appropriate it, would the Court find that to be an
independent task that the Legislature did to grow the fund,
but not eliminating the obligation under Section "D". She
agreed that could be a possible argument.
Co-Chair Harris asked what would happen if the Legislature
placed language into the budget to appropriate a certain
amount of money to the Constitutional Budget Reserve to
satisfy the terms and conditions in the constitutional
language under Section 17(D). That is the intent of the
Legislature. Ms. Cook thought that would be a good argument
to put before the Court. If you could clearly indicate that
it is the intent of the Legislature to satisfy the 17(D)
requirement, it would make a good case.
Co-Chair Harris presented a hypothetical situation in which
the State had a natural gas pipeline and the amount of money
coming into the State coffers was more than enough to
satisfy the needs of the government and then that money was
placed into a savings or placed into the CBR to cover the
amount taken out over the years. That could satisfy the
terms that the Constitution requires to sweep and the CBR
could be repaid. Ms. Cook noted that she would be inclined
to agree because she would assume that the Legislature also
has the power to make the choice to make the appropriation
to the CBR or to hold that fund, saying that it is not going
to eliminate the sweeping obligation of the general funds.
It could create a clear expression of legislative intent, in
the particular appropriation act.
Representative Stoltze referenced Page 2, Section 19, asking
the implications of that language in the amendment. Ms.
Cook acknowledged the concerns regarding dueling
constitutional provisions. She suspected that the Court
would not construe it that way. If there were no POMV
amendment, and Section 15 kept the same language, the Court
would find that section to be clear, only income available.
The enactment of the proposed language could not convince
the Court that the Legislature could appropriate from the
Permanent Fund for dividends for anything other than the
income.
Representative Stoltze requested Ms. Cook to research that
further. He noted that he did not have the same confidence
in the five members of the Supreme Court. He thought that
the decisions may be different than what was conceived in
1990. Ms. Cook concurred that the Supreme Court has many
facets that change rapidly. She did not ever want to attempt
to second-guess how they would face any problems. With the
current language, the principal could only be used for
investment and the income shall be put in the general fund
unless provided otherwise by law. The Legislature has in
fact, elected to provide that the income of the Permanent
Fund go into a separate account located in the Permanent
Fund. However, the Legislature could provide by statute
that the income go to an account that is not in the
Permanent Fund, which would only take a statute change. If
confronted with that language, an appropriation from the
Permanent Fund provides payment of the dividends to State
residents. At that point, you could not appropriate from
the Permanent Fund because it does not permit that. If the
Legislature appropriated from the general fund, that
appropriation might not be exempt under that exemption and
the limit might not apply. The problem is the fact that it
might undo the spending limit itself.
Representative Stoltze cautioned that future legislatures
could play chicken with the courts with regards to the use
of the permanent fund earnings. Ms. Cook understood that
Representative Stoltze feared that the language might allow
an appropriation from the principal of the Permanent Fund.
She did not think a Court would reach that decision. A
Court might find that an appropriation from the Permanent
Fund from a different source is not exempt from the spending
limit. Ms. Cook did not see that the Court would find that
if an appropriation occurred, the purposes of the spending
limit would have any authority to actually make the
appropriation. That is not what the language does. The
language only says how to calculate an amount available for
an expenditure for a succeeding fiscal year. The worst case
scenario that could occur is that the State would elect to
set up some program of Permanent Fund payments funded from a
different source and be included within the spending limit
calculation.
Representative Stoltze MOVED conceptual Amendment #3 to Page
2, Line 19, deleting "from the" and inserting "of", to read:
"An appropriation of the Alaska permanent fund for payments
of permanent fund dividends to State residents."
Representative Hawker OBJECTED.
In response to a question by Representative Hawker, Ms. Cook
advised that most likely, a Court would still find it
subject to exclusion if moved to a POMV. If it could be
demonstrated particularly to a specific year that the POMV
formula actually invaded some of the principal, then someone
might be able to present a case to the Court.
Representative Hawker spoke against the amendment,
suggesting that it was more generic verbiage that
encompassed to wide of possible latitudes.
Mr. Ecklund offered alternative language: Page 2, Line 19,
deleting: "From the Alaska Permanent Fund". Representative
Stoltze WITHDREW Amendment #3.
Vice Chair Meyer MOVED to ADOPT new Amendment #3: Page 2,
Line 19, deleting "from the Alaska Permanent Fund". There
being NO OBJECTION, the new Amendment #3 was adopted.
Mr. Ecklund spoke to the next change in the work draft, Page
3, Line 10, Subparagraph (13), adding an exemption to the
limit. That language would describe the reverse sweep, and
would not count against the appropriation limit. He asked
Representative Hawker to describe the change made to Page 1.
Representative Hawker referenced the graph "CS HJR 9 (FIN)
Spending Limit; Base Year of 3 prior year average and 3 year
floating average for variables". (Copy on File). He
discussed the basis for the accommodation of the spending
limit and how much spending increase showed being allowed on
an annual basis.
Representative Hawker stated that in the previous version of
the bill, the index was created from a combination of what
the average rate of change is in the State's population and
personal income. The personal income line has risen
substantially, which has pulled up the spending level line,
if the spending limit was based on the cost of living and
population increase. The committee substitute adopts the
base spending inflator, the average rate in the growth of
the population and the consumer price index and would
provide a slower growth curve. He emphasized the importance
of the personal income line, inflation and that the proposed
limit recognizes the importance of that information. The
work draft proposes to use the base inflation factor; the
average population and the consumer price index (CPI).
However, the manner in which the language is written makes
it limited to the percent of change in personal income.
Representative Croft suggested that would be the most
restrictive approach that could be taken. Representative
Hawker replied that under the economic conditions that have
existed in the past few years, it would not result in the
lowest increment. He had extracted that methodology from
the legislative exchange council's recommendation for
standardized language.
Representative Croft countered, it indicates that the
language was used because we have a tax system that is
generally based on a personal income and we would not want
spending to go up higher than that. Alaska is not based on
that, but instead based on oil. It will be based on
something totally independent from personal income in the
future. He reiterated that other states have radically
different fiscal systems.
Representative Hawker stressed that there is a need to look
to other sources of revenue in the future. Interest is to
provide the greatest assurance and possible protection with
a practiced spending limit. The intent is to not let the
government grow faster than the personal income does.
In response to Representative Croft's query, Representative
Hawker explained that you would need to average the rate of
change in the Consumer Price Index (CPI) and the rate of
change in population.
Representative Croft commented that the reason to tie the
spending limit to personal income is that it would limit the
amount taken from statewide residents. He agreed that there
must be some limit in running government services. He did
not think it would limit, cap, stop or defer any tax, any
use of Permanent Fund earnings or any change in the dividend
structure. It caps what government can do. He emphasized
that he would rather limit the growth of government by how
much is taken from his pocket. Government is limited in
what it can spend, but not in taxation, which limits the
amount that can be put into schools and other services.
Representative Hawker asked if Representative Croft's
concern is the surrender of taxation. He stressed that the
intent is to maintain a growth rate without tying the hands
of future legislatures from appropriation or taxation.
Representative Croft interjected that the hands of future
legislatures are not tied on taxation, but they should be.
Instead, we are binding the hands of future legislatures to
appropriate for schools and public safety. He stressed that
the wrong things would be protected.
Representative Hawker shared Representative Croft's concern.
He voiced concern that there is no way to know the future.
He stressed that nothing should be done to restrict the
future and noted that a forced renewal by the people would
force a review of these issues.
HJR 9 was HEARD and HELD in Committee for further
consideration.
TAPE HFC 04 - 68, Side A
HOUSE BILL NO. 236
An Act imposing a tax on employment; and providing for
an effective date.
Representative Hawker recommended that the bill was ready to
move to the House Rules Committee.
Co-Chair Harris asked the amount of money a person would
have to earn before they were assessed the $100 dollar tax.
Representative Hawker replied $600 dollars. Co-Chair Harris
voiced concern that a person would have to pay $100 dollars
out of $600 dollars earned. He thought that was a
substantial amount for a person to have to pay with such a
small income. He recommended that the earned amount be
raised, having a dramatic effect on someone earning only
$600 dollars.
Representative Hawker advised that at $600 dollars, the tax
would be zero; at $610 dollars, the tax would be $1 dollar.
After that, it would be a 10% incremental increase on the
next $1,000 dollars earned. An aggregate earnings of $1,600
dollars, the tax is zero for the rest of the individual's
earnings. He clarified that in order to pay $100 dollars,
the person would have had to make $1,600 dollars.
Discussion continued between Co-Chair Harris and
Representative Hawker. Co-Chair Harris asked if
Representative Hawker would support raising the amount to
$1000 dollars. Representative Hawker replied that they had
discussed that with the sponsor of the bill and that $600
dollars was agreed upon, and that it is the federal level
for recording of self-employment earnings. He stated it was
not the substantive issue of the bill. Co-Chair Harris
pointed out that the employer would have to deduct the
amount from the person's check.
Co-Chair Harris MOVED to increase the amount from $600 to
$1000 dollars. Co-Chair Williams OBJECTED.
Vice Chair Meyer voiced concern with the amount of overhead
costs needed to generate such a small amount. He questioned
how much the change would impact the total amount generated.
MIKE WILLIAMS, (TESFITIED VIA TELECONFERENCE), TAX DIVISION,
DEPARTMENT OF REVENUE, ANCHORAGE, advised that the revenue
would remain constant whether it comes in at $600 or $1000
dollars because it is a flat tax. The tax would generate
approximately $43 million dollars.
Co-Chair Harris asked at $1000 dollars, would the Tax
Division still need to hire 13 full time and 10 part time
employees to administer the program. Mr. Williams replied
they would. Regardless of the amount, the administrative
structure would remain the same.
Co-Chair Harris maintained his motion on the amendment in
order that low paid workers would be able to keep all their
money.
Representative Croft sympathized with the intent of the
amendment. He pointed out that the amendment would only
help those people earning between $600 and $1000 dollars a
year. He did not think that it would be helping anyone
except unless there income was very low. He stated that he
was most concerned with the person making $12,000 dollars.
Representative Croft elaborated that the effort would not
have much of an effect on the real people who will be hurt
by the bill.
A roll call vote was taken on the motion.
IN FAVOR: Stoltze, Joule, Meyer, Harris
OPPOSED: Chenault, Croft, Foster, Hawker, Moses,
Williams
Representative Fate was not present for the vote
The MOTION FAILED (4-6).
Vice Chair Meyer inquired how the person who has multiple
jobs would be handled. Representative Hawker responded that
the duty to collect is imposed upon the employer until the
employee can demonstrate to that employer that they had the
full amount withheld from their wages for that year. There
could be simultaneous multiple employers or sequential
multiple employers. Complete latitude has been given that
as soon as an employee can demonstrate that they have paid
the $100 dollars, they would have no more withheld. He
added that there is a provision that in any case that an
employee should overpay the $100 dollars, they could apply
for a refund at the end of the year for that overpayment.
Vice Chair Meyer voiced concern with that, pointing out that
many people have multiple jobs throughout the year. There
will be an extra burden placed on the employees to
contribute and for them to keep track of that amount. He
thought that the bill would create extra work, burden and
bureaucracy on the employee.
Co-Chair Williams reminisced that he had worked for three
employers when the last education tax was in place. He
stressed how difficult that had been not receiving the
overpaid amount until the end of the year. If he knew that
if he could track of the amount as proposed in this
legislation, he would have done that.
Vice Chair Meyer worried that many of these workers will not
keep track of the amount they have paid in.
Co-Chair Harris asked if it would take the same number of
employees to implement a full-blown graduated income tax.
Mr. Williams said it would require a larger number of staff
for the income tax, with a full time staff of 80 people.
The amount generated would depend on the particular bill in
place. Under Governor Knowles' version, the amount
generated would have been approximately $350 million
dollars.
Representative Foster commented on the jobs that he had when
he was sixteen years old and the implications of paying that
tax had on him.
Representative Foster MOVED to report CS HB 236 (FIN) out of
Committee with individual recommendations and with the
accompanying fiscal notes. There being NO OBJECTION, it was
so ordered.
CS HB 236 (FIN) was reported out of Committee with
"individual recommendations" and with a new fiscal note by
the Department of Revenue and indeterminate note #1 by the
Department of Labor & Workforce Development.
ADJOURNMENT
The meeting was adjourned at 3:47 P.M.
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