Legislature(2003 - 2004)

03/16/2004 01:44 PM FIN

Audio Topic
* first hearing in first committee of referral
+ 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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