01/23/2004 08:04 AM House W&M
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ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
January 23, 2004
8:04 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Bruce Weyhrauch, Vice Chair
Representative Vic Kohring
Representative Dan Ogg
Representative Ralph Samuels
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Norman Rokeberg
OTHER LEGISLATORS PRESENT
Representative Paul Seaton
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 31
Proposing amendments to the Constitution of the State of Alaska
relating to the Alaska permanent fund and to payments to certain
state residents from the Alaska permanent fund; and providing
for an effective date for the amendments.
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HJR 31
SHORT TITLE: CONST AM: PERMANENT FUND
SPONSORS(S): REPRESENTATIVE(S): HOLM
01/02/04 (H) PREFILE RELEASED 1/2/04
01/12/04 (H) READ THE FIRST TIME - REFERRALS
01/12/04 (H) W&M, STA, JUD, FIN
01/23/04 (H) W&M AT 8:00 AM HOUSE FINANCE 519
WITNESS REGISTER
BARBARA COTTING, Staff
to Representative Jim Holm
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HJR 31 on behalf of
Representative Holm, Sponsor.
REPRESENTATIVE JIM HOLM
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: As sponsor, answered questions about HJR 31.
STEVEN PORTER, Deputy Commissioner
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Explained the effects of HJR 31 on the
Department of Revenue.
JAMES BALDWIN, Senior Assistant Attorney General
Opinions, Appeals, & Ethics
Office of the Attorney General
Department of Law
Juneau, Alaska
POSITION STATEMENT: Explained the legal perspective on HJR 31.
ACTION NARRATIVE
TAPE 04-3, SIDE A
Number 0001
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 8:04 a.m. Representatives Hawker,
Samuels, Kohring, Weyhrauch, Wilson, Moses, and Ogg were present
at the call to order. Representative Gruenberg arrived as the
meeting was in progress. Representative Seaton was also
present.
HJR 31-CONST AM: PERMANENT FUND
Number 0115
CHAIR HAWKER announced that the only order of business would be
HOUSE JOINT RESOLUTION NO. 31, Proposing amendments to the
Constitution of the State of Alaska relating to the Alaska
permanent fund and to payments to certain state residents from
the Alaska permanent fund; and providing for an effective date
for the amendments.
CHAIR HAWKER stated that Representative Holm, sponsor of HJR 31,
could not be present in person, but is testifying from Fairbanks
via teleconference.
Number 0226
BARBARA COTTING, Staff to Representative Jim Holm, Alaska State
Legislature, presented the sponsor statement for HJR 31 on
behalf of Representative Holm.
MS. COTTING explained HJR 31 by first pointing out that Section
2, page 2, adds a new section to the constitution which leaves
15 billion dollars in the principal of the permanent fund and
distributes the rest equally to all qualified Alaskans. After
that, no more dividends are paid out, she added. To qualify,
individuals must be eligible for the permanent fund dividend
distributed this year, 2004, which means that they were legal
Alaskan residents in 2003. At the fund's current value, a
couple of days ago, the fund was at 27 billion, so that would
mean that $12 billion or more would be distributed, she said.
That would be about $20,00 per person. At the current level of
payout, that would be about 20 years of dividends people would
receive in a lump sum, she added.
MS. COTTING referred to Section 1 of HJR 31 to explain that
after the payout, 75 percent of the [realized income from the]
fund each year would be available to the legislature to provide
services and programs, and the remaining 25 percent would stay
in the fund and remain untouchable.
Number 0450
REPRESENTATIVE JIM HOLM, Alaska State Legislator, explained the
reason he is proposing HJR 31. He stated that the current
percent of market value (POMV) proposal may not gain enough
support to pass. He said that a solution is needed soon because
of the CBR [Constitutional Budget Reserve] draw. He also
believes that a population increase clause is needed.
REPRESENTATIVE HOLM stated that he has resurrected an idea
similar to the one then-Senator Mackie formerly proposed in
1999. He reviewed the history of the permanent fund plan by
referring to 1959, when the format to statehood was partially
dictated by the federal government. He stated that because
[Alaska] lacked a taxable economy and a population that could
support it, it was determined that all subsurface rights for the
potential resources, - oil and gas, gold, and so forth - would
be reserved to the state in lieu of granting standard property
rights to individuals. The State of Alaska was to hold in trust
all subsurface resources for the people's collective good. He
strongly believes that the people's resources were taken from
citizens at statehood. He said that "we" might own the land,
but not the resources underneath it.
Number 0648
REPRESENTATIVE HOLM stated that Alaskans are accused of not
paying their fair share because they do not pay federal income
tax. Approximately $1.7 billion derived from royalty payments
in fiscal year '03 are a percentage of a resource that was
reserved for the collective good of its citizens. He suggested
that if [Alaska] owned the resources, then 100 percent of value
is being taxed away for government use. In return for the
royalty or tax, as Representative Holm perceives it, Alaskans
received government services and the dividend check equal to
plus or minus $20,000 from 1982 to date.
Number 0730
REPRESENTATIVE HOLM suggested that HJR 31 will allow Alaskans to
receive another $20,000 and then the dividend program would
cease to exist, as Alaskans know it today. This would use about
$12 billion of the corpus of the fund, leaving $15 billion left
to be earning money as before. Citizens of Alaska who have
lived here for the past 20 years will have received about
$40,000 from the subsurface resources, he said. Representative
Holm called this a prepayment plan, a prepayment of 20 years of
dividend checks.
REPRESENTATIVE HOLM questioned what would happen if the current
dividend plan continues over time and the population of Alaska
increases. He suggested that yearly dividend payments would not
buy anything significant; however, with a lump sum of around
$20,000, Alaskans could pursue many life-altering options. He
suggested many options.
REPRESENTATIVE HOLM repeated the idea that all Alaskans own the
subsurface rights collectively and stated that what HJR 31 would
do is fund government with the earnings remaining in the
permanent fund and increase the ability of Alaskans to build
their own future. He stated that the $15 billion left would
earn approximately $1.2 billion per year at 7.6 to 7.8 percent
interest. After the proposed 75 percent cap with 25 percent
going back in to be reinvested in the $15 billion fund, there
would have been, this year, $875 million available in earnings,
plus the $1.7 billion of royalties and corporate taxes. There
would have been roughly $2.57 billion in the general revenue
fund to be used for government functions, which would have been
$300 to $400 million more than was actually needed for this
year. That money, he said, could have been put into the CBR to
be used when the price of oil drops.
Number 1043
REPRESENTATIVE HOLM spoke about the downside of HJR 31, in that
some may say it may overheat the economy. He believes it won't.
He described his bill as a reorganization of the permanent fund.
He called it "a recapturing of the New York Stock Exchange and
bringing it to the people of Alaska." He disputed other
imagined negatives.
REPRESENTATIVE HOLM also offered several positives such as:
people could pay off student loans, buy a home, pay mortgages,
pay credit card debt, or invest the money. He envisions a
private corporation in Alaska owned by its citizens and not the
government, always investing in Alaska. He believes that $2 to
$4 billion of the $12 billion would be returned to Alaska.
REPRESENTATIVE HOLM spoke of the possibilities venture-capital
businesses could have for Alaskans who might buy stock in such a
business. He gave the example of a chemical plant that would
generate jobs and income for Alaskans for decades to come. He
stated that $12 billion of resource revenues should be returned
to the people of Alaska, the result of which would provide far-
reaching economic benefits for generations to come.
REPRESENTATIVE WILSON commented about the similarity between
Representative Holm's words and those of Paul Harvey. She said
that these ideas are a new way of thinking and a new direction
to pursue.
Number 1730
REPRESENTATIVE WEYHRAUCH questioned whether HJR 31 is different
from the Mackie plan in that it does not distribute all of the
permanent fund to the people. He also asked for clarification
about whether or not HJR 31 distributes only a part of the
permanent fund to the people.
REPRESENTATIVE HOLM answered both of these questions in the
affirmative.
REPRESENTATIVE WEYHRAUCH asked for what purpose the remaining
amount is to be used.
Number 1820
REPRESENTATIVE HOLM explained that the $15 billion would keep
earning as it has in the past and would provide roughly $1.2
billion per year at 8 percent interest. He said that 75 percent
of that could be used for government purposes and 25 percent
would be reinvested in the permanent fund and also used to
inflation-proof it.
REPRESENTATIVE WEYHRAUCH asked, if this bill were adopted, if
POMV could also be on the ballot.
REPRESENTATIVE HOLM replied that POMV is a very positive
approach and could be "married with this quite easily."
Number 1915
REPRESENTATIVE WEYHRAUCH questioned whether, if HJR 31 was
adopted, the permanent fund division would be eliminated.
REPRESENTATIVE HOLM responded in the affirmative.
REPRESENTATIVE WEYHRAUCH asked if the analysis of the fiscal
impact of HJR 31 included the impact of the elimination of the
entire permanent fund division.
REPRESENTATIVE HOLM stated that he had only seen the fiscal
notes about three minutes ago and did not know the answer.
Number 2000
REPRESENTATIVE SAMUELS asked what would happen if the stock
market took a downturn. He stated the consequences would be
similar to what is in place now and that the structural
financing problems would not be fixed by HJR 31.
REPRESENTATIVE HOLM respectfully disagreed and explained again
how the deficit would be made up. He believes that there is
plenty of money extra in this bill to not only fund the deficit
spending Alaskans have been accustomed to, but also to shore up
the CBR, which could be used when the price of oil falls. He
also explained how Alaska does not get much corporate income
tax, but if the money was given back to Alaska and put into
corporations that are taxed for their efforts and energies, he
thinks there would be a far better return on the investments
than from the New York Stock Exchange.
CHAIR HAWKER stated that there was a problem with the realized
income structure of the POMV plan, which means that there only
is income if a gaining investment has been sold. He asked
Representative Holm whether he has given any thought to that
concern that has been so well stated by the Alaska Permanent
Fund Corporation board and has been manifested in the proposed
POMV amendment. He asked whether Representative Holm would
consider working this idea into his proposed constitutional
amendment.
Number 2420
REPRESENTATIVE HOLM answered that he would, but added that the
stock portfolio would change. For example, real estate would no
longer be a part of the portfolio, but the more aggressive
investments would be kept. He said that the issue of liquidity
of the permanent fund would need to be addressed.
REPRESENTATIVE OGG reviewed the history of the Constitional
Convention and questioned the restriction of the subsurface
rights, whether it was enacted by the federal government or the
State of Alaska, and when that policy came into effect.
REPRESENTATIVE HOLM answered that he did not know.
REPRESENTATIVE OGG stated it would be helpful to know and would
make a difference if it was the federal government or [Alaska's]
Founding Fathers. He continued his review of the intent and
purpose of the setting up of the permanent fund, stating that it
was a constitutional amendment that set up the original
permanent fund.
REPRESENTATIVE HOLM stated that it was his understanding that
the permanent fund was generated for the purpose of the
continuation of government and the ability to fund government
for generations to come. He said, at its conception, the
permanent fund plan was not a dividend plan. That was done
later, he added. He didn't know if the dividends were meant to
be given back to the people in the form of goods and services,
government services, or for people to create their own economic
engines in Alaska. He believes that the people would do a much
better job investing than the government would.
REPRESENTATIVE OGG referred to an excerpt from the 1976 election
pamphlet and a statement in favor of Proposition 2, the creation
of the permanent fund. [Upon hearing that Representative Holm
did not have a copy of that pamphlet, he decided to deal with
that subject at another time.]
Number 3013
REPRESENTATIVE GRUENBERG asked what the federal tax implications
of HJR 31 would be. He questioned if there is $27 billion in
the fund and $15 [billion] is left in, that would mean that
there is a $12 billion payout, and if the average tax rate is at
25 percent, that would mean about $3 billion going to the
federal government.
REPRESENTATIVE HOLM agreed.
REPRESENTATIVE GRUENBERG said that was money that would be taken
away from the taxpayers and given directly to the federal
government.
Number 3149
REPRESENTATIVE WEYHRAUCH questioned if the annual payment would
have a significant impact on rural areas and if there had been
any thought of a five-year "payout phase-out" with the value of
the payout locked in to the value on January 1, 2004.
REPRESENTATIVE HOLM answered that there was thought given to
this topic, but the reason that it was not stated is that all of
the payout options could be considered at a later date.
REPRESENTATIVE WEYHRAUCH said a recent legal analysis on the
POMV, the payout, and the impact of the federal laws on the
permanent fund, implied that the permanent fund would not be
subject to federal taxation with the POMV or dividend locked
into the constitution. He questioned whether, with such a large
check cut, the legal analysis would change, subjecting the
remainder of the fund to taxation.
Number 3340
REPRESENTATIVE HOLM said he has not looked at that issue, but
that analysis which he has heard said that was probably not the
case. He suggested that a corporation could be created so there
would be no tax implications.
CHAIR HAWKER stated that Representative Weyhrauch had to leave
momentarily during the last response.
Number 3500
REPRESENTATIVE SEATON questioned the philosophy behind the 102
million acres given to Alaska at statehood and the subsurface
rights' going to the state. He said the permanent fund has
given the state resources more liquid [assets] than at the time
of the statehood Act and said it seems that 50 million acres of
the surface rights should be distributed to the current
residents of Alaska. He said the only reason that idea wasn't
incorporated into the current fund was because the permanent
fund deals with liquid assets. He asked for further
clarification of this idea in terms of HJR 31.
REPRESENTATIVE HOLM stated that those ideas were not in his
philosophy and added that when the federal government did not
give [the people] 50 percent of the land, he was not happy. He
does not think that, at this point in time, the transfer of
subsurface rights to the people would be possible. He thinks
the idea has merit and could be changed, depending on the views
of the people. He said that he was willing to listen to these
new ideas.
Number 3700
REPRESENTATIVE SEATON said that many bonds have been passed in
the state and that the purpose of the bonds was to spread the
cost of capital expenses to future generations. He asked if the
dividend accomplished the same thing, spreading the recovery of
the capital resources extracted now to future generations.
REPRESENTATIVE HOLM said he doesn't think that there was a
relationship and he does think that bonds are a bad idea because
they are a way to shift responsibility on others.
Number 3858
CHAIR HAWKER had a question about Section 30, [Section 2 of HJR
31] page 2, second sentence, "All provisions of statute and
regulation that are both applicable to permanent fund dividends
for 2004 and in effect on January 1, 2004, apply to payments
under this subsection except provisions that relate to the
amount of the dividend and the date the dividend is paid." He
asked if all of the current hold harmless provisions in the law
are kept in place.
REPRESENTATIVE HOLM referred Chair Hawker back to the Mackie
proposal to look for that information because he was not sure.
Number 4047
CHAIR HAWKER asked if the intention of the bill is to preserve
hold harmless provisions. He gave as an example a situation of
a family on public assistance who would lose their assistance
based on increased revenue after receiving the payout. He
questioned whether it was the intention of HJR 31 to reimburse
the family for the public benefits lost or not to pay the hold
harmless benefits.
REPRESENTATIVE HOLM said that the second statement was correct,
to not pay the hold harmless benefits. He referred to March 22,
2000, when then-Senator Mackie addressed this issue after
talking to Margaret Pugh, then commissioner of the Department of
Health and Social Services, and was told that this could be the
best public assistance program ever to get people off of public
assistance and self-supporting.
Number 4330
STEVEN PORTER, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, gave highlights and examples of the
effect HJR 31 would have on the Permanent Fund Dividend Division
(PFDD). He stated that PFDD would, in effect, be closed out and
it would receive about $1 million worth of benefits in the first
year by reducing positions. He said that in fiscal year 2006
and beyond, the total program savings would be about $5.3
million, the cost of the whole division. The appeals,
collection, and fraud divisions would be retained and the fraud
division would increase in size to manage the potential
problems.
CHAIR HAWKER questioned the figure $5.3 million because the
Permanent Fund Dividend Division fiscal note shows $950,000.
MR. PORTER replied that Chair Hawker was correct and the figure
would have to be corrected. He also added that amendments [to
the fiscal note] would be made after today's hearing.
MR. PORTER spoke about the Child Support Enforcement Division,
which has a unique situation. He said that there were about
$500 million in arrearages and that the infusion of $12 billion
into the economy in one day would pay down approximately $240
million of those arrearages in a single event. Some of that
money is owed to the state, and some is owed to the custodial
parents, he said. There would be both positive and negative
ramifications, he said. In the short term, Alaska would excel
for one year and pick up $6.4 million in collection incentives
from the federal government. In the other years, Alaska would
no longer be able to garnish permanent fund dividends and would
lose about $9.3 million a year and probably lose about $500,000
of incentives a year from the federal government.
TAPE 04-3, SIDE B
Number 4649
MR. PORTER said that individual taxpayers would pay about 50
percent more in taxes to the federal government for a one-time
payment than they would if they received the same amount over 20
years. The federal government would receive about $2.1 billion
or 20 percent of the dividend payment from individual income
taxes. Individuals in the lower income bracket are eligible for
certain credits and would lose about $112 million in credits as
a group, he said. He paraphrased statute AS 43.23.085 which
states, "A program administered by the state or municipalities,
the eligibility for which is based on financial need, may not
consider a permanent fund dividends as income or resources
unless required to do so by federal law or regulation." That
provision would need to be changed for Representative Holm's
proposed amendment, he said.
Number 4500
MR. PORTER also summarized AS 43.23.075 as saying, "Individuals
who are denied assistance under certain federal programs based
solely on the basis of receipt of a permanent fund dividend are
eligible for state assistance." That provision, as well, would
need to be changed.
MR. PORTER explained that a $12 billion payout equals the total
cost of building a gas pipeline from the North Slope to Valdez,
including a gas treatment plant, a liquefaction plant, and the
purchases of several LNG [liquefied natural gas] tankers.
MR. PORTER said that any department in the State of Alaska could
get together and discuss the impacts of infusing the economy
with $12 billion. He said the departments will find potential
for many impacts, both positive and negative, and it will be a
challenge and an opportunity to identify them all.
Number 4337
REPRESENTATIVE GRUENBERG stated that child support collection is
a major problem and he fears that a lot of children will never
see the support unless something is done to ensure child support
collection in the future, possibly [as money] put in trust.
MR. PORTER agreed that it is an important issue and stated that
under the current law there is no opportunity for a trust, but
that an amendment should be considered to capture opportunities
to ensure that the children in Alaska are protected over time.
REPRESENTATIVE GRUENBERG stated that he didn't want an answer
today, but that there are provisions in Title 25 for the court
to sequester funds for the future payments of child support. He
invited the [Department of Revenue] to examine that issue and
said his office would be interested in helping.
REPRESENTATIVE WILSON asked about the ramifications of Alaska's
owning a natural gas pipeline.
MR. PORTER replied that the projections on the revenue from a
natural gas pipeline are between $400 million and $1 billion a
year. What has not been calculated yet is the cost of servicing
debt, he said. If one pays cash for an asset, one doesn't
service debt, so that would be an additional benefit, he
explained. He said he does not have the exact number on the
debt service.
REPRESENTATIVE WILSON suggested the committee needs to rethink
all of this.
Number 3850
JAMES BALDWIN, Senior Assistant Attorney General, Opinions,
Appeals, & Ethics, Office of the Attorney General, Department of
Law, spoke about legal issues involving HJR 31. Tax
consequences are worth exploring further, he said, since the
payments are so different from those in the past. He stated
that if HJR 31 were to become law there would be a lawsuit
because of the amounts that are at stake. The Department of Law
has been successful in turning back equal protection challenges
to the permanent fund dividend program because the court has not
applied the strictest scrutiny that can be applied in equal
protection analysis. It has been found that the state has two
interests, he said. One is to encourage the permanence of
residents, and the second is to encourage those residents in the
maintenance of the permanent fund. He speculated that if the
dividend program went away then perhaps the second leg of that
justification would also go away. He said that thought should
be given to what might happen if this second basis for defending
the permanent fund no longer exists.
MR. BALDWIN stated that he agreed with Chair Hawker's
interpretation of the realized versus unrealized income issue.
He said that currently the permanent fund necessitates having
two sets of books. He believes that it is preferred to go to
the market-valuation approach for all things. He said that if
management is not prudent or honest, the fund could realize more
income than the market value would permit. This language would
allow that to be a distribution, in that case. That is a
downside of the "realized income" term's being used and being
grafted into the constitution, rather than into the statutes, he
said. He stated that it is a problem.
MR. BALDWIN said that the amendment to Section 15 [Section 1 of
HJR 31] says that the 25 percent that does not get distributed
should be retained in the fund, but it does not say in what
status, because this amendment [HJR 31] retains the distinction
between principal and income, whereas the POMV amendment does
not. [The POMV amendment] eliminates the difference between
principal and income. The question is whether [the 25 percent]
is retained as principal or income, he said, and needs to be
cleared up.
Number 3425
MR. BALDWIN stated that in order to mesh with existing law, the
term "net income" rather than realized income should be used,
because net income gives the corporation the ability to cover
its costs of investing, which are substantial, out of its own
funds. The way it is stated in HJR 31 [the corporation] would
be left to seek a general fund appropriation to cover the cost
of investing.
MR. BALDWIN said that in Section 30 [Section 2 of HJR 31] there
is a date certain when valuation is to take place for purposes
of determining distribution. He suggested that whenever there
is a date certain, it is always the wrong date, in terms of the
stock market or conditions. He stated that it is wise to let
experts determine the date rather than just choosing one, one
day after the certification date, which is sometime in January
2005.
Number 3243
MR. BALDWIN agreed that if committee members don't want the hold
harmless to apply, those provisions should be exempted. He
stated that there were other agencies that would have fiscal
impacts from HJR 31, as well.
REPRESENTATIVE WILSON said that because of the previous
discussion about POMV, it would be very prudent to be looking at
some changes to make HJR 31 set up like a POMV, instead of based
on the interest earned.
Number 3054
CHAIR HAWKER concurred with Representative Wilson's suggestion
and asked Representative Holm to consider what has been said
today in working on a second generation of HJR 31. He summed up
the discussions of this hearing and mentioned that there are
three permanent fund proposals before the House Special
Committee on Ways & Means this session. [HJR 31 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:12 a.m.
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