Legislature(2003 - 2004)
03/18/2004 01:44 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
March 18, 2004
1:44 P.M.
TAPE HFC 04 - 61, Side A
TAPE HFC 04 - 61, Side B
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
Representative Peggy Wilson; Bob Bartholomew, Chief
Operating Officer, Alaska Permanent Fund Corporation,
Department of Revenue
PRESENT VIA TELECONFERENCE
Dan Dickinson, Director, Division of Oil and Gas Audit,
Department of Revenue, Anchorage; Michael Williams, Tax
Division, Department of Revenue, Anchorage
SUMMARY
HB 236 An Act imposing a tax on employment; and providing
for an effective date.
HB 236 was HEARD and HELD in Committee for further
consideration.
HB 298 An Act relating to the distribution of
appropriations from the Alaska permanent fund
under art. IX, sec. 15(b), Constitution of the
State of Alaska, and making conforming amendments;
and providing for an effective date.
HB 298 was HEARD and HELD in Committee for further
consideration.
HOUSE BILL NO. 298
An Act relating to the distribution of appropriations
from the Alaska permanent fund under art. IX, sec.
15(b), Constitution of the State of Alaska, and making
conforming amendments; and providing for an effective
date.
REPRESENTATIVE MIKE HAWKER provided an overview of the
legislation. He stated that HB 298 would be effective only
if a Percent of Market Value (POMV) constitutional amendment
is approved by the voters during the 2004 general election.
HB 298 provides conforming language to existing statute to
accommodate changing the constitutional requirement that all
income of the Permanent Fund be deposited into the general
fund to the more limiting appropriation mechanism of "up to
5%" of market value in the proposed POMV constitutional
amendment. It would also recognize the merger of the
Earnings Reserve Fund into the Permanent Fund.
Representative Hawker added that HB 298 provides the annual
appropriation from the Permanent Fund under the POMV
management structure, to be divided equally between paying
individual dividends and public services.
Representative Hawker described each section:
· Section 1: Amends the basis for the Alaska jury
list to people applying for a Permanent Fund
Dividend. Former language referenced applicants for
a "distribution of Alaska income."
· Section 2: Changes the duties of the Legislative
Budget and Audit Committee (LBA) from making annual
recommendations for investment policy for the
"income" of the Permanent Fund to making annual
recommendations for investment policy for the
Permanent Fund. The change would be consistent with
the merger of the Earnings Reserve (income) Account
into the Permanent Fund and with the general
oversight responsibilities of LBA for the Permanent
Fund operations.
· Section 3(a): Provides that no appropriation
"shall" be made from the Permanent Fund in excess of
the average 10-year real rate of return. If the
fund does not make a 5% real return over 10 years,
the amount available for appropriation would be
reduced to the real return. The provision provides
a statutory framework for implementing the "up to
5%" provision in the proposed POMV constitutional
amendment.
· Section 3(b): Provides that annual appropriations
from the Permanent Fund be divided equally between
paying individual dividends and public services.
· Section 3(c): Defines the index to be used in
determining the Rate of Inflation.
· Section 4: The proposed POMV constitutional
amendment allows appropriations based on the "market
value" of that fund. The section provides a
statutory mandate that "market value" be determined
in accordance with generally accepted accounting
principals.
Representative Croft questioned the value flexibility and if
it was realized or unrealized. Representative Hawker
explained that under the generally accepted accounting
principals, the value of business investments of the
Permanent Fund Corporation would be measured on a market
principal. The unrealized earnings and losses would be used
for determination of the value of the fund.
Representative Croft agreed that would be easy with the
stocks and bonds but more difficult with the small real
estate investments. Representative Hawker suggested that it
would be determined in a case-by-case base.
BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA PERMANENT
FUND CORPORATION, DEPARTMENT OF REVENUE, explained that the
determination of value under the generally accepted
accounting principals for stocks and bonds that are publicly
traded in the market have a daily pricing. Under the
accounting principals, they are determined daily for the
value. For the real estate properties direct investments
for buildings, the generally accepted accounting principals
require that the value be recorded at the cost. They are
not marked up and most of the income from real estate comes
from the rental income. That is recorded on an on-going
basis. If buildings loose value, for accounting purposes
that is recorded.
Representative Croft asked if it was only marked down, not
up. Mr. Bartholomew replied that was correct.
Representative Croft thought, "Games could be played with
what fair market value is". He asked other areas that might
be problematic. Mr. Bartholomew advised that at this time,
the Permanent Fund is not invested in anything other than
stocks, bonds and real estate. The Board has made two
decisions during the last two meetings to allocate
approximately 3% of the value of the fund into alternative
investments. The two possible categories are:
· Private equities investing in start-up businesses;
and/or
· Buying businesses already in place.
A manager would be hired to do this work and they would be
responsible for providing a quarterly evaluation. There are
generally accepted accounting principals and rules that are
followed in evaluations.
Representative Hawker added that the Permanent Fund is
subject to an annual outside audit that provides a benchmark
and standardized disclosure procedures, providing assurance
that the determination of fair value would be objective and
consistent and not manipulated by the management of the
fund.
Mr. Bartholomew continued:
· Section 5: Eliminates the current statutory
provision that any unexpended operating budget of
the Permanent Fund Corporation be included in the
determination of "income" of the fund for the
calculation of income available for distribution.
The determination of income available for
distribution will no longer be required under the
proposed POMV constitutional amendment, which bases
the amount that can be distributed on market value.
Accordingly, the provision would no longer be
relevant.
Representative Croft asked if that amount would come out of
the legislative 5%. Mr. Bartholomew explained that the
current constitutional amendment would limit all
appropriations out of the Permanent Fund to 5%, hence the
operating and the investment management costs would come
from that 5%. That would make a portion be placed for the
cost of management, approximately $45-$50 million dollars
per year.
Representative Hawker continued:
· Section 6: The Permanent Fund Corporation manages
the investment portfolio of the Mental Health Trust
Authority. Current statute provides that the income
from those funds be determined "in the same manner
the corporation determines the net income of the
Alaska Permanent Fund." The Mental Health Trust
Authority previously adopted a POMV style
management. The section provides a statutory
mandate that the net income of the Mental Health
Trust fund be determined in accordance with
generally accepted accounting principals. That is
the same language adopted for the Permanent Fund in
Section 4.
· Section 7: The section changes language in the
existing Permanent Fund Dividend payment statutes to
language that conforms to the proposed POMV
methodology. The change has no substantive
consequence on the current dividend payment
statutes.
· Section 8: The section changes language in the
disclosures required on the payment stub for the
Permanent Fund Dividends to language that conforms
to the proposed POMV methodology. The change has no
substantive consequence on the disclosures required.
· Section 9: Repeals statute that would be superceded
by operation of the proposed POMV constitutional
amendment. AS 37.13.140 defines income and net
income of the Permanent Fund for purposes of making
distributions. Under the proposed POMV
constitutional amendment, distributions are based on
market value, not on income. AS 37.13.145 defines
the disposition of income of the Permanent Fund
including inflation proofing and transfers it to the
dividend account. Inflation proofing is inherent in
the proposed POMV constitutional amendment. Section
3 of HB 298 provides for transfers to the dividend
account.
· Section 10: Provides that Sections 3, 4 and 6-9 of
this Act, take effect only if a POMV amendment is
approved by the voters during the 2004 general
election and then takes effect.
· Section 11: Provides that subject to Section 10,
st
the effective date of the Act would be January 1,
2005.
· Section 12: Provides that subject to Sections 1, 2,
and 5, it will take effective immediately.
Co-Chair Williams inquired about Section 12. Representative
Hawker noted that he personally did not support that
section, suggesting that it "clouded" the issue. Mr.
Bartholomew added that the three changes would have little
effect on the Permanent Fund.
Vice Chair Meyer questioned how the Ways and Means Committee
determined the 50/50 split. He assumed that it was the
correct split but wondered how it had been determined. He
noted that the Conference had recommended a 60/40 split and
that the Permanent Fund Corporation had written a letter
indicating that to keep the dividend at the same level as it
currently is, a 70/30 split should be used.
Representative Hawker advised that the 50/50 split had been
an "intuitive agreement". It was a judgment decision and
would be a "fair" division of the proceeds. Justification
is highlighted in the graph handout contained in member's
packets indicating, given the approximate five year balance
of $26 billion dollars, 5% of that would make available for
public spending, $1.3 billion dollars. If that amount was
divided into equal components, half to the whole of the
State and half to the general fund for State purposes. A
$650 million dollar amount would continue to be able to pay
a dividend check in excess of $1000 dollars a year and
continue to grow.
Vice Chair Meyer commented, based on that chart, the State
would be receiving $650 million dollars, an amount more than
needed at present time. He inquired if in that case, would
then more go toward dividends.
Representative Hawker advised that the Legislature retains
the complete authority of appropriation. Dividends could
either be increased or they could deal with the deferred
capital needs or apply funds to the $6 billion dollar debt
owed to the Capital Budget Reserve (CBR) fund. The
Legislature is entrusted with the management of public funds
and would be responsible to determine what would be the most
appropriate manner to utilize the remaining funds.
Vice Chair Meyer acknowledged that the proposed idea is a
great plan. He thought that as the fund grows, the 5% would
increase, as would the State's needs. He added sometime,
the State needs to consider inflation proofing education.
If a spending cap was in place, the formula could work well.
Mr. Bartholomew interjected that from the Board of Trustee's
perspective, addressing the use of earnings would be outside
of their policy responsibility. The Board has not taken a
position on how the money should be used but instead
attempts to determine what can be available. There is no
recommendation for the amounts; however, there is
information on historical and future payments under various
allocation earnings.
Mr. Bartholomew noted that the Permanent Fund had prepared
several different analysis. He suggested that the
information be looked at from a couple different
perspectives, as there is a lot of volatility and that
creates weakness in the current system. He pointed out how
much of the 5% has historically been allocated to dividends.
There have been years when the entire 5% could have been
needed. If the formula goes back to 1990, computing the
actual dividend payments as a percentage of the fund and
then moving forward to 2015 provides a 25-year window. That
amount of time can encompass the "good and bad times" in the
market. A medium case return is predicted for the future
and looks more like a 70/30 split. By starting next year
and looking forward at the next 10-year period, as presented
at the Conference of Alaskans, that amount would result in a
60/40 split. The difference is that in the next three
years, there is a large downward dip in what is being paid
into the dividend because of the 5-year average and the bear
market experienced.
Representative Stoltze asked if it was intended to pass the
enabling legislation prior to the passage of the resolution.
Co-Chair Williams responded that it was his intent to hear
all the bills that relate to the POMV and move them to the
House Rules Committee.
Representative Stoltze mentioned the applications and their
effective dates and if it would require a 2/3 vote of both
bodies. He wondered what would happen if one piece passed
and the other did not. If that happened, when would the
effective dates take place? Co-Chair Harris admitted those
were good points.
Co-Chair Harris stated that under the proposed bill, there
would be a 50/50 split. He asked Mr. Bartholomew, which
part of the 50% would the fees for the Permanent Fund come
from. Mr. Bartholomew understood that if the direction was
to allocate 50% of the available amount to the dividend
fund, then the Legislature goes to the operating budget,
making the decision of where the fee is taken from. He
commented that he had never been involved in those
discussions.
Co-Chair Harris assumed that it would come out of the 50%
appropriated to the general fund. Mr. Bartholomew clarified
that if the Legislature was giving 50% to the dividend, they
would then be taking all the operating costs out of the
other half. Co-Chair Harris acknowledged that made sense.
Co-Chair Harris voiced his appreciation for the hard work
done by Representative Hawker and the Ways and Means
Committee. He added that the concept of taking no more than
5% from a "pot of money" and insuring that nothing is taken
from the corpus of the fund, then the Legislature taking
money from it would be prohibited. He pointed out that some
legislators believe that the main body of the fund should
not be depleted by the Legislature. He voiced concerns with
the 50/50 split because he did not think it would be
"sellable". He supported the 60/40 split with 60% for the
dividend and 40% to be used for work in general government.
Co-Chair Harris elaborated that he would be more comfortable
with the 40% being used for public education rather than the
general fund. Public education is a huge growing cost for
Alaska. He believed that it would be the most "accepted"
funding vehicle to come before the State, pointing out that
over 90% of Alaskans support greater public education
funding. Even at the $650 million dollars, that amount
could not cover this year's $1 billion general fund dollar
cost for public education. He reiterated that he would
support amendments "leaning toward" public education.
Representative Fate referenced Section 8, which would place
eligibility for dividends into the Constitution.
Representative Hawker pointed out that is already statutory
language.
Co-Chair Harris clarified that language would only conform
legislation to the amendment of the constitution.
Representative Hawker noted that he had not read any
language that would become constitutional. The point is
that there are some statutes under the conditional effect
language currently drafted, Sections 1, 2 & 5, would take
effect immediately upon being signed by the Governor and all
the rest would be conditional. Representative Fate noted
that he had misunderstood the reference.
Representative Croft referenced Section 3(b) and asked if
the 5% would be deposited into the general fund. Mr.
Bartholomew looked at the constitutional amendment as
proposed, noting that it does not direct a deposit to the
general fund but instead directs that appropriation to be
limited to 5%. The underlining appropriation bill would
determine where money goes.
Representative Croft observed that as a constitutional
matter, it would be sitting in the permanent fund and the
Legislature would give constitutional authority to
appropriate up to 5% out of it. Mr. Bartholomew agreed that
was correct.
Representative Croft asked if the constitution mentioned the
Earnings Reserve Account or if that account in the Permanent
Fund was really just a general fund account in the same
area. Mr. Bartholomew explained that currently, the
Earnings Reserve was by statute defined as an account within
the Permanent Fund, according to the statutory definition
from 1982.
Representative Croft asked the legal effect in Section 3(b).
He asked if the statute would have any effect of the
Legislature's ability to appropriate from them. Mr.
Bartholomew understood that all the Constitution was doing
was limiting the total draw to 5% and then the statute would
define where it goes. There would be an interpretation of
Lines 14-18, regarding the legal requirements. He
recommended Legislative Legal confirm that query.
Representative Croft maintained that the language "50% may
be appropriated" was odd legal language. He asked the legal
affect of Sections 3(b)(1&2), as he did not see any limits
appropriating authority in that language without using words
such as "must, may or more than". He requested that someone
address that concern. Co-Chair Harris acknowledged the
language was "permissive" as voiced by Representative Croft.
Representative Croft offered to check with Tam Cook at
Legislative Legal Services regarding the concerns.
Co-Chair Harris explained that a lot of what the Legislature
is allowed to do through statute would be determined by what
the constitutional provisions indicate. The legislation
would technically do away with the Earnings Reserve Account.
There would be a single account and then no more than 5% of
that could be used in any one year. If the earnings were
less than 5%, they could not be used to maintain the value
of the single corpus. Statutorily, of that amount, it would
be determined how much could be used for dividends. That
language could be in the constitution.
Co-Chair Williams noted that HB 298 would be HELD in
Committee for further consideration.
HOUSE BILL NO. 236
An Act imposing a tax on employment; and providing for
an effective date.
REPRESENTATIVE MIKE HAWKER commented that the legislation
would impose an education tax on wages and net earnings from
self-employment in Alaska. HB 236 provides that the tax
collected would be separately accounted for and may be
appropriated for education. The tax imposed may not exceed
$100 per calendar year.
· Section 1: Provides a short title: Alaska Education
Tax Act.
· Section 2: Adds the education tax to the list of
taxes that are prior, paramount and superior to all
other leans upon the real and personal property of
the person liable for the tax.
TAPE HFC 04 - 61, Side B
Representative Hawker continued:
· Section 3:
· 43.45.011: Imposes a tax, not to exceed a combined
total of $100 a calendar year on wages and net
earnings from self-employment in excess of $600.
The tax is imposed at a rate of 0% on the first $600
of earnings, 10% on the next $1,000 of earnings and
0% on all other earnings. Section 3 also provides
that the tax is imposed only in calendar years
th
following a June 30 fiscal year end when the cash
balance in the Constitutional Budget Reserve Fund
(CBR) is less than $1.0 billion dollars. The tax
would be suspended in a subsequent calendar year
th
following a June 30 fiscal year end when the cash
balance in the CBR was greater than $2.5 billion
dollars.
· 43.45.021: Provides that the education tax is to be
collected from wages by employers in accordance with
regulations adopted by the Department of Revenue.
· 43.45.026: Provides that the Department may require
security deposits from employers who have been
delinquent in remitting the education tax.
· 43.45.031: Provides that self-employed individuals
remit their education tax in accordance with
regulations adopted by the Department of Revenue.
· 43.45.041: Provides for refunds of overpayment of
the education tax.
· 43.45.051: Requires that a person required to
report a payment to a self-employed individual to
the federal government, report the same information
to the Department of Revenue.
· 43.45.061: Provides that the tax collected be
accounted for separately and may be used for
education.
· 43.45.099: Defines critical terms by reference to
the Internal Revenue Code (26 U.S.C.)
Representative Hawker highlighted the sectional analysis:
· Section 4: Allows the Department of Revenue to
develop regulations to implement the Act before the
effective date of the Act.
· Section 5: Allows Section 4 of the Act to take
effect immediately.
· Section 6: Allows the other sections of the Act to
st
take effect January 1, 2005, although the education
tax would not actually be imposed until the CBR
trigger point was reached.
REPRESENTATIVE PEGGY WILSON commented that Alaska has many
resources and that the most precious resource is our
children. A head tax for education is important.
In response to Co-Chair Williams, Representative Wilson
thought that the caller option would be a good idea, as it
would allow the people of the State to keep the Legislature
in a position of reporting what is spent in regard to what
is paid. It provides the necessary "pressure" for when
times are economically difficult statewide.
Co-Chair Williams inquired how the Ways and Means Committee
had determined the statewide testimony issues regarding
revenue taxes.
Representative Wilson replied that the Ways and Means
Committee, which helped in making the determination for the
education tax calculation, had heard a lot of statewide
testimony. Representative Hawker added that the idea of a
school tax was voiced throughout the State during the summer
hand he was impressed that the school tax had been
consistently supported. He added that many Alaskan
residents are hesitant to support the Percent of Market
Value plan without initiating taxes first.
Co-Chair Williams questioned how much would be generated
from receipt of the tax. Representative Wilson anticipated
approximately $43 million dollars collected and the cost to
administer the tax will be about $1.4 million dollars.
Vice Chair Meyer addressed the fiscal note, pointing out
that the initial capital cost would be about $683 thousand
dollars and that the Department would need to hire about 10
people to administer the program. He commented that was a
"lot of expense" to administer this program. Vice Chair
Meyer suggested that an income tax "could get to the same
place and generate the same amount". Representative Wilson
acknowledged that she would be willing to "switch". Vice
Chair Meyer reiterated concerns with the high administrative
costs for the program.
Vice Chair Meyer asked about a "double tax" for those that
live outside of Alaska who come to work in State.
Representative Hawker pointed out that the initial fiscal
note had been overviewed on with the Department of Revenue.
When the bill is in place, it will cost the State
approximately $1 million dollars a year to administer and
collect almost $46 million dollars a year. It is not
intended to be a complete income tax but rather a small
component to deal with the fiscal concern. He argued that a
$1 million dollar cost to administer a program that would
generate $46 million dollars would be a fair exchange. He
added that placing a surcharge on the out-of-state workers
remains an issue.
Vice Chair Meyer commented the idea would be more "sellable"
if out-of-state workers could be taxed more. He asked about
the $685 thousand dollar fiscal note.
Vice Chair Meyer asked how the legislation would deal with
the person working for multiple employers. Representative
Hawker responded that the provisions in the bill address
that first and if the person overpays during the course of a
year, the State would refund that at the end of the year.
There is a provision that an employer "shall" withhold money
from an employee, unless the employee can provide written
documentation that they had previously paid the tax. If
there were sequential employers throughout the year, it
would be easy to take their pay stubs in and show that the
amount had been paid. The responsibility rests on the
employee.
Representative Croft asked where the language was located
that indicates the tax will go to education. Representative
Hawker replied it is on Page 5, Line 18, the disposition of
tax proceeds.
Representative Croft responded that it shall be deposited
into the general fund and that the Legislature "may"
appropriate for education. He questioned if the amount
could be appropriated for anything else. Representative
Hawker advised that the State constitution prohibits the
absolute dedication of funds. It is a "best interest
determination" that the money be set-aside for specific
purposes. It becomes a statement of legislative intent that
the funds are designated for that purpose, by creating
separate accounting of those funds.
Representative Stoltze inquired if Representative Wilson
favored the trigger mechanism. Representative Wilson said
she did. Representative Stoltze noted his concern with
"triggers", commenting that the money should go directly to
the education cause.
Co-Chair Williams advised that amendments to the bill would
be taken at the next meeting.
Vice Chair Meyer voiced appreciation to the sponsors for
bringing the education concept forward.
HB 236 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 2:56 P.M.
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