02/23/2002 10:05 AM House STA
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
February 23, 2002
10:05 a.m.
MEMBERS PRESENT
Representative John Coghill, Chair
Representative Jeannette James
Representative Hugh Fate
Representative Gary Stevens
Representative Peggy Wilson
MEMBERS ABSENT
Representative Harry Crawford
Representative Joe Hayes
COMMITTEE CALENDAR
HOUSE BILL NO. 35
"An Act relating to the market value of the permanent fund and
to distribution of income of the permanent fund; and providing
for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 304
"An Act relating to disposition of income of the permanent fund;
and providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 398
"An Act relating to disposition of income of the Alaska
permanent fund; and providing for an effective date."
- HEARD AND HELD
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 199
"An Act relating to taxation, including taxation of income of
individuals, estates, and trusts."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 35
SHORT TITLE:DISTRIBUTION OF PERMANENT FUND INCOME
SPONSOR(S): REPRESENTATIVE(S)HUDSON
Jrn-Date Jrn-Page Action
01/08/01 0033 (H) PREFILE RELEASED 1/5/01
01/08/01 0033 (H) READ THE FIRST TIME -
REFERRALS
01/08/01 0033 (H) STA, FIN
01/08/01 0033 (H) REFERRED TO STATE AFFAIRS
02/23/02 (H) STA AT 10:00 AM HOUSE FINANCE
519
BILL: HB 304
SHORT TITLE:PERM. FUND INCOME/ DIVIDENDS/ FUNDS
SPONSOR(S): REPRESENTATIVE(S)WHITAKER
Jrn-Date Jrn-Page Action
01/14/02 1954 (H) PREFILE RELEASED 1/4/02
01/14/02 1954 (H) READ THE FIRST TIME -
REFERRALS
01/14/02 1954 (H) STA, FIN
01/16/02 1992 (H) COSPONSOR(S): FATE
02/16/02 (H) STA AT 10:00 AM BUTROVICH 205
02/16/02 (H) -- Meeting Postponed to
2/23/02 --
02/23/02 (H) STA AT 10:00 AM HOUSE FINANCE
519
BILL: HB 398
SHORT TITLE:DISPOSITION OF PERMANENT FUND INCOME
SPONSOR(S): REPRESENTATIVE(S)SCALZI
Jrn-Date Jrn-Page Action
02/08/02 2184 (H) READ THE FIRST TIME -
REFERRALS
02/08/02 2184 (H) STA, FIN
02/08/02 2184 (H) REFERRED TO STATE AFFAIRS
02/11/02 2211 (H) COSPONSOR(S): STEVENS
02/23/02 (H) STA AT 10:00 AM HOUSE FINANCE
519
BILL: HB 199
SHORT TITLE:INCOME TAX: INDIVIDUALS/TRUSTS/ESTATES
SPONSOR(S): REPRESENTATIVE(S)HUDSON
Jrn-Date Jrn-Page Action
03/19/01 0650 (H) READ THE FIRST TIME -
REFERRALS
03/19/01 0650 (H) STA, FIN
03/23/01 0712 (H) COSPONSOR(S): SCALZI
01/18/02 2002 (H) SPONSOR SUBSTITUTE INTRODUCED
01/18/02 2002 (H) READ THE FIRST TIME -
REFERRALS
01/18/02 2002 (H) STA, FIN
01/18/02 2002 (H) REFERRED TO STATE AFFAIRS
02/14/02 (H) STA AT 8:00 AM BUTROVICH 205
02/14/02 (H) Heard & Held -- Location
Change --
MINUTE(STA)
02/23/02 (H) STA AT 10:00 AM HOUSE FINANCE
519
WITNESS REGISTER
REPRESENTATIVE BILL HUDSON
Alaska State Legislature
Capitol Building, Room 502
Juneau, Alaska 99801
POSITION STATEMENT: Testified as sponsor of HB 35; testified on
HB 304 and HB 398; testified as sponsor of SSHB 199.
LARRY PERSILY, Deputy Commissioner
Office of the Commissioner
Department of Revenue
PO Box 110405
Juneau, Alaska 99811-0400
POSITION STATEMENT: Answered questions regarding HB 35;
testified on HB 398.
REPRESENTATIVE JIM WHITAKER
Alaska State Legislature
Capitol Building, Room 411
Juneau, Alaska 99801
POSITION STATEMENT: Testified as sponsor of HB 304.
REPRESENTATIVE KEN LANCASTER
Alaska State Legislature
Capitol Building, Room 421
Juneau, Alaska 99801
POSITION STATEMENT: Testified briefly on HB 304.
REPRESENTATIVE DREW SCALZI
Alaska State Legislature
Capitol Building, Room 13
Juneau, Alaska 99801
POSITION STATEMENT: Testified as sponsor of HB 398.
REPRESENTATIVE ETHAN BERKOWITZ
Alaska State Legislature
Capitol Building, Room 404
Juneau, Alaska 99801
POSITION STATEMENT: Testified regarding HB 398.
CARRIE WILLIAMS
PO Box 539
Cooper Landing, Alaska 99572
POSITION STATEMENT: Testified regarding HB 398; emphasized the
need to raise more revenue.
ED MARTIN, JR.
PO Box 521
Cooper Landing, Alaska 99572
POSITION STATEMENT: During hearing on HB 398, testified in
opposition to HB 35 and HB 398; suggested other revenue-raising
measures such as a lottery should be considered.
MIKE SIGLER, Member
Harborview Site Council
1505 Crest Court
Juneau, Alaska 99801
POSITION STATEMENT: Testified during hearing on HB 398 in
support of using the permanent fund and broad-based, new taxes
to support education.
SHERMAN C. "RED" SMITH
PO Box 770
Cooper Landing, Alaska 99572
POSITION STATEMENT: Testified during the hearing on HB 398,
saying he would be more in support of HB 304 and suggesting
there are other sources of income.
JOE SONNEMAN
324 Willoughby Avenue
Juneau, Alaska 99801
POSITION STATEMENT: Testified in opposition to HB 398.
JIM KELLY, Director of Communications
Alaska Permanent Fund Corporation
Department of Revenue
PO Box 25500
Juneau, Alaska 99802-5500
POSITION STATEMENT: Testified on HB 398, providing information
on the permanent fund.
ACTION NARRATIVE
TAPE 02-16, SIDE A
Number 0001
CHAIR JOHN COGHILL called the House State Affairs Standing
Committee meeting to order at 10:05 a.m. Representatives James,
Fate, Stevens, Wilson, and Coghill were present at the call to
order.
HB 35-DISTRIBUTION OF PERMANENT FUND INCOME
[Contains discussion of SSHB 199]
Number 0185
REPRESENTATIVE BILL HUDSON, Alaska State Legislature, sponsor of
HB 35, thanked the committee for the opportunity to present "a
series of options." He noted that he was bringing before the
committee the second half of what he'd presented the previous
week in the form of SSHB 199. He reminded the committee that
his efforts have been to try to bridge, or fill, the impending
fiscal gap of $850 [million] to $1.1 billion.
Number 0331
REPRESENTATIVE WILSON moved to adopt the proposed committee
substitute (CS), version 22-LS0289\L, Cook, 2/6/02, as a work
draft. There being no objection, Version L was adopted.
Number 0429
REPRESENTATIVE HUDSON explained that [Version L] incorporates
the permanent fund board of trustees' recommendation to change
the method used to calculate the annual dividend distribution to
the method used by most large, managed funds. He continued:
By distributing a percentage of the market value of
the funds averaged over five years - as opposed to an
average of the earnings of the permanent fund over
five years - we believe ... we can balance out and
smooth out the distribution, ... with an expected
average rate of return on the permanent fund's
investment of 8.25 percent. And we heard from the
permanent fund board of trustees and the experts that
were hired by the board that 8.25 was the anticipated
annual earnings.
Paying out 5 percent ensures an annual inflation-
proofing factor of around 3 percent. So, the first
thing the bill tries to do is to adopt a method or
measure in distributing income from this ...
multibillion-dollar ... permanent fund.
Number 0558
The board of trustees recommended the 5-percent payout
limit. HB 35 statutorily fixes a distribution stream
for that 5-percent payout. And then it goes further
in order to try to both maintain the permanent fund
dividend over long periods of time, and also to
provide for some makeup of the deficit that is
currently between our recurring spending and our
annual revenues. We have a 50-percent contribution to
the general fund.
So, we take and automatically inflation-proof the fund
by limiting the payout, and then we split the payout
50-50: 50 percent into the dividends and 50 percent
into the general fund. This will pay for
approximately one-half of the $1 billion budget
deficit each year, while allowing for the continuation
of the permanent fund dividend.
Number 0648
The permanent fund dividends would be reduced
initially, but would continue to grow with the
infusion of inflation-proofing dollars. This is not
capping the dividend. This is, essentially,
statutorily constraining the amount of money that goes
into the dividend - 50 percent of the earnings - and
how much can go in to make up the deficit loss that we
have on an annual basis.
We believe that HB 35 will give the permanent fund
strength, security, and stability far into the future.
It will ensure the commitment to pay dividends to
Alaska, while also [ensuring that the] infrastructure
of the state will not fall into further neglect.
Number 0735
And I point out that some of you have served on that
special committee that went around the state of Alaska
to find out what the condition of our schools and all
other governmental assets were. And an excess of a
billion dollars was determined to be in deferred
maintenance. And so, this would allow the
continuation to that.
REPRESENTATIVE HUDSON remarked that Representative Fate had
spoken eloquently regarding the need to "grow the State of
Alaska" to provide new opportunities, for example.
Representative Hudson offered his belief that maintaining the
Constitutional Budget Reserve (CBR) and substituting "the
essence of HB 35" would provide [the state] with a "pretty good
guarantee" of over $1 billion for at least the next seven to ten
years. [That money] would be available for the following:
catastrophic emergencies; growth, development, and taking
advantage of new opportunities; deferred maintenance; and giving
the next governor the opportunity and time to attempt to find
new income.
REPRESENTATIVE HUDSON summarized the combination he'd put before
the committee as follows:
$285 million from the ... minimal income ... tax
stream - which is 2.25 percent of the adjusted gross
earnings, [a] flat tax [that] hits everybody,
essentially, the same way - coupled with HB 35, taking
50 percent of a 5-percent payout and distributing it
to dividends, and 50 percent to the state.
Number 0916
REPRESENTATIVE HUDSON referred to charts provided by the
Department of Revenue. He said although the "split" proposed is
50-50, anyone in the House or Senate could [change that ratio];
it would depend on the goal. He explained that his goal has
been to attempt to fill a major portion of the fiscal gap.
Number 1022
REPRESENTATIVE HUDSON referenced a past remark of former
Governor Hammond that if income is going to be used from the
permanent fund, it shouldn't be the first source. He noted that
the first thing he'd presented to the committee was an income
tax, which he believes fits with Governor Hammond's ideas. He
also noted that Governor Hammond had said if income of the
permanent fund is to be used, it ought to be specified in law
"so that any future legislators would not be able to just willy-
nilly modify that thing and cause disrepair to the dividend
program." He mentioned Governor Hammond's strong commitment and
concern regarding the growth and sustaining of the permanent
fund dividend (PFD).
REPRESENTATIVE HUDSON mentioned that the "50-50" [split] is
"because of today's conditions." He indicated losses in the
permanent fund and the [subsequent] reduction in the amount of
money the permanent fund has available for distribution, between
$1.2 billion to $1.4 billion "at the 5-percent payout." He said
that has been testified about by the permanent fund [trustees].
He remarked, "So, we've essentially developed the proposal that
the permanent fund trustees desire to do constitutionally, and
that may go forward - there's a separate bill to do that." He
opined that "this bill absolutely fits ... hand in glove into
that concept." He continued:
We have not modified anything or put anything into
this bill that will alter or negatively affect the
board of trustees' efforts to try to constitutionally
fix the inflation-proofing. That's their goal, ... to
guarantee that the permanent fund continue on and
continue to grow. ... They say nothing about the
distribution, because that's not their ... business.
That's our business; that's what we do.
Number 1145
CHAIR COGHILL recalled that the constitutional amendment came
through the House State Affairs Standing Committee the previous
year and is in the House Judiciary Standing Committee. He
indicated part of the policy call was in regard to the
constitutionality of the issue.
Number 1227
REPRESENTATIVE HUDSON said he'd supported that measure's coming
forward for public hearings, and he emphasized the need to have
it be a major policy consideration. Whether or not that
happens, he said, [HB 35] can stand on its own; it provides the
permanent fund trustees what they want, but not in the
constitution. He explained that it defers to future
legislatures the option of modification regarding [the
percentage]. He reiterated that "all we're talking about here"
[in regard to HB 35] is the 5-percent payout split between the
dividend and the government.
REPRESENTATIVE HUDSON acknowledged that this legislation
wouldn't fill the entire $1 billion gap. Even if the income tax
and the distribution of 50 percent of the earnings of the
[permanent fund] are adopted, it's still only about $825 million
of a billion-dollar gap. He posited that the current
legislature and those to follow would be required to cut almost
all of the inflation out of government for the next five to ten
years, or until a major income stream is discovered, such as
[through opening to oil and gas exploration the Arctic National
Wildlife Refuge (ANWR)].
Number 1393
CHAIR COGHILL referred to a comparison in members' packets of
the three [proposed plans entitled "CBRF Balances FY2002-
FY2010," with Representative Hudson's plan "A" and the
Department of Revenue's plans "B" and "C"]. He asked
Representative Hudson to review the comparison for the
committee.
REPRESENTATIVE HUDSON requested that his staff and Mr. Persily,
who had prepared the graphs, join him at the witness table. He
referred to the "A" plan, the first page of graphs, labeled
"POMV 5% (50% to dividend program / 50% to state government):
approximately $630 million starting FY 2003." He noted that
he'd asked Mr. Persily to provide two other plans whereby the
[legislature] chooses to make a split of 60 percent to the
dividend and 40 percent to government, or 70 percent to the
dividend and 30 percent to government - plans "B" and "C,"
respectively. He said, "The arcing line is the Constitutional
Budget Reserve."
REPRESENTATIVE HUDSON reminded members that he is attempting to
eliminate [the current legislative practice] of balancing the
budget through use of the CBR, and [to prevent] elimination of
the CBR. He noted that former Governor Hammond's sentiment is
that if the legislature continues to balance the budget through
use of the CBR and it is consumed by 2004, the only funding
source will be the earnings reserve of the permanent fund; when
that occurs, the PFD will suddenly be at risk, and will very
likely be the next thing to be consumed. Representative Hudson
explained that there are probably not enough people in Alaska to
pay enough taxes to fill this gap.
Number 1644
REPRESENTATIVE HUDSON noted that the "A" plan shows the CBR fund
at just under $2.5 billion, dropping by the year 2007. Also
shown as an element in the graph is a $25-per-passenger cruise
ship fee, which wasn't part of his own bill but was put in by
the governor. He indicated the [proposed] 10-cents-per-drink
alcohol tax would bring in $30 million and would be implemented
for three quarters of fiscal year 2003, if adopted. Mentioning
the effects of HB 35, he pointed to the bottom-line amount of $1
billion and told the committee that was his target. He noted
that his plan ["A"] "does not succeed when it gets out ... a
little past [the year] 2009."
REPRESENTATIVE HUDSON called attention to the "B" plan, which
gives 60 percent to the dividend. The graph shows that the
dividend would be $1,237 in 2002 and would grow to $1,334 by
2010. He said the 40 percent [in this plan] "reflects less
money to make up that cap." He said one of former Governor
Hammond's concerns was not wanting the PFD to be capped, but
Representative Hudson indicated that would require using up the
CBR sooner. He noted that under all three plans, there is time
for the future legislature and the next governor to act and
"still have a billion dollars out there."
Number 1924
REPRESENTATIVE JAMES asked what the Department [of Revenue's]
calculation was that resulted in the numbers shown.
Number 1990
LARRY PERSILY, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, answered that [the graph before the
committee] assumed none of the following: population growth,
inflation, or additional economic activity other than oil fields
that are known to be coming online in the next few years.
REPRESENTATIVE JAMES remarked, "Representative Coghill was so
great to ask Scott Goldsmith for some information about the job
loss on the various different options." She asked
Representative Hudson if he had considered that at all.
REPRESENTATIVE HUDSON said a 1-percent growth had been left
"down there." He indicated the inflation is about 2.25 percent
to 2.5 percent currently. He remarked, "We believe, as the
chairman has stated a number of times, that government is going
to have to suck it up, so to speak, here." He noted that just
the day before he'd seen the aforementioned paper of Mr.
Goldsmith, which indicates the number of jobs that would be lost
by cutting the budget, [adding] an income tax, and reducing the
CBR. Representative Hudson said he had taken all of that
information into consideration. He again cautioned against
balancing the budget from the CBR for two more years, at which
time there would be steep decline and then "the terrible decline
in the economy and the number of jobs that are lost."
Number 2200
REPRESENTATIVE JAMES indicated agreement that nothing much
really happens if the CBR is used to fill the fiscal gap for the
next two years, after which the "real mess hits the fan." A
great hole will be created if no action is taken now, she
opined. Representative James stated concern that income tax or
sales tax won't solve the billion-dollar problem. She said no
matter where "you take that from" out of the economy, there will
be some immediate job loss. She indicated some people may leave
to look for better opportunities.
Number 2309
REPRESENTATIVE HUDSON indicated open-town meetings had been held
throughout the summer, the last of which was in Anchorage; 25
people met, including Democrats, Republicans, Senators, and
Representatives. He mentioned people from the oil industry and
facilitators who "really come from business." The essential
[message], he said, was that if nothing is done, the PFD likely
will be lost by 2007 or 2008. He said, "We think it's a whole
lot better to have a small income tax, use some of the earnings
of the permanent fund, [and] still have that $600-$700 million
annual infusion of dividends hitting the street out there."
REPRESENTATIVE HUDSON mentioned letters on record from
corporations, from Alaskans United, and from "the 20-20 people,"
for example. He reemphasized former Governor Hammond's message
not to use the dividends first or the earnings of the permanent
fund, without specified limits. He indicated it would be
difficult for future legislators to automatically take the PFD
away, if it were put into law.
Number 2259
REPRESENTATIVE JAMES remarked that she didn't necessarily have
the same confidence in former Governor Hammond. She added, "But
what I don't like to see is this sort of thing going out to the
public, because it shows a real disaster, no matter what we do,
when we get down there." She mentioned the need to factor in
population growth and questioned the ability to hold the budget
flat or at 1 percent. She also indicated the need to assist
industry.
Number 2647
REPRESENTATIVE HUDSON acknowledged that this isn't a pleasant
thing to recommend to Alaskans, but said it is "extremely
responsible." He pointed out that [the possibilities of]
increased oil revenues, a gas line, and [opening] ANWR, for
example, were not included. He said, "You have to almost depend
upon the next administration to come in and figure out how
they're going to fit the bodies that they will inherit to the
money that they will have available to them - providing we make
it available to them."
REPRESENTATIVE HUDSON mentioned potential problems with the
pipeline, earthquakes, or natural disasters that must be
responded to, should they occur. He cautioned about the need to
have the CBR and permanent fund available. Given that oil
reserves are finite, he said the level of spending has grown
beyond the state's ability to sustain it over the long term.
Number 3000
MR. PERSILY referred to the discussion by Representative James
and mentioned the $285 million in fiscal year 2004 and the same
amount in 2010. He said [the department] had spent considerable
time attempting to figure out if there is some way to show how
much income tax might be taken in during fiscal year 2010.
However, [the department] had concluded that it is nearly
impossible to know what the economy will look like in 2010; it
would depend on many factors, including the price of oil, [oil
and gas] production, [whether there is drilling in] ANWR, the
National Petroleum Reserve - Alaska (NPR-A), and [the potential]
gas line.
MR. PERSILY offered that the economy and the revenues would
"closely track." If new development occurred and there were an
increase in population - and therefore a greater need for public
services such as "school, reimbursement, and the rest" -
expenses would increase. With a broad-based tax, however - in
this case, an income tax - because of that activity the income
tax revenue and some other revenue would increase as well. He
said "income and the need for that income" would run parallel,
and "for the sake of models, we'd just leave it flat, because
what we're trying to show here is the balance in the CBR." He
said Representative James was correct that "we could end up with
more revenue out here than we show."
Number 3207
CHAIR COGHILL concurred [with Representative James], adding that
if [the legislature] had the ability to "get our hands around
something that we knew was coming, we could factor it in," but
that there were many unknowns regarding forestry, oil, and
mining, for example. He remarked, "In fact, some of the state
growth has been in direct relation to our inability to produce
on our public lands."
Number 3255
REPRESENTATIVE WILSON pointed out that there are more expenses
than shown in the equation. For example, there is more than $1
billion in deferred maintenance, including harbors that are
deteriorating and buildings that have recently caved in.
CHAIR COGHILL offered his belief that it is part of "the other
$200 million," as Representative Hudson had previously
mentioned, which is going to be "squeezed into some kind of
action," for example, reducing government services or even
selling assets. He said, "We'll have this discussion when we
have all three of them on the table."
CHAIR COGHILL said the policy call would be the 5 percent, which
mirrors the constitutional amendment proposed by the permanent
fund board, and the 50-50 payout of that 5 percent, which will
go half to the state general fund and half to dividends, "having
already settled the inflation-proofing question." He asked if
he was correct in the "mechanism of that."
Number 3440
REPRESENTATIVE HUDSON told Chair Coghill he was correct. He
indicated a recent hearing during which the permanent fund
trustees discussed the 5-percent payout and the automatic
inflation-proofing, versus the present system, which is the
average of the [most recent] five years' earnings. He noted
that recently there had been 14-15 percent in earnings [during
times of high economic growth nationwide], which dropped by 3.5
percent. The amount of the PFD therefore has varied. The same
would happen to the income stream if the decision were made to
use some of the earnings of the permanent fund on a percentage
basis, unless the 5-percent payout is adopted. He suggested it
would create an almost impossible task for future legislators,
because "how in the world are they going to know what programs
to put into effect this year, that goes for the next three."
Number 3607
REPRESENTATIVE STEVENS stated his appreciation of the visual
aids supplied by Representative Hudson. He surmised that
Representative Hudson hadn't chosen to put more [money] into
state government and reduce the dividend because of wanting to
maintain approximately $1,000 a year into the foreseeable future
[for PFDs].
REPRESENTATIVE HUDSON concurred that that was his goal. In
response to a question by Representative Wilson, he said the
income tax incorporated [would be] at 2.25 percent.
Number 3700
CHAIR COGHILL said that is in keeping with SSHB 199. He stated
his intention that if there were sufficient time at the present
hearing, he would entertain a motion to "adopt an amendment into
it that we can discuss on Tuesday."
REPRESENTATIVE HUDSON said he would like to speak to the
amendment on SSHB 199 whenever it is ready. [HB 35 was held
over.]
CHAIR COGHILL called an at ease at 10:44 a.m. and called the
meeting back to order at 10:46 a.m.
HB 304-PERMANENT FUND INCOME
[Contains discussion of SSHB 199]
CHAIR COGHILL announced the next order of business, HOUSE BILL
NO. 304, "An Act relating to disposition of income of the
permanent fund; and providing for an effective date." He noted
that Representatives Berkowitz and Lancaster were present.
Number 3819
REPRESENTATIVE JIM WHITAKER, Alaska State Legislature, sponsor
of HB 304, presented the bill. He referenced Representative
Hudson's earlier allusion to the significant fiscal problem
before [the legislature]. He offered that four options exist:
cost control; broad-based taxes; utilization of some earnings of
the permanent fund; and most important, economic growth. He
concluded that all four options must be used to ensure a
successful result.
Number 3904
REPRESENTATIVE WHITAKER gave a PowerPoint presentation. He
noted the importance of understanding Alaska's finances - how
the general fund works in relationship to the Constitutional
Budget Reserve (CBR) and how the permanent fund works in
relationship to the earnings reserve account (ERA). The general
fund receives revenues from oil royalties, severance tax,
property tax related to the oil industry, corporate income tax,
a number of fees, and miscellaneous sources. Because these
aren't sufficient to pay the state's bills in times of deficit,
however, the CBR is used as a shock absorber; for example, in
the current fiscal year $865 million of drawdown must be
absorbed. He continued:
The permanent fund has a corpus of $21 billion, and
the fund principal is protected. So what can come out
of the principal? The answer is a resounding
"Nothing." It cannot be used. ... What's the
relationship with the earnings reserve account which
... at the end of this fiscal year will have $2.8
billion in it? It, too, acts as a ... shock absorber
for the permanent fund.
Debits and credits to the permanent fund are realized
by the earnings reserve account; that is, earnings,
losses, and dividends all relate to draws or deposits
to the earnings reserve account. If the permanent
fund corpus realizes a loss, it is not the corpus that
absorbs that loss; it is the earnings reserve account.
That's an important point to remember - the corpus
never loses; it comes out of the earnings reserve
account.
Number 4119
REPRESENTATIVE WHITAKER mentioned the ongoing budget deficit and
emphasized that the funds are related. At the current spending
rate, the CBR will be gone in 2004. Therefore, the ERA will
become the shock absorber for both the general fund and the
permanent fund; that is not sustainable. If the ERA functions
as a shock absorber for both funds, it likely will be
effectively drained by the end of the decade, and the dividend
program will therefore cease. He remarked, "At that point,
there is only one way to fund government, and that is directly
with the earnings of the permanent fund ... to the general
fund."
CHAIR COGHILL asked if this was discounting any tax [that might
be instituted].
Number 4312
REPRESENTATIVE WHITAKER answered in the affirmative. He said:
If we do nothing, that's what will happen by the end
of the decade. ... Those who stand if front of us and
say "by doing nothing, we are saving the permanent
fund dividend" are simply wrong. If we do nothing,
the dividend is gone by the end of the decade. And
the only hope that we have to save that segment of the
Alaskan economy is by doing something now. So, as you
can see, then, there were two - and those two are the
permanent fund and its earnings going directly to the
general fund. ...
If nothing is done by the end of the decade, the
dividend program is gone, government spending will be
significantly reduced by necessity, and our economy
will shrink. Now what does a shrinking economy mean?
It means less prosperity; it means less opportunity;
and I really don't want to go there, and I think it
would be terribly irresponsible of us to let us go
there. Having said [that], what can we do? ... That
takes us back to the point at hand.
Number 4414
REPRESENTATIVE WHITAKER offered that the state first needs to
control costs, and some form of broad-based taxation is
necessary. He commented:
I'm a conservative Republican, and it is a painful
experience for me to have to say that the way that we
must go in the state of Alaska is to tax ourselves.
But I'm also a responsible Republican. And if I'm
responsible, I have to stand up and say this is what
we must do.
REPRESENTATIVE WHITAKER emphasized that economic growth has to
be a significant part of any plan put forward. He noted that HB
304 utilizes $200 million of the earnings of the ERA, which is
transferred to the general fund. That is all the bill does, he
concluded.
CHAIR COGHILL asked whether the $200-million transfer is
sustainable.
REPRESENTATIVE WHITAKER expressed that this was his
understanding based on information received from the [Alaska]
Permanent Fund Corporation. He added that his own analysis
draws the same conclusion.
CHAIR COGHILL asked, "And that would be under the existing
formula as we stand right now?"
Number 4632
REPRESENTATIVE FATE inquired what - according to permanent fund
personnel - is the maximum, sustainable amount that could be
taken from the ERA.
TAPE 02-16, SIDE B
Number 4625
REPRESENTATIVE WHITAKER offered that the [Alaska] Permanent Fund
Corporation has indicated the state can utilize $1.25 billion;
currently, over $1 billion is being used for the dividend
program. Therefore, a $200-million level is sustainable.
Number 4553
REPRESENTATIVE FATE asked if other scenarios that include varied
amounts from $150 million to $300 million have been tried. He
asked whether the 200 [million dollars] seems to Representative
Whitaker to be the optimal amount to take out of the ERA.
REPRESENTATIVE WHITAKER replied yes.
Number 4525
CHAIR COGHILL offered that using $200 million [from the ERA]
leaves at least a $660-million question. He surmised that it is
a part of the solution, according to Representative Whitaker.
REPRESENTATIVE WHITAKER answered in the affirmative.
CHAIR COGHILL stated that Representative Whitaker's point was
well taken regarding [the state's] spending above what it is
able. He speculated that the [decline] in oil [revenue] has
precipitated this. He expressed his opinion that [the
legislature] has to lead with a good-faith effort of reducing
government. These questions become significant, he said,
because [government spending cannot be reduced by $1 billion].
This would offer a $200 million fix. He offered that he thinks
this is a legitimate discussion.
Number 4414
REPRESENTATIVE JAMES asked Representative Whitaker whether it is
his assumption, with this legislation, that changing the
calculation of the dividend isn't on the table.
REPRESENTATIVE WHITAKER replied:
This is an idea in search of a better idea. If
there's a better way to approach it, then we should.
And certainly reformulation of the distribution of
permanent fund earnings is something that should be on
the table. It is not inclusive to this bill. No.
REPRESENTATIVE JAMES asked if this is or can be made available
to the public.
CHAIR COGHILL said it could be made available. He noted that he
has testimony from Mr. Goldsmith regarding what would happen
under the various scenarios with regard to job opportunities and
the economic impact in Alaska. He offered to make that
available as well.
REPRESENTATIVE JAMES expressed concern that taking a billion
dollars from the economy will have a disastrous impact.
Therefore, there has been the suggestion to [withdraw it] over
time, which has been done with the [legislative majority's
previous] five-year plan that she believes has left the state
better off.
REPRESENTATIVE JAMES noted that [the materials] indicate there
would be 2,600 jobs lost with the income tax proposed by
Representative Hudson [SSHB 199], while sales tax would reduce
3,200 jobs, as would the dividend cut. A cut in operation would
reduce jobs by 6,500. She expressed concern that these
projections are based on what is known today, rather than
projections of what will happen tomorrow. The state needs more
business. She said she believes the state is going to be
totally dependent upon oil and gas production in order to pull
out of this [economic situation]. However, there is the belief
that the state existed before oil and gas, and thus other
applications such as mining, fishing, and timber could be
utilized in order to have a better economy. She asked if [those
other applications] have been considered for the projections.
Number 4035
REPRESENTATIVE WHITAKER noted that he, too, is concerned with
Alaska's economy and the fact that Alaska's gross state product,
the true measure of prosperity, has grown very slowly. In some
measures, the gross state product has even shrunk over the last
decade. In reviewing ways that the aforementioned trend could
turn, Representative Whitaker felt that there were some choices.
He mentioned that the tourism industry should never be forgotten
as a growth opportunity. Furthermore, basic transportation
infrastructure ensures that Alaska will have significant
opportunities that it doesn't today. Moreover, Alaska's economy
is directly tied to the oil and gas industry for which
production has declined for a significant period, although it is
currently somewhat stable. If Alaska is to grow the oil and gas
sector of the economy, there must be a competitive environment
on the North Slope. Additionally, there must be a [natural] gas
line. He continued:
If, indeed, we are to solve our economic problem, we
need to quit looking at things like this and saying
that is the future - and [instead] say a gas line is
our future, increased production on the North Slope is
our future, increased size of a tourism sector of our
economy is our future, a railroad is our future. The
basic stuff economies are built on is our future.
Number 3816
CHAIR COGHILL remarked that the drop in oil prices has forced
this discussion. "The pressure that is bringing it to bear is,
can we afford the type of government we have," he said. He
related his belief that [Alaska] has fallen into an entitlement
world, often federally driven, that has grown since the 1960s.
That model isn't based on what America is based on, which is the
part of the discussion Chair Coghill said he is attempting to
force. He related his view that the entitlement world and the
production world have to at least grow together, if they're
going to grow. In regard to HB 304, Chair Coghill asked why the
bill [uses] the ERA rather than the CBR.
REPRESENTATIVE WHITAKER answered that using the ERA is driven by
necessity. Regarding the state's options, some earnings of the
permanent fund must be utilized in order to balance the state
budget, which was the intention of the permanent fund when it
was established.
CHAIR COGHILL clarified that the policy call is whether to use
the ERA as put forth in [Representative Whitaker's legislation]
or use other mechanisms utilizing the CBR. Chair Coghill noted
that this is a dynamic discussion because other proposed
legislation may change the CBR or the way the permanent fund
payout is figured.
Number 3600
REPRESENTATIVE JAMES turned to the state's demographics
regarding 18- to 44-year-olds. She questioned who is going to
do the work if all these jobs come to pass. Furthermore, there
is much anecdotal information that for the years in which there
has been a permanent fund and maximized use of federal funds,
there is a large, growing poor sector who are unable to work.
Although Representative James wanted to take of Alaskans who are
needy, she said she didn't want them to come from other states
because Alaska is more generous than other states.
Number 3511
REPRESENTATIVE BILL HUDSON, Alaska State Legislature, agreed
with Representative Whitaker that the state has to look forward.
He explained that one reason he has put forth his bills has been
his belief in the need to preserve and, if possible, grow the
CBR. He recalled being in the legislature when the CBR was
created as a rainy-day fund and a growth and opportunity fund.
If the income of a billion dollars or so of the CBR isn't
available, there will be no major opportunities for new kinds of
economic development in the state. "If you come up with a plan
... that preserves as much of that as possible, has the income
available from it to provide for the maintenance of our
infrastructure, and the growth and opportunities to the future
of the State of Alaska, I think we will have done a very good
piece of work," he concluded.
CHAIR COGHILL commended those who'd established the CBR and the
permanent fund.
REPRESENTATIVE KEN LANCASTER, Alaska State Legislature,
mentioned the importance of realizing that prior legislatures
put in almost half of what is in the permanent fund corpus
today. Without the corpus, the earnings of the CBR or the ERA
wouldn't exist.
CHAIR COGHILL indicated he would hold the public testimony. [HB
304 was held over.]
HB 398-DISPOSITION OF PERMANENT FUND INCOME
[Contains discussion of HB 35, HB 304, and HB 413]
CHAIR COGHILL announced the next order of business, HOUSE BILL
NO. 398, "An Act relating to disposition of income of the Alaska
permanent fund; and providing for an effective date."
Number 3142
REPRESENTATIVE DREW SCALZI, Alaska State Legislature, sponsor of
HB 398, noted that his proposed legislation is similar to HB 35
and HB 304. He stated that it is not a "stand-alone" bill;
other revenue streams would need to be incorporated. He said it
does take "a little angle" regarding use of the permanent fund
earnings. He noted that the recent fiscal policy caucus has
included discussion about maintaining the Constitutional Budget
Reserve (CBR) at some level - whether at $1 billion or $1.5
billion - to use as a shock absorber for [unpredicted]
expenditures related to the fluctuation of oil [prices].
REPRESENTATIVE SCALZI indicated his friend, former state
Representative and Senator Clem Tillion, was involved in the
past "at this level of creating the dividend program," with a
plan to somehow tie the permanent fund to the price of oil. He
then paraphrased the written sponsor statement as follows:
[House Bill 398 is] a mechanism that maintains an
adequate balance of the constitutional budget reserve
for public services. It would restore the budget
reserve fund at [the] start of each [fiscal] year, to
$1.5 billion, [a] reasonable amount to preserve
services, while providing a cushion against any one-
time, one-year risk in low oil prices.
[House Bill 398] would use permanent fund earnings to
refill the budget reserve each year, while providing
for a healthy dividend for Alaskans.
[House Bill 398] would serve as an incentive to the
legislature, the governor, and the public, to adopt
new revenue sources to help close the budget gap and
to preserve the dividend for future legislatures to
come.
In HB 398, it would encourage responsible state
spending and the linking of state spending with the
annual dividend. [House Bill] 398 would link the
amount of each year's dividends to the price of oil
and the state spending, which would make the dividend
more relevant to an Alaska economic situation than the
existing program that links the dividend only to the
permanent fund's Wall Street investments.
[The legislation would] use ... the existing statutory
formula to determine the amount of the permanent fund
earnings available for distribution each year. There
would be no change in the current formula that
averages the fund's earning[s] over the past five
years. That would remain the same.
[The legislation would] use the existing statutory
formula to inflation-proof the fund's principal; but
before any money is distributed for any purpose,
sufficient funds would be moved from the earnings
reserve account to the principal to cover ...
inflation over the past year.
Then, the budget reserve ... trigger ... would ...
kick in at that point. In any year [that] the CBR is
below $1.5 billion on June 30 ... - the last day of
the fiscal year - this legislation would direct that
an amount sufficient to restore the CBR to $1.5
[billion] ... be taken from the funds available for
distribution.
This does not go into the earnings reserve [account] -
only the excess earnings that are used for the
permanent fund dividend program. And that has to be
very clear, because if we don't do that, then
obviously we're going to eat up the earnings reserve
[account], just like Representative Whittaker said,
and then we don't have anything but the corpus left.
So this would ... take an amount to restore that
[$]1.5 [billion] from the calculated amount that goes
through the dividends.
Now, as I said before, this is not a stand-alone bill
by any means, and I did not try to incorporate an
income tax or sales tax or anything else into that, or
projections on what would happen if we did have an
economic stimulus, or if we had tremendously low
prices in oil, or low production.
Number 2725
But I do think we need a shock absorber to have a fund
balance, so to speak, like most boroughs and cities
do, that they need to rely on. And that's what that
CBR, in my belief, is for.
So, in years of low oil prices, we would have to take
more of those earnings. This does not set, like HB
304, a level of $200 million each year; it's
whatever's necessary. It could be more; it could be
less. But that is going to have to be attributed to
all those things that will kick in: price of oil,
production of oil, what we pay in income taxes or
sales taxes, [and] any of the other mechanisms.
That's our choice.
How bad do we want to tax ourselves? We ask the
people, "How valuable is that permanent fund dividend
to you?" You make the call. You tell us, because if
you don't, it's going to take more out of the
permanent fund dividend to supplement the CBR.
So what I've done in this bill - HB 398 - is start at
the $1.5 billion and work backwards. It's just
another option to the two bills that you had before
us.
Number 2607
REPRESENTATIVE BILL HUDSON, Alaska State Legislature, offered
his belief that Representative [Scalzi] has offered an excellent
idea. He added that he saw no reason that the concept of
percentage of market value (POMV) couldn't be cranked into his
bill as well, because it would provide leveling and
stabilization over time. He indicated positive [results] from
using this concept, providing that "we come up with the leveling
effect of the POMV."
REPRESENTATIVE HUDSON noted that under [Representative Scalzi's]
approach, as [the CBR funds] are spent, they fill back up, but
only to the amount necessary. He compared that with his own [HB
35], in which he has chosen an "automatic 50-50 [split]." He
said the advantage of putting it into the CBR is that it
requires a [three-fourths] vote of the House and Senate before
it can be tapped. He added, "We put that in there when we
created the constitutional budget reserve, to constrain the
growth of government, to constrain the amount of spending." He
noted that some people want to do away with that and allow a
simple majority vote to tap those funds; however, he said that
wasn't the original intent in creating the CBR.
REPRESENTATIVE HUDSON told the committee he liked aspects from
both his own and Representative Scalzi's bills and thought the
two could be "quite nicely accommodated."
Number 2411
CHAIR COGHILL reminded members that when the committee had
considered one of the income tax proposals, there was a trigger
mechanism that dealt with keeping the CBR at a certain level.
He added, "Somewhere along the line, if we need to, we might
want to reconcile those."
Number 2360
REPRESENTATIVE JAMES offered the following understanding, "You
calculate the dividend in the same way that it's currently
calculated, which is ... 21 percent of [the] five-year average,
or half of the earnings reserve [account], whichever is the
smaller." Indicating HB 398 presumably was based on $1.5
billion in the CBR, she asked if the only way "it could drop
from that would be [by] having spent it."
REPRESENTATIVE SCALZI said, "That's correct."
REPRESENTATIVE JAMES asked, "If we had to go into the
constitutional budget reserve to fill the budget, then that
money essentially would be coming right out of the dividend,
directly."
REPRESENTATIVE SCALZI concurred.
REPRESENTATIVE JAMES asked if whatever was left of the ERA would
be available for other spending, or would "sit there."
REPRESENTATIVE SCALZI explained that under [HB 398] the ERA
wouldn't be touched. He said there may be a time when, if the
legislature spent the CBR down to $3 million, for example, and
the available revenue from the ERA calculation for the dividend
program was only $1.1 billion, then the budget reserve gap could
not be filled to $1.5 [billion] again. He clarified, "You can
only take what is available from the dividend program." He
noted that using the CBR requires a [three-quarters] vote of the
legislature.
Number 2210
CHAIR COGHILL said, "So, if we went to $8 [a barrel for] oil
again - heaven forbid - at a spending level that we're at now,
it would be, easily, right at [$1.5 billion], and that could
take the whole CBR, going beyond what the dividend could give."
REPRESENTATIVE SCALZI concurred. He paraphrased an example from
the second page of his sponsor statement, which read as follows:
If, after a broad-based tax and other revenue measures
were adopted to raise a total of $600 million a year,
and if the remaining budget gap were then $500
million, then $500 million would be taken from
permanent fund earnings to refill the [CBR].
And, if $1.1 billion in permanent fund earnings were
available for distribution under the 5-year income-
averaging formula, there would be $600 million left
for dividends after $500 million was used to refill
the [CBR]. That would equal a dividend of about
$1,000 per Alaskan.
CHAIR COGHILL noted, "It wouldn't grow beyond the formula if we
became very prosperous."
REPRESENTATIVE SCALZI responded as follows:
If we became prosperous through other means, that
mechanism would still be in place to go the other way.
If, for instance, as Representative Hudson was saying,
... you have a floating measure in this -- you don't
really have that in the other ... bills, because you
can't really flex your income tax yearly. I mean, you
have to vote on what the income tax is going to be.
You can ... raise your sales tax, but it's always
retroactive as to what happened before. We know that
when we have to fill the gap, we go right to that CBR
and we make a vote at the end of session to fill that
gap. And that's why I think we need something that's
flexible, ... yet very much attainable. So, that's
where the flexibility comes in, in having it drawn out
this way.
Number 2007
REPRESENTATIVE JAMES asked Representative Scalzi if, in his
plan, the excess earnings of the fund left in the ERA would also
grow.
REPRESENTATIVE SCALZI said, "That's correct."
REPRESENTATIVE JAMES noted that there would be two pots of
money, then, guaranteeing $1.5 [billion] in the CBR and growing
the ERA of the permanent fund.
REPRESENTATIVE SCALZI concurred. He said the intent was not "to
go into" the ERA because once it is gone, all that is left is
the principal and there is nothing to work with. Representative
Scalzi said he is trying to save both the principal and the ERA.
He suggested Mr. Persily could answer questions as well.
REPRESENTATIVE JAMES noted two options for future legislators to
address a "hole in the budget": a three-quarters vote to go to
the CBR reserve, or a majority vote to take it out of the ERA.
She said, "I don't know that that's the option that we would
like to leave."
CHAIR COGHILL said it is a policy call. He added, "And that is
actually an option that is open today, according to
Representative Berkowitz, and I think that's accurate."
Number 1725
REPRESENTATIVE HUDSON said that was precisely the reason that
he'd amended his bill. He said he believes that the [budget]
gap is so atrocious that he didn't want to have to go to a
three-quarters vote on the CBR. He stated that he originally
had all of the income "that we split" going into the CBR in the
same manner as in [HB 398]. He continued as follows:
I have seen the [three-quarters] vote of the [CBR] -
regardless [of] whether the Democrats are in control,
or the Republicans are in control - become, "My vote
has got to be worth something; so, you don't get my
vote unless I get something else into the budget."
CHAIR COGHILL said, "It has been held hostage to actually raise
the cost of spending, in many cases."
Number 1632
REPRESENTATIVE ETHAN BERKOWITZ, Alaska State Legislature, stated
the following:
During the time that I have negotiated on the CBR, we
have used it as a shield; we have not used it as a
sword. And if it does anything, what it does is shift
spending priorities, rather than increase spending
priorities. The amount of additional funds [that]
have gone into the budget ... on account of a CBR vote
have been relatively minimal, compared to the overall
size of the budget.
CHAIR COGHILL commented, "It is a negotiation tool."
Number 1520
CARRIE WILLIAMS, testifying via teleconference, asked that
everyone realize that the state must raise more revenue. She
said the PFD has become very important to many people. She
posited that the "alternative tax issue" needs to be addressed
and asked that the legislature consider the impact of the local
issues. Ms. Williams mentioned a cruise tax, income tax, and
alcohol tax, asking [the committee] not to eliminate those from
local government. She asked the committee to consider in its
plans that local government needs to assume increasing
responsibility for "its own support and its needs."
MS. WILLIAMS noted that she didn't have possession of the
complete bill, but surmised that HB 398 suggests a temporary
transfer of funds from the CBR. She said, "In the interim, I
would say, if we would go that direction, please put an absolute
deadline on when you would come up with alternative revenues,
not depending on [the] CBR and withdrawing annually from that."
CHAIR COGHILL clarified the following for Ms. Williams:
Just for your information, it was the earnings reserve
account. And it would be a $200 million draw that has
been calculated to be sustainable. And it would
certainly be any legislative session's prerogative not
to take it. So, you know, it would have some
safeguard.
MS. WILLIAMS, in response to a question from Chair Coghill, said
she is from Cooper Landing. She then stated her belief that [HB
398] would allow the legislature to maintain and replenish the
CBR at a certain level. She asked, "Would this ever equate to
the fact that no PFD would be available for the public payout?
She asked whether it is possible to withdraw adequate [money]
from the CBR to [equal] earnings on the current market.
CHAIR COGHILL affirmed that it wouldn't be tied to the earnings.
If [Alaska] had a "bad oil year, it could possibly take the
whole dividend," he said.
MS. WILLIAMS said she thought it might be an issue the public
would want to be educated on. She said, "We look forward to Mr.
Lancaster coming around and educating us all." She reiterated
the need to consider other alternatives. She mentioned
depreciated capital facilities, harbors, and schools, for
example, that are in near-disaster condition and need attention.
MS. WILLIAMS indicated she would be listening to further
testimony. At present, without additional education, she said
she would be in support of looking at the $200,000 withdrawal
from the reserve. She indicated the time to "get those taxes in
place." She said she thinks [Alaskans] want modern-day services
and need to be willing to help pay for those.
CHAIR COGHILL pointed out that the amount [of the withdrawal]
would be $200 million.
Number 1041
ED MARTIN, JR., testifying via teleconference, told the
committee he lives in Cooper Landing and that his father was
"the one who started the 'vote no' campaign down [for a previous
year's advisory vote on whether the legislature should use
permanent fund earnings for state government] here on the
peninsula." Mr. Martin told the committee HB 35 would change
the formula to "an unacceptable amount." He stated his belief
that 86 percent of the people who went to the polls [in that
advisory vote] had voted, "No, do not touch it without a vote of
the people." He said [HB 35] would circumvent that, and he
doesn't agree with it. He stated his certainty that many
people, including every member of his family, would vote against
it. He added, "That portion of [HB 35] is the one that I
dislike the most."
MR. MARTIN, turning attention to HB 398, said it is essentially
based upon the same principle, tying it to the PFD, oil
revenues, or state spending. He offered his belief that that is
"absolutely wrong." Mr. Martin indicated the permanent fund was
invested for the mineral wealth, and that at statehood "they
decided the state would retain that." He offered that it is a
rainy-day account for the people, but isn't supposed to be a
rainy-day account for the government. He suggested remarks
about capping the permanent fund [dividend] relate to a "zero-
growth atmosphere" that has existed under the current
administration. He stated:
Apparently, we have Democrats right now that are
introducing these bills, because I can't think, in my
mind, that we have elected Republicans down there that
would cut state spending, that would look at revenues
other than taxation - an encroachment on the liberties
of Americans and state residents, by way of taxation -
when in fact, we are a resource-rich state for which
there has been zero and flat development. ...
Nobody is putting together a hearing, so far this
year, on revenue [matters] other than taxation, and I
think it's wrong. I think we should be looking at a
lottery to help fund education, like the Lower 48's in
Washington, Florida, and Georgia. I recently was down
there, so I had the opportunity ... to (indisc.)
tickets down there. So, based upon any study of the
lottery system, you surely would want to include those
who would visit the state, or transients that might be
in the military.
Number 0728
REPRESENTATIVE BERKOWITZ told Mr. Martin he himself is a
Democrat, but emphasized that the efforts to solve this issue
are being made as Alaskans and as a legislature, and that it
isn't a partisan problem. He noted that considerable effort has
been invested in developing a natural gas pipeline and promoting
the [oil and gas] development of the Arctic National Wildlife
Refuge (ANWR). He told Mr. Martin: "I'm sure that you
understand the gravity of the situation and you will lend your
efforts as an Alaskan, and not as a partisan, to solving the
problem."
MR. MARTIN responded that he was not necessarily trying to draw
a line of distinction between both parties; however, he believes
there are philosophical difference between them that won't be
changed by "any conversation here." He offered examples.
Number 0445
MIKE SIGLER, Member, Harborview Site Council, told the committee
his two children attend Harborview Elementary School in Juneau.
He explained that the council, a parent-teacher organization at
the school, supports the use of the permanent fund and new,
broad-based taxes in order to fund education. Mr. Sigler said
the State of Alaska is an important partner in funding Alaska's
schools. With oil revenues declining, [the council] sees the
only way to maintain education funding is to seek new revenue
sources, now rather than later. He remarked, "We must reach
into our pockets to ensure a decent education for our children
in the future." He noted that [the council] supports the
efforts of Representative Hudson and the other members of the
fiscal policy caucus [to resolve the budget crisis]. He
continued:
We also request that you consider increasing education
funding for children not meeting education standards.
At Harborview [Elementary] School, nearly one-third of
children fall below state education standards, and
there are too few teachers to provide extra help to
all of these children.
MR. SIGLER said he'd handed out a fact sheet on Harborview
Elementary School detailing this challenge. He suggested the
school is likely representative of many Alaskan schools. He
told the committee members that the Quality Schools [Initiative]
and [Learning] Opportunity Grants provided this year by the
legislature have helped, but weren't enough to meet all
children's needs. He concluded: "Please continue these grants,
consider increasing them, and ask your constituents whether
their schools face the same challenges as Harborview
[Elementary] School."
Number 0238
SHERMAN C. "RED" SMITH, testifying via teleconference, told the
committee he came to Alaska [in 1948] and has been living in
Cooper Landing since 1949; he has been involved politically to
varying degrees during that period of time. Mr. Smith said one
thing that has come to his attention is that "it is very
difficult for us to communicate with each other." He continued:
So, let me see if I can get a message across to you.
Let's say that in my youth I milked a cow. Now, the
permanent fund is kind of like an udder on a cow. ...
[There are] four appendages to that udder, and it
looks like we have two of them in use right now. You
have a reserve fund and another fund there, and now
we're lookin' for more ways of milking that one cow,
which is [the] oil industry, basically, that provides
that udder on that cow that we're milking.
The thing that we haven't done, is we forgot that if
we're going to have anything except that one cow to
milk, we should have been protecting the heifers,
'cause ... cows reproduce, see. Well, our permanent
fund should have been reproducing like the cow, and
probably some of that investments left in Alaska,
here, would have given us another heifer or two, and
we'd have had more than one cow to milk.
The oil industry cannot survive without industrial
minerals. We have local sources of industrial
minerals that should be in production up here,
supplying the oil industry. We also have people that
are knowledgeable, like myself, that know that ...
they don't always have to be petrochemical plants;
there can [be] chemical plants utilizing our dead and
dying forests. ...
We can't change the past, but let's see if we can get
some of these smaller -- like the heifers that I'm
referring to. Let's help 'em grow up so we can milk
them, too, you see. And then we'll be able to ...
maintain some of this social structure that we have in
our state.
TAPE 02-17, SIDE A
Number 0001
MR. SMITH continued:
In all these 50-some years now, I don't believe that
except on rare occasions that I've heard our
representatives, like yourselves, down there, sit down
and discuss something ... positive that we can do
other than just milking the one existing cow. So ...
this is an opportunity for us. We're going to get a
new administration.... It is time that we focus on
some of these smaller-scale programs or utilizing our
resources. If they do nothing else with them ..., we
could at least support the existing larger
corporations within our state.
I hope I haven't offended anybody or misled you, but I
think that this -- and I reviewed and listened here
during this discussion of the bill that I've been able
to understand here. In my understanding, I would be
more in support of HB 304. I believe it's more
definitive. I believe it gives ... [a] simpler
understanding and less complicated bookkeeping, and a
number of reasons why I would've supported it.
(Indisc.)
I will not support anything that expands government at
the present time because I think we've got all kinds
of government that we don't need in the State of
Alaska right now. Certainly, I understand that we
have to pay our bills. Now, one of the things I do
when I pay my bills -- I [had a] fiscal crisis; I sold
off some of my land. And I think that that's a
possibility again, if we could start selling off some
state lands and allowing developments to take place on
them. There's a number of other sources of income
that haven't been tapped. Anyway, thank you for your
time. Thank you for hearing me.
Number 0313
REPRESENTATIVE HUDSON thanked Mr. Smith for keeping positive.
He informed Mr. Smith that there has been review in regard to
ways in which to harvest, to a greater extent, the timber killed
by [spruce bark] beetles. There is also review of value-added
use of timber and oil. However, such tasks are difficult and
expensive.
MR. SMITH pointed out that as of January 31, 2001, the State of
Alaska, per the written request of Alaska's congressional
delegation, sued the U.S. Forest Service in federal district
court. In regard to that litigation, Mr. Smith expressed the
need to "stop the people that have been killing the heifers."
Number 0498
JOE SONNEMAN came forward to testify. He recalled a comment
that taking 50 percent of the dividend is a flat tax, which is
true. However, he disagreed that [HB 398] would have an equal
impact on everyone. When an equal amount is taken from
everyone, those at the lower end of the economic spectrum feel
it more because it is a larger percentage of their smaller
incomes. Therefore, reduction of the [permanent fund] dividend
has an unfortunate effect on those with lower income. The
permanent fund is good because it's an inverted head tax - that
is, it gives an equal amount to everyone and thus helps those
with lower incomes more, because it's a larger percentage of
their smaller incomes. Therefore, Mr. Sonneman felt that is why
83 percent or so voted [in the aforementioned advisory vote]
against using some of the permanent fund to fund government.
"Logically speaking, when you say 'no' to some, it means you
don't want any of it used," he remarked.
MR. SONNEMAN remarked that although the original intent of the
permanent fund was to fund government when oil ran out, the
original intent was changed when the dividend program was
enacted. Therefore, he didn't believe the comments regarding
the original intent of the dividend apply.
MR. SONNEMAN recalled the sponsor's discussion saying that the
real problem is excess spending over income, which Mr. Sonneman
believes to be true. He suggested addressing that by reducing
spending and increasing income, not by trying to break into the
permanent fund. Mr. Sonneman informed the committee that in
1969, when oil was discovered on the North Slope, the state's
annual budget was $150 million. He noted that he has read that
the current budget proposals are over $7 billion. Therefore,
there is an unsustainable level of spending. That part of the
problem needs to be addressed, rather than breaking into the
permanent fund.
MR. SONNEMAN agreed with an earlier comment that economic growth
should be part of the solution. However, he noted that he is
less confident in the comment expressing the need to work on
basic extractive industries and transportation. Mr. Sonneman
noted that he has a Ph.D. in Government Finance. He informed
the committee that for years, economic studies have said the
terms of trade favor the producers of manufactured goods over
those of raw materials. In other words, those buying raw
materials from Alaska and turning them into something make more
money than Alaskans do by selling the raw materials. Therefore,
Alaska should encourage its manufacturing industries and the
processing of ideas, such as with Microsoft.
Number 0945
MR. SONNEMAN cited a recent economic study that refers to "The
Curse of Resources," which [reports] that most places with large
amounts of natural resources haven't fared well. Mr. Sonneman
reiterated the need to encourage [Alaska's] manufacturing
industries as well as taxing them. In conclusion, Mr. Sonneman
noted his opposition to both bills [HB 304 and HB 398].
CHAIR COGHILL suggested that $1 billion of the budget is the PF)
payout. Therefore, $1 billion could be taken off the top of the
$7 billion in budget proposals, and then there could be
discussion of overspending.
REPRESENTATIVE BERKOWITZ clarified that $1.2 billion of the
budget is the PFD payout. There is also about $500-600 million
in inflation-proofing, and a substantial amount comes from
federal funds. Representative Berkowitz estimated that $150
million in the year 1960 would equal $2.4 billion in 2000.
Number 1215
REPRESENTATIVE JAMES agreed with Mr. Sonneman. She said she
understood that money is made at the point of value-added
manufacturing and processing because that is where people work
and create something. However, Alaska has the problem of being
disconnected. This disconnection requires that the materials
and supplies be imported in order to export the final product.
The cost of transportation is prohibitive.
REPRESENTATIVE STEVENS asked what Mr. Sonneman would suggest to
reduce spending.
MR. SONNEMAN answered that he didn't know, but offered to
provide an answer later. He recalled the comment that part of
the perceived need is to keep the CBR. If the CBR is used to
grow more "heifers" and those other growth industries are taxed,
that's a better solution than keeping a pot of money and taking
the dividend from the people who would be hurt the most by that.
Number 1450
JIM KELLY, Director of Communications, Alaska Permanent Fund
Corporation, Department of Revenue, began by referring to a
document entitled "Big Picture" that he'd provided to the
committee. He said all of the legislation before [the
committee] works in terms of the big picture. Looking back over
the first 25 years of the permanent fund, the permanent fund has
produced a little less than half the money oil has produced.
The fund began with oil money that was then invested in stocks,
bonds, and real estate, after which it produced $25 billion in
income. This occurred during a time when state oil revenues
reached $55 billion.
MR. KELLY agreed with earlier comments regarding recognizing
those who have saved the money and placed the state in its
current position of having $25 billion. If the decision to have
the permanent fund hadn't been made, today's discussion would've
been completely different. Mr. Kelly emphasized, "I say that
because I want you to know that the decisions that you make
today are going to be looked at the same way 25 years from now."
He predicted that 25 years from now, people will say that oil
produced about $20 billion worth of benefit to the state,
whereas the income of the permanent fund will total about $75
billion. He noted that a significant amount of [the permanent
fund] will have to be reinvested in order to accomplish [$75
billion worth] of income. Appropriable income after covering
inflation will be more than twice as much as can be expected
from oil.
MR. KELLY summarized that the decisions made today matter for
the future. Furthermore, the decisions made regarding the use
of the permanent fund earnings, because it's the state's largest
expected source of revenue, are the most important decisions.
Therefore, the decisions need to take into consideration the
protection of that income stream.
Number 2000
MR. KELLY turned to a document entitled "SJR 13/HJR 15
Projections" that he'd provided to the committee. On the back
of this document, the top spreadsheet refers to the total 5-
percent payout, which the [corporation] believes is the
sustainable income the state can expect to earn from the
permanent fund going forward. This distribution in residual
income is based on maintaining the status quo. He explained
that in reference to HB 35, the middle line of the top
[spreadsheet] would be divided in half: half would go to
government and the other half would to dividends. Mr. Kelly
characterized that [5-percent payout] as the best-case scenario
because if the permanent fund income is the greatest source of
wealth in the future, that is probably way to get the most
wealth out of the permanent fund.
MR. KELLY then turned to a document entitled "State of Alaska
Sources of Revenue," which many have described as the do-nothing
case. Mr. Kelly viewed this as the worst decision. He directed
attention to the columns for fiscal years 2008 and 2009. He
informed the committee that earlier in the year [the
corporation] was asked what would happen if the CBR ran out and
the ERA were treated in the same fashion [as the CBR] and was
thrown at the fiscal gap. The result would be that five to six
years from now, the ERA would be exhausted. Therefore, [the
state] would be dependent upon what is earned in that year.
MR. KELLY pointed out that some years, no money is earned [by
the permanent fund], which occurred this year and last. In such
a situation five or six years from now, the fiscal gap wouldn't
be solved and the ability to protect the permanent fund against
inflation - and to provide dividends - would be lost. The
picture would be bleak. Therefore, the desire is to arrive
somewhere between the worst and best scenarios.
MR. KELLY concluded by stressing that although the permanent
fund is large, it isn't large enough to be everything to all
people. It isn't large enough to allow full inflation-proofing,
pay dividends according to current statutes, and pay for the
state fiscal gap. The permanent fund can do two of those three
things fairly well. Mr. Kelly emphasized the importance of
inflation-proofing because it will generate the money that can
be used for the other two parts.
Number 2210
REPRESENTATIVE JAMES remarked, "I agree and have said repeatedly
that we can maintain a healthy dividend over the long term and
utilize some of the earnings of the permanent fund to help fill
the gap, but we can't if we wait. If we do it this year, we can
do that, and we can guarantee that over the long term."
REPRESENTATIVE HUDSON noted that Mr. Kelly and the chief
executive officer of the Alaska Permanent Fund [Corporation] had
attended all meetings throughout the previous summer [of the
fiscal policy caucus].
CHAIR COGHILL noted his appreciation of the town meetings held
by the fiscal policy caucus.
Number 2430
LARRY PERSILY, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, came forward to comment on HB 398. Mr.
Persily recalled earlier discussion regarding new revenues and
building the economy, which is one thing HB 398 would
accomplish. As the economy grows and there are new revenues,
there would be a direct effect on the dividend because the
dividend payout would be linked to how much is needed to fill
the fiscal gap. As the budget gap closed, more funds would be
available for the dividend because less would be required to
replenish the CBR under HB 398. Mr. Persily said HB 398 could
be used to link oil prices to state spending to the economy.
That could be merged with the percentage of market value. For
example, 5 percent would be available for distribution each
year, what was necessary to refill the CBR would be taken as a
line of credit, and the remainder would be used for dividends.
CHAIR COGHILL asked if the trigger mechanism in the governor's
bill [HB 413] was based on the tax-rate formula using the CBR as
part of the formula.
MR. PERSILY explained that the governor's income tax bill had
the following two triggers: it would cut the income tax rate in
half at $2 billion, and cut it again at $2.5 [billion].
However, HB 398 says only $1.5 [billion] is necessary for the
CBR regardless of the economy, revenue generated from taxes, or
the state budget.
MR. PERSILY referred to a chart that shows a band at $1 billion
and at $2 billion with the understanding that even with
additional new revenues, one would probably not want to drop
below $1 billion on the CBR. Although a certain amount each
year would be needed, he said the public doesn't want government
to accumulate more savings that it needs.
Number 2749
REPRESENTATIVE JAMES expressed concern with the requirement that
the CBR be refilled every year at June 30 with whatever money is
available. She said it seems the CBR should be filled up or
there should be a different mechanism. She emphasized the need
to have extra money. She noted her caution regarding a
constitutional amendment that would place Alaska in the
situation that Representative Hudson's bill does. She remarked
that she doesn't have a problem with [following Representative
Hudson's bill] for a while, and if it works out, that's fine,
and then there could be a constitutional amendment. However,
she said she wasn't willing "to go there first" and find out how
it works because she didn't want the state to find itself in a
disastrous situation in which the only option would be to borrow
money.
MR. PERSILY pointed out that a constitutional amendment wouldn't
have to be done. A percentage-of-market-value payout in statute
could be used as Representative Hudson uses in his legislation.
Mr. Persily related his belief that there would probably always
be a need for something like the CBR, a line of credit, [or
other] cash flow. Currently, 80 percent of the state's revenue
comes from oil; even by the end of the decade, oil will remain a
significant source of the state's revenue. However, that source
of revenue fluctuates such that there is the need for a line of
credit, cash flow to pay for government services until tax
revenues come in later in the year.
Number 2956
CHAIR COGHILL posed a situation in which HB 398 is passed
[along] with a tax bill such as that proposed by the governor
[HB 413]. He surmised that there would probably be an increased
take of the dividend before moving to a reduction of taxes,
because at $1.5 billion [the state] would take dividends before
any changes were made to the tax structure. Therefore, there
would be tremendous pressure to increase that to $2.5 [billion]
in order to avoid [impacting] the dividends.
MR. PERSILY specified that one assumption under HB 398 is that
for it to work, some additional revenue sources would be
necessary and some broad-based taxes would be necessary because
the entire [fiscal] gap couldn't be filled even with the
permanent fund earnings [under] the percentage of market value.
The incentives under HB 398 are tied to state spending and the
state's accounted price of oil, but would really only work if
additional revenue measures are passed.
CHAIR COGHILL said that is his point. He noted that a segment
of his district feels there should be a tax before touching the
permanent fund; however, [HB 398] proposes the inverse.
MR. PERSILY said if some form of HB 398 were adopted along with
an income tax, HB 398 probably wouldn't become effective until
fiscal year 2004, depending upon the amount of additional
revenue raised.
Number 3215
REPRESENTATIVE JAMES related her understanding that when that
point is reached, the dividend will be used [immediately] rather
than using the excess earnings of the fund.
MR. PERSILY agreed that would be the case under the current
language [of HB 398]. However, if HB 398 were amended to
include the percentage of market value, then it wouldn't take as
much from the dividend [distribution] because the full 5 percent
would be utilized rather than dividends, which equate to about 4
percent of the permanent fund earnings.
REPRESENTATIVE BERKOWITZ requested that Mr. Persily contrast the
alternative of doing nothing with following HB 398 or generating
income off the CBR.
CHAIR COGHILL recalled that Mr. Kelly had already spoken to that
when [he said] the decline would be severe and rapid.
REPRESENTATIVE BERKOWITZ asked, then, whether [HB 398] would be
preferable of the "two bad choices."
MR. PERSILY answered that the Department of Revenue believes [HB
398] is preferable. Furthermore, by keeping money in the CBR,
interest is earned that is available for public services, thus
reducing the need to take permanent fund earnings.
Number 3400
REPRESENTATIVE COGHILL announced that he would like to end up
with one bill that would be the House State Affairs Standing
Committee committee substitute. He said he is using this
discussion as momentum to "push" the other side of the
discussion in regard to government growth and programs. He
highlighted that at least $200 million has to come from the
government in some fashion. Representative Coghill remarked
that part of the issue is in regard to whether government can
take the responsibility of an economy that should be generating
the money. Furthermore, the permanent fund has created the
expectation that government can give something that [is] an
economic generator; at the same time, it discourages economic
generation. [HB 398 was held over.]
HB 199-INCOME TAX: INDIVIDUALS/TRUSTS/ESTATES
[Contains discussion relating to HB 413]
CHAIR COGHILL brought attention to the final order of business,
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 199, "An Act relating to
taxation, including taxation of income of individuals, estates,
and trusts."
Number 3730
REPRESENTATIVE BILL HUDSON, Alaska State Legislature, sponsor of
SSHB 199, specified that the amendment in packets is labeled 22-
LS0753\J.1, Kurtz, 2/18/02. It read:
Page 1, line 12:
Delete "(1)"
Page 1, line 13:
Delete ";"
Insert "."
Page 1, line 14, through page 2, line 1:
Delete all material and insert:
"As soon as practicable after September 30
of each year, the department shall publish the
applicable tax rate under this subsection for the
following calendar year. The applicable tax rate for
a resident individual is
(1) two and one-fourth percent of the
individual's taxable income if the unaudited balance
in the budget reserve fund created by art. IX, sec.
17, Constitution of the State of Alaska, on
September 30, was equal to or less than
$2,000,000,000;
(2) one percent of the individual's taxable
income if the unaudited balance in the budget reserve
fund created by art. IX, sec. 17, Constitution of the
State of Alaska, on September 30, was more than
$2,000,000,000 but less than $2,500,000,000; or
(3) zero if the unaudited balance in the
budget reserve fund created by art. IX, sec. 17,
Constitution of the State of Alaska, on September 30,
was $2,500,000,000 or more."
Page 2, line 3:
Delete "(1)"
Page 2, line 6:
Delete ";"
Insert "."
Page 2, lines 7 - 10:
Delete all material and insert:
"As soon as practicable after September 30
of each year, the department shall publish the
applicable tax rate under this subsection for the
following calendar year. The applicable tax rate for a
nonresident or part-year resident individual, or for
an estate interest is
(1) two and one-fourth percent of the
individual's, estate's, or trust's taxable income,
multiplied by a fraction, the numerator of which is
taxable income from sources in the state and the
denominator of which is taxable income from all
sources, if the unaudited balance in the budget
reserve fund created by art. IX, sec. 17, Constitution
of the State of Alaska, on September 30, was equal to
or less than $2,000,000,000;
(2) one percent of the individual's,
estate's, or trust's taxable income, multiplied by a
fraction, the numerator of which is taxable income
from sources in the state and the denominator of which
is taxable income from all sources, if the unaudited
balance in the budget reserve fund created by art. IX,
sec. 17, Constitution of the State of Alaska, on
September 30, was more than $2,000,000,000 but less
than $2,500,000,000; or
(3) zero if the unaudited balance in the
budget reserve fund created by art. IX, sec. 17,
Constitution of the State of Alaska, on September 30,
was $2,500,000,000 or more."
REPRESENTATIVE HUDSON explained that the amendment proposes a
trigger mechanism on SSHB 199, the flat-tax proposal. It would
establish three different levels of the constitutional budget
reserve (CBR) and trigger the tax, depending upon the level. If
there is more than $2 billion in the CBR but less than $2.5
billion, [the flat tax] would be 1 percent. However, if the CBR
is in excess of $2.5 billion, the [flat tax] would be zero.
Therefore, the tax would be related to the need. Representative
Hudson pointed out that [the amendment] language is included in
the governor's legislation [HB 413]. Even with this amendment,
there will be no bearing on the ultimate production of SSHB 199
because it will still draw in $285 million to help fill the
fiscal gap.
REPRESENTATIVE JAMES asked if this the only amendment that
Representative Hudson would entertain.
REPRESENTATIVE HUDSON answered that he was open to other
constructive suggestions.
CHAIR COGHILL noted that he had specifically asked for this
amendment. However, it doesn't eliminate the ability to place
other amendments before the committee. He said he'd wanted the
committee to see the amendment before the next hearing.
Number 4130
REPRESENTATIVE JAMES related her belief that more than one
trigger is necessary, as is the other side of the issue. She
said she isn't necessarily against the amendment, but there is
the need to see the net result first. There needs to be a
leveling [mechanism] on both sides.
CHAIR COGHILL clarified that there was [no intention] to take
anything off the table. Therefore, he indicated the need to
look at [all the bills relating to generating more state income]
in order to avoid passing out contradictory pieces of
legislation.
Number 4258
REPRESENTATIVE HUDSON said he appreciated the need to ensure
that government is lean. However, he pointed out that the
budget process happens outside of this committee; thus he urged
the chair not to hold up any essential elements. He related his
belief that there will be strong support for significant
"holding the line" [for state spending]. However, there has to
be a combination of "holding the line" and filling the gap -
with [some from taxes], some coming from the CBR, some from the
earnings reserve [account] (ERA) of the permanent fund. All of
those elements have to meld together at the same time. If that
is the goal, Representative Hudson said he is supportive of it.
CHAIR COGHILL acknowledged the purview of the [House] Finance
Committee. However, he also recognized that as chair of this
committee, he has this opportunity to have a say on the issue.
Number 4521
REPRESENTATIVE JAMES remarked that some reductions in spending
will require statutory change. Therefore, a bill will be the
mechanism, rather than merely addressing the budget. [SSHB 199
was held over.]
CHAIR COGHILL announced his intention to determine which of the
three bills [relating to the permanent fund] is the best.
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at 12:32
p.m.
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