Legislature(2001 - 2002)
10/19/2001 11:11 AM House JUD
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE JUDICIARY STANDING COMMITTEE
October 19, 2001
11:11 a.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chair
Representative Scott Ogan, Vice Chair (via teleconference)
Representative John Coghill
Representative Kevin Meyer
Representative Ethan Berkowitz
MEMBERS ABSENT
Representative Jeannette James
Representative Albert Kookesh
OTHER LEGISLATORS PRESENT
Representative John Davies
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 15
Proposing amendments to the Constitution of the State of Alaska
relating to inflation-proofing the permanent fund.
- HEARD AND HELD
CS FOR SENATE JOINT RESOLUTION NO. 23(FIN) am
Proposing amendments to the Constitution of the State of Alaska
relating to an appropriation limit and a spending limit.
- HEARD AND HELD
CS FOR SENATE JOINT RESOLUTION NO. 24(RLS)
Proposing amendments to the Constitution of the State of Alaska
relating to the budget reserve fund.
- HEARD AND HELD
PREVIOUS ACTION
BILL: HJR 15
SHORT TITLE:CONST. AM: PERMANENT FUND
SPONSOR(S): RLS BY REQUEST OF LEG BUDGET & AUDIT
Jrn-Date Jrn-Page Action
02/14/01 0316 (H) READ THE FIRST TIME -
REFERRALS
02/14/01 0316 (H) JUD, FIN
02/14/01 0316 (H) REFERRED TO JUDICIARY
10/19/01 (H) JUD AT 11:00 AM Anch LIO Conf
Rm
BILL: SJR 23
SHORT TITLE:CONST AM: APPROPRIATION/SPENDING LIMIT
SPONSOR(S): SENATOR(S) DONLEY
Jrn-Date Jrn-Page Action
04/09/01 1013 (S) READ THE FIRST TIME -
REFERRALS
04/09/01 1013 (S) FIN
04/11/01 1080 (S) COSPONSOR(S): AUSTERMAN
04/17/01 (S) FIN AT 9:00 AM SENATE FINANCE
532
04/17/01 (S) Heard & Held
04/17/01 (S) MINUTE(FIN)
05/03/01 1462 (S) FIN RPT CS 4DP 2DNP 3NR SAME
TITLE
05/03/01 1462 (S) DP: DONLEY, GREEN, LEMAN,
WARD;
05/03/01 1462 (S) NR: KELLY, AUSTERMAN, WILKEN;
05/03/01 1462 (S) DNP: HOFFMAN, OLSON
05/03/01 1462 (S) FN1: (GOV)
05/03/01 1465 (S) RULES TO CALENDAR 1OR 5/3/01
05/03/01 1471 (S) READ THE SECOND TIME
05/03/01 1471 (S) FIN CS ADOPTED UNAN CONSENT
05/03/01 1471 (S) COSPONSOR(S): LEMAN, KELLY
05/03/01 1471 (S) ADVANCED TO 3RD READING
FAILED Y14 N6
05/03/01 1472 (S) ADVANCED TO THIRD READING 5/4
CALENDAR
05/03/01 (S) FIN AT 9:00 AM SENATE FINANCE
532
05/03/01 (S) Moved CS(FIN) Out of
Committee
05/03/01 (S) RLS AT 1:45 PM FAHRENKAMP 203
05/03/01 (S) MINUTE(FIN)
05/03/01 (S) MINUTE(RLS)
05/04/01 1502 (S) READ THE THIRD TIME CSSJR
23(FIN)
05/04/01 1502 (S) RETURN TO SECOND FOR AM 1
UNAN CONSENT
05/04/01 1502 (S) AM NO 1 ADOPTED UNAN CONSENT
05/04/01 1503 (S) AUTOMATICALLY IN THIRD
READING
05/04/01 1503 (S) PASSED Y14 N6
05/04/01 1503 (S) ELLIS NOTICE OF
RECONSIDERATION
05/05/01 1526 (S) RECON TAKEN UP - IN THIRD
READING
05/05/01 1526 (S) PASSED ON RECONSIDERATION Y14
N6
05/05/01 1559 (S) TRANSMITTED TO (H)
05/05/01 1559 (S) VERSION: CSSJR 23(FIN) AM
05/05/01 1571 (H) READ THE FIRST TIME -
REFERRALS
05/05/01 1571 (H) JUD, FIN
05/05/01 1571 (H) REFERRED TO JUDICIARY
10/19/01 (H) JUD AT 11:00 AM Anch LIO Conf
Rm
BILL: SJR 24
SHORT TITLE:AMEND CONSTITUTIONAL BUDGET RESERVE FUND
SPONSOR(S): FINANCE
Jrn-Date Jrn-Page Action
04/09/01 1013 (S) READ THE FIRST TIME -
REFERRALS
04/09/01 1013 (S) FIN
04/17/01 (S) FIN AT 9:00 AM SENATE FINANCE
532
04/17/01 (S) Heard & Held
04/17/01 (S) MINUTE(FIN)
04/23/01 1215 (S) FIN RPT 6DP 3NR
04/23/01 1215 (S) DP: DONLEY, KELLY, GREEN,
WILKEN,
04/23/01 1215 (S) LEMAN, WARD;
04/23/01 1215 (S) NR: AUSTERMAN, HOFFMAN, OLSON
04/23/01 1216 (S) FN1: (GOV)
04/23/01 (S) FIN AT 9:00 AM SENATE FINANCE
532
04/23/01 (S) Moved Out of Committee
04/23/01 (S) MINUTE(FIN)
04/30/01 (S) RLS AT 11:50 AM FAHRENKAMP
203
04/30/01 (S) <Bill Postponed to 5/1/01> --
Time Change --
04/30/01 (S) RLS AT 4:45 PM FAHRENKAMP 203
04/30/01 (S) -- Meeting Canceled --
05/01/01 1401 (S) RULES TO CAL W/CS 1OR 5/1
SAME TITLE
05/01/01 1401 (S) FN1: (GOV)
05/01/01 1412 (S) READ THE SECOND TIME
05/01/01 1412 (S) RLS CS ADOPTED UNAN CONSENT
05/01/01 1413 (S) ADVANCED TO 3RD READING
FAILED Y14 N6
05/01/01 1413 (S) ADVANCED TO THIRD READING 5/2
CALENDAR
05/01/01 (S) RLS AT 12:15 PM FAHRENKAMP
203
05/01/01 (S) -- Time Change --
05/01/01 (S) MINUTE(RLS)
05/02/01 1443 (S) READ THE THIRD TIME CSSJR
24(RLS)
05/02/01 1444 (S) HELD IN THIRD READING TO 5/3
CALENDAR
05/03/01 1472 (S) HELD IN THIRD READING TO 5/4
CALENDAR
05/04/01 1503 (S) BEFORE THE SENATE IN THIRD
READING
05/04/01 1503 (S) PASSED Y14 N6
05/04/01 1504 (S) ELLIS NOTICE OF
RECONSIDERATION
05/05/01 1527 (S) RECON TAKEN UP - IN THIRD
READING
05/05/01 1527 (S) PASSED ON RECONSIDERATION Y14
N6
05/05/01 1559 (S) TRANSMITTED TO (H)
05/05/01 1559 (S) VERSION: CSSJR 24(RLS)
05/05/01 1571 (H) READ THE FIRST TIME -
REFERRALS
05/05/01 1571 (H) JUD, FIN
05/05/01 1571 (H) REFERRED TO JUDICIARY
10/19/01 (H) JUD AT 11:00 AM Anch LIO Conf
Rm
WITNESS REGISTER
CLARK GRUENING, Member
Board of Trustees of the Alaska Permanent Fund Corporation
217 Second Street, Suite 204
Juneau, Alaska 99801
POSITION STATEMENT: Testified in support of HJR 15 and
responded to questions.
ROBERT STORER, Executive Director
Alaska Permanent Fund Corporation
Department of Revenue
PO Box 25500
Juneau, Alaska 99802-5500
POSITION STATEMENT: Responded to questions regarding HJR 15.
MARY GRISWOLD
PO Box 1417
Homer, Alaska 99603
POSITION STATEMENT: Testified in support of HJR 15.
JIM KELLY, Research & Liaison Officer
Alaska Permanent Fund Corporation
Department of Revenue
PO Box 25500
Juneau, Alaska 99802-5500
POSITION STATEMENT: Responded to questions regarding HJR 15.
SCOTT GOLDSMITH, Economist
University of Alaska - Anchorage
6035 Bluebell
Anchorage, Alaska 99516
POSITION STATEMENT: Testified in support of HJR 15 and
testified on SJR 23.
SENATOR DAVE DONLEY
Alaska State Legislature
Capitol Building, Room 506
Juneau, Alaska 99801
POSITION STATEMENT: Testified as the sponsor of SJR 23, and on
behalf of the Senate Finance Committee, sponsor of SJR 24.
DAVID TEAL, Director/Legislative Fiscal Analyst
Legislative Finance Division
Alaska State Legislature
PO Box 113200
Juneau, Alaska 99811-3200
POSITION STATEMENT: Answered questions on SJR 23 and SJR 24.
ACTION NARRATIVE
TAPE 01-82, SIDE A
Number 0001
CHAIR NORMAN ROKEBERG called the House Judiciary Standing
Committee meeting to order at 11:11 a.m. Representatives
Rokeberg, Ogan (via teleconference), Coghill, Meyer, and
Berkowitz were present at the call to order.
HJR 15 - CONST. AM: PERMANENT FUND
[Contains brief reference to SJR 13, the companion bill to HJR
15.]
Number 0020
CHAIR ROKEBERG announced that the first order of business would
be HOUSE JOINT RESOLUTION NO. 15, Proposing amendments to the
Constitution of the State of Alaska relating to inflation-
proofing the permanent fund.
Number 0036
CLARK GRUENING, Member, Board of Trustees of the Alaska
Permanent Fund Corporation ("the board"), said that the board
enthusiastically supports HJR 15. He noted that it was upon the
recommendations of the board that the Legislative Budget and
Audit Committee requested that the House Rules Standing
Committee and the Senate Rules Standing Committee sponsor HJR 15
and SJR 13, respectively. He relayed that for the first 21
years of the permanent fund's existence, the fund has been
governed by a six-member board of trustees whose single highest
priority policy has been to protect the fund against inflation.
The very first board testified before the legislature that the
greatest threat to permanence of the fund is inflation. In
response, the legislature adopted statutory inflation-proofing
in 1982. In more recent years, he said, the board has examined
various large endowments and public funds that use a formula
approach to determine the method and size of payouts.
MR. GRUENING explained that this approach is generally referred
to as the "percentage of market value payout," or POMV payout.
The purpose of this endowment-type formula is to protect the
long-term viability of a fund and provide consistent
distributions to the beneficiary's of that fund. He went on to
say that after considerable review and discussion, the board
recommends the constitutional change that is proposed in HJR 15.
The language of HJR 15 provides a spending limit on what can
currently be appropriated. The existing constitutional
language, which established the permanent fund, only prohibits
the appropriation of principal; in other words, he added,
anything that is not principal is considered income, which can
be spent. He explained that principal does not vary or move up
and down with the market; instead, principal is a notional
number that simply equals the sum of the constitutionally
mandated 25 percent deposit of mineral proceeds, and the
voluntary deposits that the legislature may choose to make.
MR. GRUENING acknowledged that two-thirds of the $21 billion
deposited to the principal of the fund has been made voluntarily
by the legislature as either inflation-proofing or as extra
deposits to the principal; only one-third of the $21 billion
came from the mandated deposit of 25 percent of mineral
proceeds. Over the past year, he noted, "we" have lost three
former trustees who had a great deal to do with the formation
and success of the permanent fund: Elmer Rassmussen, Hugh
Malone, and Oral Freeman. He added that they were concerned
with the future of the fund and were totally committed to
inflation-proofing it, recounting that Elmer Rassmussen used to
say, "Inflation is a thief in the night," which is as true today
as it was in 1982.
MR. GRUENING went on to say that things have changed since 1982.
For instance, the earnings reserve is now a much greater
proportion of the total fund. Also, the fiscal position of the
state is dramatically [different]. Mr. Gruening informed the
committee that if all the deposits to the fund from 1977-1992
were averaged, the earnings reserve averaged approximately 8
percent of the fund. Even today, with the recent payout and the
travails of the market, the earnings reserve still makes up
about 14 percent of the fund. Unlike the current statutory
provision, for which the legislature has faithfully appropriated
money, the proposal before the committee provides for inflation-
proofing of the entire fund. Moreover, the proposal is a
formula that will maximize distributions over the long term,
which is significant due to the state's current fiscal
situation. "The Alaska permanent fund has, and will continue to
be in the future, the largest single revenue source ... as
compared to any other Alaska resource," Mr. Gruening emphasized.
The Alaska permanent fund will be larger than oil in the future,
and larger than tourism, fishing, and anything anticipated from
a natural gas pipeline. Mr. Gruening explained that the board's
proposal for inflation-proofing doesn't require any statutory
change, including the dividend statute. Therefore, the 5
percent payout of market value assures complete and protected
inflation-proofing while providing maximum sustainable payout
over the long term, regardless of future decisions made by the
legislature or the voters.
MR. GRUENING concluded by saying that if Alaska is going to have
a fund that is truly permanent, steps to ensure that have to be
taken. Therefore, there has to be investment for future
generations as well as current generations, which requires
commitment to the principles of long-term investment. The long
term is more than a business or political cycle. At a minimum,
the long term should include the time in which "our children,
grandchildren, and their children grow into adulthood." Mr.
Gruening said, "The critical flip-side of a sound long-term
investment strategy is a sound and sustainable distribution
payout plan; a plan that will sustain and maximize benefits to
each generation of Alaska." The form in which these benefits
flow will be a subject of debate in the years to come. However,
the fund can't do it all. Mr. Gruening remarked:
What, I think we ..., as Alaskans, want to avoid at
all costs is defaulting to a position where the
constitutional budget reserve is today. Within the
next 4-5 years, the CBR, without some change, is
destined for extinction. As the investment horizon of
the CBR shortens, it has been and will continue to be
necessary to keep the assets of the CBR in very short-
term and less profitable investments. As the day of
the CBR's demise grows near, the trustees and staff of
your permanent fund will also have to seriously
consider a shorter investment horizon for a
significant proportion of the fund, unless there is
something that changes. Whether we liken an Alaskan
permanent fund to a whole resource industry, like the
Alaska fisheries, or to some kind of perpetual
endowment, one thing is clear: the Alaska permanent
fund imports more money into the state year after year
than any other revenues or natural resources.
Legislative passage and voter approval of this
amendment would protect the ability of the fund to be
managed for the long term and to continue to pour
money into the Alaska economy. One final thought:
Your legislature, that is the Twenty-Second
Legislature, has an opportunity to accomplish
something, I think, as significant and as beneficial
as the Ninth Legislature did 25 years ago with the
original constitutional amendment. The trustees
believe that this proposal for complete and protected
inflation-proofing makes ultimate good sense for
Alaska's permanent fund for Alaska's future.
Number 0170
REPRESENTATIVE BERKOWITZ remarked that it seemed that most of
the [proposed] changes could be done statutorily. If that isn't
the case, are there any collateral benefits, such as providing
Wall Street greater assurance with regard to the security of the
permanent fund, that would enhance the state's bond ratings.
MR. GRUENING answered that a statutory payout rule would be no
different, in terms of its impact on inflation-proofing, than
the current statute, which has been [saving] the fund because
the money was there. Much of the money that was part of the
principal was extra that wasn't required. However, he
emphasized that any appropriation [that the legislature makes]
overrides the statute. "Unless it's in the constitution, it's
not constitutional to protect it," he pointed out. When the
voters hear and understand this, the public seems to accept that
the fund can be used for other things than its current use.
Number 0193
ROBERT STORER, Executive Director, Alaska Permanent Fund
Corporation, Department of Revenue, responded with an
unequivocal yes to Representative Berkowitz's question regarding
bond ratings. He pointed out that part of recognizing one's
risk tolerance is one's discipline to stay the course. The past
three years of fall meetings with the rating agencies has
illustrated that rating agencies like to see a disciplined
spending approach and such an approach enhances the way in which
the rating agencies view the State of Alaska's finances, and
therefore the state's credit rating.
Number 0204
REPRESENTATIVE MEYER commented on the challenge of educating the
voters on the issue and, therefore, he asked if that is a
concern. Furthermore, the permanent fund is a sensitive issue.
Representative Meyer asked whether any thought had been given to
such concerns when reviewing whether to proceed with a
constitutional proposal versus Representative Berkowitz's
proposal.
MR. GRUENING related his belief that the public would feel a
greater degree of confidence with [the constitutional proposal].
Clearly, this will be the [public's] most important policy
initiative. He highlighted his belief that this is really going
to be up to the legislature, especially since there's only one
more session before its possible passage. The idea of this
matter being in the constitution has seemed to provide the
public with some comfort. He noted that he discovered this in
the presentations [with which he had taken been part].
MR. STORER agreed. Mr. Storer noted that the challenge, during
these presentations, is to distill this idea into understandable
terms. From his speeches, he has gathered that the public finds
comfort in seeing a disciplined approach to the permanent fund.
Number 0235
REPRESENTATIVE COGHILL returned to the issue of the [state's]
bond rating. He asked if the combination of the legislature's
actions with regard to the statute and its authority, and the
management of the fund, has lessened [the state's] bond rating.
MR. STORER replied no. He acknowledged that the legislature has
appropriated money into the principal fund, inflation-proofing
as well as additional sums. The rating agencies have been
comforted by that action. He clarified his perspective that as
the state's finances are debated more, the more disciplined
approach will provide continued solace for the bond rating
agencies.
REPRESENTATIVE COGHILL expressed concern with the notion that
since the fund, under this proposal, would be managed under a
constitutional protection, it would provide a better bond rating
than if in statute with public debate. He said that such a
situation would call in to question the credibility of the
public debate in the legislature.
MR. STORER clarified that the legislature's actions to date have
assisted in the state's high bond rating. Therefore, from his
perspective, the statute could settle the issue if [the statute]
was memorialized in the constitution, which is, to some degree,
a higher order of discipline. The rating agencies would find
solace in that. However, that isn't to say that the rating
agencies would view some use of the permanent fund as
[inadequate].
Number 0277
CHAIR ROKEBERG turned to Mr. Gruening's statement that this
amendment [HJR 15] wouldn't require any statutory changes. He
found that statement troubling because, in his opinion, the
current statute is broken and needs to be fixed. Chair Rokeberg
also expressed concern with how the inflation-proofing design
fits into the entire model in terms of the statute, specifically
related to the sweep effect and down market situations.
MR. GRUENING clarified, "What is meant by that is that you can
adopt a constitutional spending limit or inflation-proofing
provision and still administer the dividend statute in the same
way." Mr. Gruening noted that "we" have indicated that having a
payout of the dividend based on market value is probably less
volatile. Although that would be advisable, it isn't necessary
for passage of [HJR 15]. However, the statute could,
undoubtedly, be improved upon and that will be up to the
legislature to decide how to do so.
CHAIR ROKEBERG recalled earlier comments that CBR investments
must be for the short-term horizon because of the contraction of
the length and need for the funding. Chair Rokeberg said that
he understood that the perceived need for funding, market
conditions, and the amount available has an impact on the length
and quality of the investment instrument that [is chosen].
However, he also understood testimony to indicate that as time
passes without any changes, the same type of policy changes that
relate to the permanent fund itself will have to occur. He
said:
I suspect that that's because ... if we kept the
status quo, the earnings reserve is in the situation
where it could be appropriated by the legislature;
therefore, as a matter of policy, the corporation
would have to shorten the length of commitment on the
part of the investment vehicle in the security you
might buy to make sure that those funds were available
for appropriation on a near-term basis as we get
nearer falling of the cliff and go broke.
MR. GRUENING agreed with Chair Rokeberg's understanding.
Number 0332
MR. STORER posed the question: Why 5 percent? He noted that
the staff and the board have spent much time reviewing that and
have determined that 5 percent of a five-year moving average is
on the high end of achievable. He explained that over the long-
term, the current asset allocation of the fund would earn about
8.25 percent. Analysis suggests that inflation will be about
3.25 percent. Therefore, "we know that we can afford to payout
up to 5 percent of the fund and retain the balance of the
earnings to ensure that the fund is inflation-proofed for the
future," he explained. However, Mr. Storer acknowledged that
markets change and thus there has been review of history, which
has found that asset allocation similar to the fund and statute
have also amounted to about a 5 percent payout. This review is
over about a 75-year course. Mr. Storer reiterated that there
is review of risk, which is measured by volatility of the
market. He expressed the need to define an asset allocation,
within a risk tolerance, that achieves the goals while also
having the discipline to stay the course. Without that
discipline, one won't achieve his/her goals.
MR. STORER informed the committee that there are two components
of this fund. What makes the fund unique is its principal
protection via the constitution. However, when reviewing any
fund, one would review the fund's cash flow. The fund has been
in a situation whereby it has been in a negative cash flow for a
decade. Although such a situation is fine and part of the
analysis, one must recognize that and include it in the risk
return profile. He explained that he mentioned this because
most endowment funds that use this model have a 4.5-5 [percent]
payout rule, although some payout more. In response to Chair
Rokeberg, Mr. Storer said that the inflation-proofing
appropriation isn't part of cash flow in his calculation. He
explained that "we" are paying out $1.1 billion on the dividend
while receiving about $400 million.
CHAIR ROKEBERG related his understanding that although it's an
appropriation to the corpus, the inflation-proofing
appropriation isn't considered part of the cash flow.
MR. STORER clarified, "I do not consider it a negative cash flow
because it's retained in the fund."
CHAIR ROKEBERG asked if it's a positive cash flow because it
moves from the earnings reserve into the corpus.
MR. STORER said he would say no, although he remarked that it is
a good point. "If that's the case, we're at about a push right
now," he said. He specified that most would define it as money
that is leaving the fund rather than entering the fund. He
explained, "My point is that if you look at a Harvard or an MIT,
they can afford to take a greater risk profile and the reason
being is they can withstand the near-term volatility of a
riskier profile ... because they are continuing to get new funds
so they can meet their payoff discipline. And if their wrong in
the near term, they know that they'll have a positive cash flow,
which allows them ... to take ... an asset allocation that would
have a higher expected return, significantly higher than ours as
an example." He explained that he noted this because if the CBR
dissipates and there are greater withdrawals on the permanent
fund, ironically, the fund would have to be managed more
conservatively. Therefore, the 5 percent discipline provides
more effective management.
Number 0429
CHAIR ROKEBERG asked if the unrealized gains are now considered
part of the principal.
MR. STORER replied no, the principal would be new oil revenue
and contributions to the fund by the legislature, as well as
inflation that the legislature appropriates into the fund.
Unrealized gains and losses aren't part of the principal.
However, the accounting records have changed. Mr. Storer
explained that the dividend is calculated by realized income,
which is the dividend's interest plus the actual realized gains
of a buy and sell of a security. However, "GAP" accounting says
that one must book the gains and losses every day. "It's not a
question of principal, it's how you mark to market the fund on a
daily basis," he explained.
CHAIR ROKEBERG inquired as to the position of the corporation.
He asked, "Which set of books do you use?"
MR. STORER answered that the "GAP" is followed for accounting
purposes as well as the annual report, which says that gains and
losses are recognized.
CHAIR ROKEBERG interjected that he disagrees with that ["GAP"
accounting].
MR. STORER continued by informing the committee that [the
corporation] does recognize realized income to compute the
dividend. Therefore, "you see it both ways."
Number 0496
MARY GRISWOLD testified via teleconference in support of HJR 15
because it provides a better money management framework. She
said that POMV reduces the pressure to manage the permanent fund
for return over value. "Managing for value is generally
considered a better fiscal approach. A 5 percent payout is
generally recognized by large endowments as the highest
sustainable payout, beyond which the real value of the fund
would diminish over time." She highlighted a secondary benefit
of HJR 15 as providing a reasonable money stream for government
if the legislature chooses to use it. Currently, the money in
the earnings reserve account is available for legislative
appropriation for purposes other than dividends. Although the
legislature has never spent it, she felt that there would be
more pressure in the future for the legislature to use this
money. Therefore, HJR 15 will limit the amount the legislature
can use to a predictable and modest amount.
MS. GRISWOLD noted that it is important to recognize that
dividends are as much as they are because the legislature made
special appropriations from the earnings reserve account to the
principal and did not spend the earnings available. However,
any use of permanent fund earnings for purposes other than
dividends will decrease the value of the dividend because
whatever is spent won't be available to earn more money. Still,
dividends could be reduced by much more under the current payout
system versus POMV. The status quo dividend formula could be
preserved with a 5 POMV, an 80 percent allocation for dividends,
and a 20 percent allocation for government. However, one must
realize that a 20 percent transfer from the fund will reduce the
fund's future income-producing potential. Ms. Griswold said
that she believes it is time to allocate some permanent fund
earnings to government and she saw a 5 POMV as the best way to
do so. More importantly, Ms. Griswold saw the 5 POMV as a
better money management tool that will keep the permanent fund
permanent for future generations.
MS. GRISWOLD, in response to Chair Rokeberg, agreed that her
understanding was that there would have to be an 80:20
allocation in order to maintain the permanent fund dividend at
its current level.
Number 0546
ARLISS STURGULEWSKI, former Senator, Alaska State Legislature,
remarked that she is really proud of the Board of Trustees and
its management of the fund. She felt that there has been
extraordinarily good management of the fund, and that has placed
the state in its current position. Furthermore, the legislature
has been [helpful as well]. Ms. Sturgulewski announced that she
is in strong support of this proposed constitutional amendment.
Ms. Sturgulewski commented that Hugh Malone and Elmer Rasmussen,
as well as people from around the country who dealt with large
foundations really developed the idea of inflation-proofing.
She informed the committee that last year, 32 percent of the
amount of the dividend came from inflation-proofing. There was
also a substantial portion of the dividend that came from the
dollars that the legislature put into the fund. Ms.
Sturgulewski related her feeling that the permanent fund would
be the target if the fiscal gap isn't answered, which she felt
would be a mistake. Ms. Sturgulewski noted that she serves on
the University of Alaska foundation, the Board of Sheldon
Jackson, and the local board of the YMCA, all of which use
similar principles [to that of inflation-proofing the permanent
fund].
TAPE 01-82, SIDE B
MS. STURGULEWSKI highlighted the fact that [even with HJR 15]
the legislature would maintain its authority. The resolution
merely protects a pot of money that will afford the legislature
the ability to appropriate money from this pot in times of
pressure. She hoped the committee would move ahead with this.
Number 0009
CHAIR ROKEBERG remarked that one of the problems with HJR 15 is
that it requires the legislature to place a de facto cap or
stipulate an allocation.
MS. STURGULEWSKI [agreed] that HJR 15 doesn't solve the fiscal
planning, although it provides a tool: money. The legislature
still has to make the decision.
CHAIR ROKEBERG surmised then that [the constitutional amendment]
would have to proceed one step further in order to impact any of
the long-range fiscal gaps.
MS. STURGULEWSKI agreed.
CHAIR ROKEBERG expressed concern with the adoption of this
amendment without the ability of the legislature to deviate from
the 5 percent constitutional rate, in the event of an emergency.
He said that flexibility would probably give this amendment a
boost.
MS. STURGULEWSKI echoed earlier statements that it would be up
to the legislature to make the determination. Furthermore, the
earned income account would still be available.
CHAIR ROKEBERG interjected that with the adoption of [HJR 15]
the earned income account would go away.
MR. GRUENING remarked that the only thing that would be limiting
would be the concept of principal. He posed a situation in
which [HJR 15] was in place and there was a large emergency,
which would result in the reordering of priorities.
MS. STURGULEWSKI said that everyone should understand that
currently "we" have the components of the constitutional
appropriation and there is the amount that the legislature has
placed in the corpus. Furthermore, there are the earnings.
Number 0044
CHAIR ROKEBERG restated his question that deals with the circuit
breaker concept. He saw this amendment as allowing [the
legislature access to] only the 5 POMV funds. Therefore, he was
concerned that the legislature has no provision to allow for an
emergency allocation.
MR. GRUENING said, "Without amending the constitution." Mr.
Gruening pointed out that such an argument was made against
establishing the permanent fund in the first place. Senator
Radar said to the Senate that it shouldn't tell future
legislatures that it can't spend it all.
CHAIR ROKEBERG commented that such was taken care of with the
creation of the statutory earnings reserve, although he wasn't
sure that was fully understood at the time the fund was created.
MR. STORER pointed out that there is 5 percent, $1.2-$1.3
billion, available per year under this program. However, it
would mean spending the dividend. In response to Chair
Rokeberg, Mr. Storer said that this year it was just short of
$1.1 billion. Therefore, the legislature would have about $1.25
billion to address an emergency. He noted that usually an
emergency of the magnitude [that would be addressed by the $1.25
billion] would take years to address.
CHAIR ROKEBERG questioned whether $9 [a barrel for] oil would be
considered an emergency.
MR. GRUENING facetiously pointed out that a three-quarter vote
could be taken.
CHAIR ROKEBERG expressed concern with the potential $800-$900
million annual gap and the availability of [only] about $200
million [to address that gap].
MS. STURGULEWSKI commented that such difficulties illustrate why
the permanent fund is a target. She asked whether [the
legislature] wants to have [the 5 POMV of the permanent fund] as
one of its tools on an ongoing basis [as proposed under HJR 15].
Number 0089
REPRESENTATIVE COGHILL turned to the mechanics, the timing, that
would take place if HJR 15 were to pass and be adopted by the
voters. He inquired as to the timing in relation to overlapping
the statute with regard to the earnings reserve account and the
determination of advisory averaging while moving into a market
base.
MR. STORER answered that he believes there is a 60 or 90 day
lag. However, the computation would use the prior five years
and thus one would immediately know how much is available.
Number 0100
JIM KELLY, Research & Liaison Officer, Alaska Permanent Fund
Corporation, Department of Revenue, clarified that it would be
less than 90 days; it would be some time prior to February 2003.
At that time, the projections show a 5 percent payout being
around $1.3 [billion]. He pointed out that in terms of
emergencies, the legislature has a solution in the form of the
CBR, which has $3 billion and that is as much as is in the
earnings reserve account. Mr. Kelly remarked that if one wants
to think about a long-term solution to a problem, one wants to
keep a constitutional budget reserve. However, the permanent
fund should be looked at as a growing source of income. Mr.
Kelly reviewed the forecast over time in regard to the growth of
the [earnings reserve account] and emphasized that the
legislature wants to ensure that it has this resource. Without
[the earnings reserve account], there is not only no resource,
there is no solution to the problem.
Number 0125
REPRESENTATIVE COGHILL referred to lines 9-11 of HJR 15 and
asked if that was taken care of in [subsection] (b). He asked
whether that language [on lines 9-11] was necessary.
MR. KELLY explained that when the constitution was created 20
years ago, all the income from the permanent fund was to be
deposited into the general fund, unless otherwise provided by
law. Therefore, the permanent fund was the principal only. In
1980, with the passage of the Alaska Permanent Fund Corporation
Act, the law was changed to provide that income stayed in the
permanent fund in an earnings reserve account. Therefore, it
was clear in statute that the income was included as part of the
permanent fund. This constitutional change clarifies the matter
further by placing [the aforementioned language] in the
constitution and thus the income of the earnings reserve account
is part of the permanent fund. Therefore, the 5 percent of the
income is paid plus the principal.
MS. STURGULEWSKI clarified, "On top of that."
Number 0157
CHAIR ROKEBERG requested that Mr. Storer or Mr. Kelly comment on
his belief that the statute is broken as it relates to the
Mother of all Models (MOMA) and thus [the state] finds itself in
a negative market situation. He recalled that particular run of
the model was based on the 1970s. He also requested comments
regarding what would happen in relation to the statute with a
Nikkei market that was 10-year down or flat-lined.
MR. STORER said that without using the MOMA but rather a simpler
model he [researched] the type of market impacts that would have
an adversarial effect on the permanent fund. He found, in
reviewing the size of the fund now back to 1971, there was a
lag. In about 1977 he found that the dividend ceased to exist
and it was difficult to fund inflation-proofing for about a
year, after which it went back up. That was the most negative
scenario he could find. He mentioned that he actually
[reviewed] the Depression era, where he found no impact.
CHAIR ROKEBERG recalled testimony from the corporation at a
Senate Finance Committee hearing that if the large amount of
monies in the earnings reserve hadn't been available, the
dividend wouldn't have been paid. He mentioned a timeframe
[during which the market] was on the downside.
MR. STORER agreed that the earnings reserve does allow a cushion
in really negative environments such as is the case currently.
CHAIR ROKEBERG surmised then that if all the money people had
wanted to take from the earnings reserve to place in the corpus
had been done, there may not have been the money to pay the
dividend, even in the near term.
MR. STORER agreed. He noted that in the late 1980s some money
did go into the principal, which replenished the earnings
reserve very quickly. Although that cushion [the earnings
reserve] is down, it still constitutes about 15 percent of the
fund. Mr. Storer indicated agreement with Chair Rokeberg's
statement that in the 1980s almost everything was inflation-
proofed.
CHAIR ROKEBERG expressed concern with the allocation issue and
reiterated his concern with the circuit breaker issue. He
related his belief that if [HJR 15] is adopted, then there
should be a statutory scheme in place that goes along with it so
that voters understand what will happen. He explained that the
threat of an untoward allocation on the PFD could be used by
opponents of the amendment. For instance, there [could be] a
50:50 split between the GF and the PFD that would lower the PFD
to the point that this amendment [HJR 15] would be defeated. On
other hand, having a residual of $100-$200 million for the GF
seems to "lock up" the permanent fund for perpetuity and would
also lead to the defeat of [HJR 15]. Therefore, Chair Rokeberg
felt that the statute has to be changed along with the
amendment, and also there needs to be some sort of circuit
breaker even if that is the three-quarter vote.
Number 0242
SCOTT GOLDSMITH, Economist, University of Alaska - Anchorage,
spoke in support of this amendment, HJR 15. He felt that [HJR
15] would achieve three very important objectives. First there
is always the potential, under the current structure, that there
may be conflicting management objectives. On the one hand,
there is the objective of maximizing long-term real rate of
return on the fund. On the other hand, there is the short-term
objective of meeting any dividend payment target, which would be
eliminated with a 5 percent annual automatic draw from the fund.
Furthermore, Mr. Goldsmith felt that the 5 [POMV] would free
management to look to the long-term and maximize the real rate
of return of the fund. Second the current annual flow of income
off the fund is somewhat unstable. Although the 5 [POMV]
wouldn't completely eliminate that instability, the fluctuations
from year to year would be significantly reduced, he thought.
Such would be useful in regard to long-term fiscal planning.
Finally, this amendment would solidify the inflation-proofing of
the principal so that there would be no chance of having years
without inflation-proofing.
Number 0276
REPRESENTATIVE DAVIES explained that the inflation-proofing [the
5 POMV] is built in to the calculation, assuming the long-term
rate of return and the long-term inflation rate. Therefore, he
questioned how "good" those numbers are.
MR. GOLDSMITH noted that he isn't an expert in how other funds
have performed. However, in speaking with others that are more
knowledgeable, he understood that 5 percent is a reasonable
target that can be achieved over the long-term. He said he
wouldn't recommend going higher than 5 percent.
CHAIR ROKEBERG pointed out that [the 5 percent] is the payout
and isn't necessarily the real rate of return, which is based on
the level of inflation.
MR. GOLDSMITH clarified that he has the understanding that a 5
percent rate of return isn't unreasonable over the long term.
In response to Chair Rokeberg, Mr. Goldsmith remarked that a 6
percent rate of return would be "stretching it a little bit."
MR. GOLDSMITH, in response to Chair Rokeberg's concern regarding
a circuit breaker for emergencies, noted that the legislature
would probably have other sources available in an emergency. He
felt that turning to the permanent fund should be the last
resort. He echoed earlier testimony that the CBR or temporary
taxes could be options.
CHAIR ROKEBERG announced that the public hearing on HJR 15 would
be recessed until some time in January.
[HJR 15 was held over.]
CHAIR ROKEBERG called for a recess at 1:06 p.m. He called the
meeting back to order at 1:45 p.m.
SJR 23 - CONST AM: APPROPRIATION/SPENDING LIMIT
Number 0326
CHAIR ROKEBERG announced that the next order of business would
be CS FOR SENATE JOINT RESOLUTION NO. 23(FIN) am, Proposing
amendments to the Constitution of the State of Alaska relating
to an appropriation limit and a spending limit.
Number 0331
SENATOR DAVE DONLEY, Alaska State Legislature, testified as the
sponsor of SJR 23. Senator Donley informed the committee that
when the Senate passed SJR 23 he promised to work with
Legislative Legal Services and the Legislative Finance Division
on defining the concept of a constitutional spending limit. The
aforementioned group has been working on that and developed the
proposed committee substitute (CS) that is before the committee
today.
Number 0361
REPRESENTATIVE MEYER moved to adopt proposed HCS CSSJR 23,
version 22-LS0734\P, Cook, 9/4/01, as the working document
before the committee. There being no objection, Version P was
before the committee.
SENATOR DONLEY turned to his slide presentation that is included
in the committee packet. He remarked, "Most Alaskans agree that
development of a long-range fiscal plan is one of the greatest
challenges facing our state." He felt that it is surprising to
look at where [the state] is today versus where it was with the
constitutional budget reserve (CBR). He pointed to a chart that
illustrated that the CBR didn't follow the projection that it
would be exhausted in 2000. Legislative Finance reviewed why
the result was drastically different than what was projected
several years ago. There were four major reasons for the
difference. The second largest reason was lower general fund
(GF) spending while the largest reason for the difference was
that there were more settlements coming into the CBR.
CHAIR ROKEBERG clarified that the CBR is higher because of
$711.9 million in spending cuts, $1.3 billion in greater
settlements, as well as greater than projected earnings and oil
revenue.
REPRESENTATIVE DAVIES explained that the $711.9 million is
partly because of budget cuts and partly because the budget
didn't grow by that much. He pointed out that there was an
assumption that the budget would grow by a certain percent and
since it didn't, there was a difference.
SENATOR DONLEY agreed.
CHAIR ROKEBERG asked, "It's not the actual savings from the
elimination of the monies, then?"
SENATOR DONLEY answered that it's the elimination from projected
budget growth. He explained that the original graph illustrates
where the state would be with the CBR based on the projections
in 1995. The next graph explains why the CBR didn't move/expire
as projected in 1995.
SENATOR DONLEY said, "The Senate Majority believes that before
considering major new taxes on Alaskans, first we need to make
sure that ... state government is running as well as possible."
He pointed out that in the U.S. constitutions are the basis for
government. Therefore, the first step should be to review the
state constitution and determine whether it is functioning
properly. He felt that there are two parts, which deal with
fiscal policy, of Alaska's constitution that aren't functioning
properly. Those are the existing constitutional appropriation
limit and the existing constitutional budget reserve provision.
The resolution before the committee addresses the existing
constitutional appropriation limit.
SENATOR DONLEY stated that the current constitutional
appropriation limit provision isn't working, the language is
misleading and unclear, and the limit has grown too large. He
explained that the limit was set in 1982 with an escalator based
on population and inflation that has driven it to an
unrealistically high amount of over $6 billion. However, the
definition of what is included in the constitutional
appropriation limit would lead to spending of about $3 billion.
He reminded the committee that the discussion revolves around
spending, as defined by the constitutional provision.
SENATOR DONLEY turned to the overwhelming rejection of the last
fiscal plan proposal in September 1999. He interpreted that
rejection as the public not wanting to give the government a
blank check; the public wanted some assurance that additional
revenues wouldn't merely fuel more spending. Therefore, having
reasonable limits on government spending would seem to be
acceptable to the majority of Alaskans and thus is the proposal
embodied in SJR 23.
SENATOR DONLEY moved on to the next slide that has a graph
illustrating the current spending limit versus recent
appropriations. The graph illustrates that [the state] is
spending about half what [the limit] allows. Senator Donley
reiterated that the constitutional appropriation limit isn't
working and has never worked. Furthermore, the language in the
provision leads one to believe that one-third of the spending
has to be towards capital projects, but an attorney general's
opinion has stated otherwise. Again, an average citizen would
be confused and thus the language should be simplified. The
interpretation has been that the one-third spending towards
capital projects would only occur if the $6 billion spending
occurs, which won't happen. "To correct this, the proposed
committee substitute proposes to base any allowable increases on
previous year's budgets and to limit those increases to only 2
percent," he explained. The [CS] also clarifies what is and is
not included in the appropriation limit.
SENATOR DONLEY continued with the slide that includes a graph
illustrating the effect of Version P. He noted that there is a
safety valve in that in years when there is the need to spend
more money, a super majority concurrence allows an additional 2
percent to be appropriated. He clarified that the [additional 2
percent appropriation via a super majority concurrence] ensures
that it is based on what is being spent in the current year.
Therefore, there wouldn't be a growth rate that is higher than
the out years. He specified that it is always based on the
amount of the prior two years, which he saw as a big improvement
to the 1982 amendment. This amendment will base the
appropriation limit on the two previous years' budgets and thus
there is a greater relationship between the two.
SENATOR DONLEY announced that these artificial limits on
spending aren't his first choice. He preferred that the
legislature and the executive branch come together and limit
spending, which is very difficult. He felt that an artificial
restraint would be the best option right now. This artificial
restraint provides the public with a constitutional mandate that
any money, in addition to the 2 or 4 percent, would go towards
reducing the fiscal gap.
Number 0553
REPRESENTATIVE OGAN inquired as to whether Senator Donley was
concerned that this would send a signal to legislators that it
is acceptable to increase the budget by 2 percent every year,
and 4 percent if the votes are obtained.
SENATOR DONLEY acknowledged that there may be a tendency to
think that way. However, this [proposal] is vastly superior to
the current malfunctioning [limit]. This proposal is a
realistic limit because going over 2 percent could only occur
with a super majority vote and going over 4 percent would
require some other provisions. Furthermore, Version P requires
that this automatically return to the voters in four years in
order to assess whether it's working or not and whether there is
the desire to take it out of the constitution. After the first
four years, the opportunity to remove this from the constitution
would automatically occur every six years.
Number 0583
REPRESENTATIVE OGAN posed a situation in which there is an
emergency need for increased spending that exceeds the 4
percent. He asked if there is any circuit breaker to deal with
that possibility.
SENATOR DONLEY pointed out that there are ten exceptions,
including appropriations to the permanent fund, dividend
program, disasters, the railroad, general obligation (GO)
[bonds], and revenue bonds. He emphasized that if there was
ever a real problem that didn't meet other definitions, such as
a disaster or war, then the capital budget could be placed on a
GO bond and placed before the voters. There could be a
contingent budget based on voter approval. Under the existing
budget, there is over $100 million of emergency leeway and the
general operating dollars would be replaced with the GF for the
capital budget.
Number 0628
REPRESENTATIVE DAVIES pointed out that a contingent budget
couldn't be passed because that would be tantamount to the
people appropriating.
SENATOR DONLEY indicated agreement with Representative Davies,
but noted that [the legislature] could be prepared to deal with
it if the people didn't approve it.
TAPE 01-83, SIDE A
SENATOR DONLEY noted the option of bonding for some expenses
that are currently dealt with through GF. Senator Donley
continued with the exceptions. Money that is appropriated from
the federal government is excluded from the [constitutional
appropriation] limit as are obligations on bonds, certificates
of participation, reappropriations, transfers between state
agencies, and appropriations under the super majority provision.
Senator Donley felt that [HCS SJR 23] is a vastly superior
definition in regard to what is included and not included in the
calculation of the appropriation limit versus the 1982 version.
Number 0010
REPRESENTATIVE COGHILL inquired as to how [HCS SJR 23] addresses
capital.
SENATOR DONLEY explained that non-federal capital expenditures
are included in this appropriation limit while federal money
isn't included.
REPRESENTATIVE COGHILL referred to the one-third portion for
capital spending that is currently in the constitution.
SENATOR DONLEY interjected that it's deleted.
REPRESENTATIVE BERKOWITZ asked if this resolution would
eliminate the three-quarters (indisc.) line item.
SENATOR DONLEY replied no.
Number 0025
DAVID TEAL, Director/Legislative Fiscal Analyst, Legislative
Finance Division, Alaska State Legislature, referred to [Article
IX] Section 16 of the Alaska Constitution, and explained that
the limit can be exceeded for permanent fund bills and
appropriation bills for capital projects if approved by the
governor. The entire discussion regarding a portion being used
for capital budget spending [is deleted] while [the current
constitutional language] refers to bills passed by the governor
or an override of a capital bill.
REPRESENTATIVE BERKOWITZ inquired as to the section in the
constitution where the three-quarter override of an
[appropriation] veto is located.
SENATOR DONLEY answered that the three-quarter override language
is located in the primary part of the constitution under
Executive Powers.
MR. TEAL quoted from Article IX, Section 16 of the Alaska
Constitution as follows: "The legislature may exceed this limit
in bills for appropriations to the Alaska permanent fund and in
bills for appropriations for capital projects, whether of bond
proceeds or otherwise ...." [This resolution] says that bills
that appropriate money to the permanent fund or appropriate
money for any capital projects that are passed by the governor
or overridden by the legislature are outside the limit.
SENATOR DONLEY interjected that the three-quarters override
requirement for a budget item is contained in the original
constitution.
MR. TEAL noted that all appropriation bills have a three-quarter
super majority override while a two-third override is required
for nonappropriation bills. Mr. Teal clarified, "What it really
says is that if you exceed the limit, you can go to the voters
and ask them if it's OK to exceed the limit."
Number 0077
REPRESENTATIVE BERKOWITZ posed a hypothetical situation in which
there was a federal mandate, a large population increase, or a
large increase in inflation. In such a situation, how would
this spending cap operate?
SENATOR DONLEY answered that the ordinary growth would be
limited to 2 percent, while any federal funding for the
situation would be outside of the limit. Furthermore, with a
super majority, the [appropriation] could be increased to 4
percent in additional spending. If inflation or population
growth was over 4 percent, then the actual per capita spending
would be forced to decrease.
REPRESENTATIVE BERKOWITZ posed a situation in which there was 10
percent inflation and a large population increase while the
federal government says that funding must be changed pursuant to
federal standards. He asked if the state would have to "eat
that difference."
SENATOR DONLEY answered that the next step would be to review GO
bonding, a portion of the capital, in order to free up
additional GF for operating, which would require a vote of the
people. He emphasized that for most states, when there isn't
enough money for their operating budget, they don't have a large
capital budget. The second step would be the automatic review
by the voters after four years, and then again in six years. If
this [appropriation limit] wasn't functioning properly, then it
could be taken out of the constitution. The ability to vote to
take the provision out of the constitution is something the 1982
provision doesn't have.
REPRESENTATIVE BERKOWITZ inquired as to why 4 percent was
chosen.
SENATOR DONLEY explained that the original proposal was one-half
of population and inflation growth. However, the past seemed to
support 2 percent as a reasonable amount of growth. He further
explained that he was trying to tie it to a close previous year
rather than a fixed point in time. However, a reasonable amount
of increase is open for debate.
REPRESENTATIVE BERKOWITZ related his understanding then that the
4 percent relates to historic inflation and historic population
growth.
SENATOR DONLEY answered, "Somewhat." However, Senator Donley
noted that one of the intents of this resolution is to work
towards lower per capita spending. "So, while it allows real
spending increases by only allowing a 2 percent increase, in
years where you may even have a bigger inflation and so you need
to go to 4 [percent], you're still working towards reducing our
overall per capita spending," he clarified.
Number 0094
CHAIR ROKEBERG pointed out that if there is high inflation, a 4-
6 percent increase, then there may actually be a diminishment of
spending in real terms. Therefore, it is possible to move into
a negative growth situation that may or may not be good.
CHAIR ROKEBERG inquired as to where the state stands in regard
to the [actual appropriated] GF.
MR. TEAL answered that [the actual] GF [appropriated] is $2.4
billion.
CHAIR ROKEBERG noted that there is about a $770 million
distinction in definition between what is called GF now and what
the definition is [in this resolution].
SENATOR DONLEY noted that there is an existing definition in the
constitution for the existing appropriation. Therefore, Version
P revises that existing definition.
MR. TEAL added that what happens over time is a shifting of
expenditures from the general fund to the other fund's column.
He explained that [Version P] looks at all state expenditures
rather than looking at straight GF appropriations, which is what
the constitution did. With this new approach, one must also
review what is excluded. For example, [the language in the
constitution for the appropriation limit] excluded permanent
fund dividends, but it didn't exclude permanent fund inflation-
proofing or special appropriations to the permanent fund both of
which are excluded in Version P. Furthermore, bond proceeds
were already excluded from the limit, but with Version P debt
service on bonds is also excluded. The Alaska Railroad
Corporation is excluded because it is off-budget and there is no
desire to include them even if the corporation became part of
the budget at some time.
MR. TEAL agreed with Chair Rokeberg's earlier remark that there
is about $700 million of other state spending that is subject to
the limit, not just GF.
MR. TEAL, in response to Representative Davies, confirmed that
the other state spending does include the Alaska Housing Finance
Corporation (AHFC) and the Alaska Industrial Development and
Export Authority (AIDEA). Mr. Teal indicated agreement that
AHFC and AIDEA are included because they are subject to the
Executive Budget Act. He explained that the operating expenses
of AIDEA and AHFC are appropriated.
Number 0150
REPRESENTATIVE MEYER remarked that this proposal reminds him a
lot of the tax cap the Municipality of Anchorage (MOA) has. He
recalled that the MOA's tax cap is based on increases in the CPI
and a five-year average of the population. He asked if an
approach like that of the MOA would be better than specifying 2
percent.
SENATOR DONLEY said that such models had been reviewed and he
was open to such a proposal. However, he noted that he was
pleased with his resolution because of its simplicity, and
because of its ultimate result of reducing capital expenditures
if inflation and population increases continue. One of the
biggest faults with the 1982 amendment was that whatever the
population and inflation, the growth was allowed.
MR. TEAL remarked that simplification is really the answer. He
recalled that the discussion over the resolution moved to the
question of how much money is involved. That discussion
[resulted] in the determination that this limit allows budget
growth of $64 million with a simple majority vote and $128
million with a two-thirds majority. Therefore, if one is
attempting to limit expenditures, what number would one choose.
Rather than try to figure out inflation and population growth, a
number was chosen. Two percent is about half of the long term
... However, Mr. Teal mentioned that if one is interested in
making this [appropriation limit] last forever, without any
modifications, then the actual growth rates should be included
because it would better keep pace.
Number 0198
REPRESENTATIVE MEYER inquired as to why the amendment [embodied
in SJR 23] would go before the voters every six years.
SENATOR DONLEY reiterated that the 1982 amendment has never
worked. He wished that there had been an automatic opportunity
to get rid of [the 1982 amendment] because it's difficult to
reach the consensus necessary in the legislature to place it on
the ballot. The amendment goes before the voters in order to
ensure that the issue is reviewed in a meaningful way. This
automatic placement before the voters forces honest review of
the amendment by the legislature. Although Senator Donley
acknowledged the argument that too many items on the ballot
[make the voter complacent], he felt that the largest problem
facing [the state] is the fiscal gap. The number one way to
solve the fiscal gap is to ensure the public, through the
constitutional guarantee, that [the legislature] won't go crazy
if additional revenue is found.
Number 0226
REPRESENTATIVE BERKOWITZ inquired as to the appropriation limits
that were in place prior to 1982.
SENATOR DONLEY replied none, save the constitutional provision
to balance expenditures to revenue.
CHAIR ROKEBERG pointed out that there could be deficit spending.
REPRESENTATIVE BERKOWITZ remarked on the simplicity of that
approach and thus he suggested going back to that provision.
MR. TEAL pointed out that in 1982 people expected $100 per
barrel of oil and revenues that exceeded expenditures.
Therefore, the purpose of the limit was to try to force [the
legislature] to not spend some of that excess revenue. Although
the $100 per barrel of oil never came, [the legislature] managed
to get through the budget process. Therefore, some would argue
that an [appropriation] limit isn't necessary because public
opinion and limited revenue are the appropriation limit.
However, that is a political argument.
REPRESENTATIVE BERKOWITZ highlighted the other limit that is in
place, an election. Elections take place every two years, and
therefore if people are unhappy with the appropriations that
legislators make, then the public can vote the legislator in or
out. Representative Berkowitz expressed concern that the
fundamental purpose of this appropriation limit is to reduce per
capita spending, which he didn't believe to be the primary
obligation of a legislator. The primary obligation of a
legislator is to fulfill the constitutional mandates for
education, public safety, and transportation. Although that
obligation is different, it does overlap [with per capita
spending].
Number 0268
SENATOR DONLEY commented that he believes it's a political
question. Senator Donley said, "My first choice is ... that we
would have the discipline to prioritize our budget, to live
within our means, and still fulfill those constitutional
directives and mandates. Unfortunately, government in a
democracy is driven just the opposite direction." Our system of
government doesn't lend itself well to dealing with deficits
because there is always this great demand for additional
spending without additional taxation. [Alaska] is almost to the
point of crisis and it's time to start doing something about it.
This proposal is a positive step forward. Furthermore, all that
is really being done here is allowing the people to vote as to
whether they think the current constitutional appropriation
limit should be revised to this proposal.
REPRESENTATIVE BERKOWITZ stated his belief that allowing people
to vote is always a good plan.
MR. TEAL pointed out that the appropriations or expenditures of
most states are limited by revenue. However, Alaska has the
CBR, which is essential to the state as a shock absorber or
budget stabilizer because oil prices and revenue fluctuate a
lot. The difficulty is that there are projections that the CBR
will not exist in five years because of the fiscal gap. Without
the CBR, the state would be in real trouble.
Number 0307
REPRESENTATIVE BERKOWITZ inquired as to how this amendment would
impact the CBR evaporation.
MR. TEAL answered by pointing out that there is some feeling
that the revenue side of the problem can't be addressed until
the blank check is taken away. Therefore, this proposal
restricts expenditures, although he didn't have an exact amount
of the restriction. This proposal has the probability of being
more effective than the existing limit. The fact that the limit
exists may help the legislature address the revenue side as
well.
REPRESENTATIVE BERKOWITZ said that in looking at a spending
restriction, there is still a revenue gap. Therefore, he felt
that the public should have a complete picture, and be told how
the revenue gap is simultaneously filled. That is, the entire
package.
SENATOR DONLEY responded that such an approach is problematic
because the public doesn't know what will and will not pass.
Furthermore, a package of these proposals can't be created.
Therefore, an [incremental approach] must be taken, which begins
by fixing the foundation.
Number 0337
CHAIR ROKEBERG inquired as to what would happen to the base if
there was an extraordinary natural disaster that necessitated a
$300 million spending appropriation.
SENATOR DONLEY clarified that things that are outside the base
don't count towards the next year's base, which he felt was an
improvement [over the 1982 amendment].
CHAIR ROKEBERG remarked that, in a certain sense, artificial
caps create artificial problems. However, he acknowledged that
the exceptions included in this resolution seem to offer some
flexibility.
SENATOR DONLEY pointed out that the super majority vote for a 4
percent increase, the public review, and the bonding option are
safety valves for a limited amount of time.
Number 0380
REPRESENTATIVE DAVIES remarked that originally he understood
this [2 percent] to be based on the previous two years and
averaged; however, [now he understood] it to be based on the two
years preceding. Therefore, "it's just looking back two years."
SENATOR DONLEY interjected, "Because we don't have the numbers
for the prior year to be able to prepare the budget for the next
year. So, we had to go back two years to base it on."
REPRESENTATIVE DAVIES surmised that if there was a situation in
which the budget was reduced and "you went out a couple of
years," then there might be a large step function that got
limited. He offered one solution: a funding average over a few
years. If there was a year in which [the budget would really be
reduced], then there wouldn't be such an impact in the next two
years.
CHAIR ROKEBERG noted the possibility of making it open-ended
[with the super majority vote to break the 6 percent] rather
than having the 2 percent. However, he questioned what would
happen in regard to budget discipline. The public would be left
to determine whether the super majority vote was valid.
REPRESENTATIVE BERKOWITZ remarked, "I'm sure when the time is
right, our friends in the Republican minority won't ... withhold
their votes for anything."
Number 0417
SENATOR DONLEY suggested that the chance of reducing the amount
of money that falls under this appropriation by more than 2
percent in one year would be fairly slim. If a 2 percent cut
was achieved, it would automatically be made up.
CHAIR ROKEBERG mentioned the possibility of underfunding the
growth effect. If there was extraordinarily fast growth, then
[the budget] may not be keeping up with public services
appropriately. Therefore, he questioned how that would be
addressed when there are static numbers. Chair Rokeberg noted
that such could be the reason for a public policy that makes the
assumption that overspending is occurring currently, and
therefore the spending cap would need to be limited in order to
deal with it underneath it.
SENATOR DONLEY answered that if forced, some prioritizing
decisions could be made to shift funds to education, public
safety, and transportation in order to ensure those areas are
addressed.
Number 0461
SCOTT GOLDSMITH, Economist, University of Alaska - Anchorage,
related an observation from the public's perspective in regard
to whether a 2 percent growth limit would convince the public
that the legislature was "taking the cure." Mr. Goldsmith
pointed out that an average of the growth rate on the chart
[included in the committee packet] would probably average 2
percent. Therefore, one could argue that this proposal merely
puts in place what is already being done and thus [the problem
isn't really being addressed]. Furthermore, the argument could
continue in the vein of the public - the general public who
doesn't understand real dollars versus nominal dollars - wanting
"real cuts." However, Mr. Goldsmith felt that [Senator Donley]
is on the correct path in saying that the public needs to
understand that working to reduce the budget has to happen
first. Mr. Goldsmith asked, "What's to stop the legislature, on
the first day of the session, from just all pledging that this
year the budget is going to be no bigger than it was last year?"
MR. GOLDSMITH informed the committee that he had done an
analysis of the earlier version of SJR 23, and therefore it's
not directly relevant to Version P. However, a number of the
changes encompassed in Version P responded to some of his
thoughts on the earlier version of SJR 23.
Number 0518
CHAIR ROKEBERG commented that by going to a 4 percent solution,
then there is a static number. However, the prior version did
include population growth and inflation. Chair Rokeberg
expressed concern that if there is a stipulated amount of 4
percent or even 6 percent, it would have a potential negative
impact on economic growth in this state. He noted the need to
keep in mind the impact of the state government on the gross
state product and how much economic activity state government
generates. To him, even the status quo is not a very satisfying
prospect, as a matter of economic policy.
MR. GOLDSMITH said that it seems that [the state] faces a trade-
off. On one hand, everyone recognizes that there is a severe
fiscal problem and there have been no solutions. However, if
holding the line on spending can be a first step to providing a
solution, then serious thought should be given to that. At the
same time, one should recognize that when one ties [the state's]
hands and limits the growth to a fixed percent per year, there
will potentially be some consequences that may be adverse in the
future. He felt that the most obvious potential adverse
consequence is the one that [Chair Rokeberg] suggested.
MR. GOLDSMITH pointed out that the amendment begins by going
into effect for four years. In his opinion, the growth rate of
the population and inflation over the next four years would be 1
percent a year and 2-3 percent, respectively. He felt that
those projections would be consistent with [2] percent growth in
the state budget, which would mean that the budget would get a
little smaller in real per capita terms. However, that is also
a continuation of the trend line that the state has been on for
the last few years. On the other hand, the Alaska economy is
very difficult to predict. If there is one year when population
growth is higher [than his aforementioned projection], then it
isn't so bad, as long as it falls again. However, if there is a
longer period, 5-10 years of sustained rapid growth of the
population or inflation, then there would likely be faster
growth of the economy. The most obvious situation that would
trigger such a scenario would be a gas line or the opening of
the Artic National Wildlife Refuge (ANWR). Such was the case in
the 1970s when the annual growth in population was 3 percent and
the annual rate of inflation was 7.6 percent. He noted that
those figures were taken from the Anchorage CPI and thus are
lower than the U.S. CPI. If there was another decade like the
1970s, then a 2 percent limit would result in a reduction in
real per capita spending of 8 percent every year for ten years.
TAPE 01-83, SIDE B
MR. GOLDSMITH continued by saying that one must recognize the
difficulty in predicting these rates of growth, and a stipulated
percent ties the state's hands in terms of flexibility and how
one can respond to situations. Furthermore, there are some
things that lay outside the GF budget, but are tied into
economic growth such as the operation of the airport, and the
non-GF portion of the university budget. He posed a situation
in which there is an influx of students. Such a situation would
be great for the state, but he surmised that their tuition would
be included in the cap and would place a squeeze on the GF.
Number 0013
MR. TEAL responded, "That is one of the weaknesses here."
However, there are ways to maneuver around having too much
decline and limited flexibility in responding to high inflation.
For instance, a third provision could be added that the cap
would be 6 percent [to an] unlimited [percent] with a 75 percent
vote.
CHAIR ROKEBERG said he liked that idea.
MR. TEAL returned to the earlier example in which university
enrollment increases, let's say that enrollment doubles in the
next five years. In such a situation, the university's tuition
receipts would double, and tuition receipts aren't exempt from
spending limits. Therefore, something will suffer if the 2
percent is used on funds that one doesn't really want to
consider, however there is no way to write them out. He guessed
university funding could be exempted. Mr. Teal clarified that
the more exemptions there are, the less the limit accomplishes.
Although one can argue that any agency or program, such as the
university, that generates its own revenue shouldn't be subject
to the limit, "we can't figure a way out of it."
Number 0038
REPRESENTATIVE COGHILL inquired as to the lag time when
determining population and inflation growth.
MR. GOLDSMITH remarked that inflation [growth] would be easier
to pin down. As mentioned earlier, Anchorage has a CPI, which
comes out in May of the next year. Therefore, there would be a
five-year delay. However, the U.S. CPI is calculated monthly.
In regard to Alaska's population growth, he suggested asking the
Department of Labor & Workforce Development.
REPRESENTATIVE COGHILL related his view that if the
[appropriation] limit is tied to per capita, then it could grow
with the per capita while limiting spending. Perhaps an
artificial cap may place undue pressure on areas where such
isn't desired. However, [there could be a] combination of
inflation and population growth with a year-and-a-half average.
He felt that such a formula could be sold [to the public] more
easily.
MR. GOLDSMITH recalled a problem with the Anchorage cap due to
the lag, in that the additional amount in expenditures is based
on the population change and inflation from the last year.
However, what one would want to do is spend to the population
and inflation change that is expected for the upcoming year. If
the population went down last year but is expected to increase
[this year], the spending [still] has to be based on what
happened in the prior year. Such a "squeeze" occurred in the
late 1980s.
SENATOR DONLEY said he would agree with that if he felt that
government was operating at maximum efficiency. However, he
felt that there is greater flexibility in the numbers rather
than following exactly what population and inflation does.
MR. TEAL noted that although the moving average does stabilize
things, it causes "you" to respond slower.
CHAIR ROKEBERG interjected that a U.S. city average, which is
published on a monthly basis, would have to be adopted.
MR. TEAL stated that having the "latest, greatest data doesn't
do any good. He pointed out that the Office of Management &
Budget (OMB) and the agencies are preparing the 2003 budget, and
thus they need to know what the 2003 numbers are now.
Furthermore, the expenditures for 2002 can't even be dealt with
because the 2002 expenditures are unknown and thus the
expenditures are based on 2001, which is why there would be a
two-year lag. Therefore, the population and inflation [data]
may as well be behind a year as well. In his opinion, "it's
just not that critical."
Number 0092
REPRESENTATIVE DAVIES mentioned the tendency to mix
appropriations and expenditures. He pointed out that the
resolution refers to the appropriation, not the expenditure, for
the two years preceding. Therefore, he questioned why there
needs to be a two year lag if it's based on the appropriation,
which is a known.
MR. TEAL pointed out that the supplemental [appropriations]
aren't complete. He reiterated that the appropriations for 2002
would be unknown.
REPRESENTATIVE DAVIES interjected that such could be known.
SENATOR DONLEY remarked that people could be enticed to short
fund the budget if the desire was to not encourage fiscal
discipline. He predicted that such a situation would result in
a larger supplemental [budget].
REPRESENTATIVE DAVIES said that the supplemental [budget] in a
given year would have to be included.
MR. TEAL, in regard to Representative Davies' suggestion, said
that FY02 supplemental [appropriations] could be counted as FY03
spending.
CHAIR ROKEBERG asked if anyone else wanted to testify on SJR 23.
There being no one, the public hearing on SJR 23 was recessed.
CHAIR ROKEBERG remarked that he was [less] skeptical now, after
recognizing that [SJR 23] may be a symbolic political act that
is necessary for the state's long-range fiscal plan.
REPRESENTATIVE DAVIES estimated that the portion of the
population that this proposal would appeal to represents about
one-third of the population. In his experience, those people
want 40 percent cuts on an annual basis, real Draconian cuts.
Therefore, he questioned whether [this proposal] would satisfy
those people to which it attempts to speak. He asked if this
[proposal] will really address the problem, so that the
legislature can move on to solving the real problem of the
fiscal gap.
SENATOR DONLEY responded that he would like to put forth his
best effort to make [this proposal] a realistic restraint
without being Draconian, if for no other reason than eliminating
what is currently in the constitution.
CHAIR ROKEBERG recessed the hearing on SJR 23.
[SJR 23 was held over.]
SJR 24 - AMEND CONSTITUTIONAL BUDGET RESERVE FUND
Number 0151
CHAIR ROKEBERG announced that the last order of business would
be CS FOR SENATE JOINT RESOLUTION NO. 24(RLS), Proposing
amendments to the Constitution of the State of Alaska relating
to the budget reserve fund.
Number 0153
SENATOR DAVE DONLEY, Alaska State Legislature, testified on
behalf of the Senate Finance Committee, sponsor of SJR 24. This
resolution would amend the current constitutional budget reserve
(CBR) amendment. Although the CBR is functioning well as a
fiscal shock absorber, it isn't functioning well in regard to
helping control spending and enforcing fiscal discipline. Under
the current situation, small groups of legislators can force
increased spending by withholding CBR votes. If one were to
count all the proposed floor amendments that were made,
rejected, and eventually included in the budget in order to
obtain the three-quarters vote, it would sum $150 million this
year. Senator Donley agreed to provide the delineation of the
$150 million.
SENATOR DONLEY informed the committee that the packet should
include the language that the voters saw when the CBR was
adopted in 1990. The lieutenant governor's description of the
CBR said that the fund could be used when money available for
appropriation in the year is less than the year before, but only
if the shortfall is made up. However, the legislative affairs'
summary specified that appropriations may be made from the CBR
only if the money available for the fiscal year is less than the
amount appropriated for the prior year. The proponents'
statement says that the CBR is an effective first step to
controlling state spending and that is party due to the ability
to use CBR funds when revenues are less than the amount
appropriated in the previous year, in which case the amount
appropriated from the CBR couldn't exceed the shortfall. Even
the opponents' explanation said that a simple majority of the
legislature could borrow funds from the CBR to make up any
shortfalls in revenues up to the amount appropriated in the
previous year. Everyone agreed that money [from the CBR] could
be accessed with a simple majority vote in order to make up for
the shortfall, up to the amount that was appropriated in the
previous year.
SENATOR DONLEY said that didn't happen, however. Once the
amendment was adopted, the legislature adopted the statutory
explanation of the language, which the court subsequently
overruled as being in conflict with the court's meaning of
"being available for appropriation". Whether the court was
correct or not, that wasn't what the people voted on.
Therefore, this resolution is an attempt to restore what was
meant by Ballot Measure No. 1 with regard to accessing the CBR.
Thus, SJR 24 proposes to correct the problem identified in the
court case and clarify that in a year in which revenues are less
than the previous year, the legislature may access the CBR by a
simple majority vote for funding up to the previous year's
appropriation. This resolution also deletes the so-called
"sweep provision," which requires a three-quarters vote to repay
the money taken from the CBR in the previous year.
Number 0217
REPRESENTATIVE DAVIES noted that [SJR 24] has been characterized
as fixing a budget, a "blackmail" situation. Although that
argument can be made, the other side is that in other areas of
the budget the Majority short funds the budget, relying on the
Minority to force limits that the Majority wants, but for which
they don't want to take credit or blame.
CHAIR ROKEBERG said that there is some truth to that statement.
REPRESENTATIVE BERKOWITZ commented that he noticed that Senator
Donley's budget report to the public took credit for funding
that "we" [the Minority] insisted on as part of the CBR vote.
He cited the funding for education and the troopers as examples.
Number 0248
MR. TEAL, in response to Chair Rokeberg, explained that
typically each year the appropriation's bill contains what is
called "the reverse sweep" section. That section is included
because the constitution specifies that if there are any
outstanding borrowings from the CBR, then every June 30th all
the subaccounts of the general fund (GF) are swept into the CBR
in order to repay it. He estimated that there is about $3
billion in debt.
SENATOR DONLEY pointed out that it is a year-to-year
forgiveness, and therefore there is no outstanding debt that has
to be handled by a three-quarters vote on the $3 billion. He
clarified that the debt is only for the debt of the prior year.
MR. TEAL estimated that approximately $100 million a year from
the GF subaccounts is swept into the CBR. The language in the
appropriation's bill says that the money taken from the GF
subaccounts is replaced by withdrawing from the CBR. Therefore,
that is a withdrawal from the CBR and would require a three-
quarter vote. In essence, [the language] says that in order to
make the [GF] subaccounts whole, a three-quarter vote is
required. That is part of SJR 24 because if the super majority
vote is trying to be avoided in order to just have a budget that
is the same as last year, then the $100 million sweep super
majority requirement must be eliminated.
CHAIR ROKEBERG related his understanding, then, that this
resolution maintains the CBR while modifying how it functions.
SENATOR DONLEY explained that the resolution modifies how the
CBR is accessed and eliminates the sweep provision. The
original intent of the amendment is restored, in that a three-
quarter vote is only required for those funds that are over and
above what was appropriated for the previous year. Therefore, a
three-quarter vote would be required if the desire is to
increase spending and obtain the [increase] from the CBR. Only
a simple majority vote is required to access money that is equal
to what was appropriated in the previous year.
Number 0292
REPRESENTATIVE DAVIES asked if that would have any cash flow
implications.
MR. TEAL noted that the opinion on that differs. Currently, the
Department of Revenue doesn't believe the cash flow issue to be
a large problem. In fact, borrowing $50-$100 million isn't
really an appropriation from the CBR because it is being repaid
before the end of the year. In other words, in FY01 the CBR
draw wasn't necessary at all because $300-$400 million was taken
from the CBR, but repaid before the end of the year. In
response to Chair Rokeberg, Mr. Teal said that no interest is
paid on the draw.
CHAIR ROKEBERG expressed his concern with the lack of interest
payments.
MR. TEAL turned to FY01, when the legislature did take money
from the CBR. Of course, the interest earnings that the GF
recovered stays in the GF, and thus the year ends and there is a
GF surplus of $80 million. The sweep provision says that the
$80 million goes into the CBR, which happened. However, the
reverse sweep only applies to the subaccounts of the GF, not the
GF itself. Therefore, the interest was returned.
CHAIR ROKEBERG characterized [a draw from the CBR] as a single
appropriation rather than an installment.
SENATOR DONLEY explained that if this resolution was placed on
the ballot and approved by the voters, the situation would
change such that the legislature could access the CBR with a
simple majority for an amount up to the prior year's
expenditures. However, there is much pressure to do more than
that. Senator Donley felt that the three-quarters vote is
appropriate since that was the original intent.
Number 0352
REPRESENTATIVE BERKOWITZ pointed out that [Article IX] Section
17 says, "(c) An appropriation from the budget reserve fund may
be made for any public purpose upon affirmative vote of three-
fourths of the members of each house of the legislature." He
understood that language to refer to any appropriation.
MR. TEAL informed the committee that there are two sections that
refer to removing money. One section requires a three-quarters
vote for any purpose. The other section requires a simple
majority vote, as long as the withdrawal is no more than was
spent in the prior year.
REPRESENTATIVE BERKOWITZ said that under law that is in
conflict, the default is to the [language] that is more
restrictive.
SENATOR DONLEY disagreed and explained that the default is to
try to read the [sections in conflict] jointly in an attempt to
make sense.
MR. TEAL clarified that the three-quarters vote [is required]
when the prior year's budget has been exceeded.
Number 0373
SENATOR DONLEY posed the possibility that the court is correct.
Even if that were the case, the court's ruling isn't what the
voters thought they were voting for nor was it the intent of the
sponsors or the opponents. Therefore, he felt that the voters
should have the opportunity to restore what they thought they
were voting for. Senator Donley went on to point out that the
court case centered around the language "available for
appropriation". As a lawyer, he felt that the court had a
defensible conclusion. However, it doesn't make it the best
public policy or what the public thought it was getting.
CHAIR ROKEBERG recalled that there have been resolutions to
repeal the entire section regarding the CBR. He inquired as to
why Senator Donley chose to take the tact he did versus
repealing the entire section.
SENATOR DONLEY answered with his belief that the CBR is working
well and was a wise step as a fiscal shock absorber. Therefore,
he felt that the well-functioning parts should be kept.
CHAIR ROKEBERG asked whether Legislative Legal Services had
provided an opinion that [Article IX, Section 17] subsection (c)
doesn't need to be modified to be crystal clear in regard to the
intent.
SENATOR DONLEY informed the committee that the version adopted
by the Senate Rules Committee accomplishes that goal.
CHAIR ROKEBERG asked whether anyone else wished to testify.
[There being no one, the hearing on SJR 24 was recessed.]
[SJR 24 was held over.]
ADJOURNMENT
Number 0412
There being no further business before the committee, the House
Judiciary Standing Committee meeting was adjourned at 3:23 p.m.
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