Legislature(1995 - 1996)
03/29/1996 08:08 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
March 29, 1996
8:08 a.m.
TAPES
SFC-96, #59, Sides 1 and 2
SFC-96, #60, Side 1
SFC-96, #60, Side 2 (575-220)
CALL TO ORDER
Senator Steve Frank, Co-chairman, convened the meeting at
approximately 8:08 a.m.
PRESENT
In addition to Co-chairmen Frank and Halford, Senators
Phillips, Rieger, Sharp, and Zharoff were present. Senator
Donley arrived as the meeting was in progress.
ALSO ATTENDING: Barbara Ritchie, Deputy Attorney General,
Civil Division, Dept. of Law; Laurie Otto, Deputy Attorney
General, Criminal Division, Dept. of Law; Vince Usera,
Assistant Attorney General, Commercial Section, Dept. of
Law; Alison Elgee, Deputy Commissioner, Dept. of
Administration; Dick Pegues, Director, Administrative
Services Division, Dept. of Law; Nancy Slagle, Director,
Budget Review, Office of Management and Budget; Dan Fauske,
CEO/Executive Director, Alaska Housing Finance Corporation,
Dept. of Revenue; Kevin Brooks, Director, Division of
Administrative Services, Dept. of Fish and Game; Nico Bus,
Acting Director, Division of Support Services, Dept. of
Natural Resources and Dept. of Military & Veterans Affairs;
Paul Larson, Deputy Director for Fisheries, Division of
Commercial Fisheries Management and Development, Dept. of
Fish and Game; John Bitney, Legislative Liaison, Alaska
Housing Finance Corporation, Dept. of Revenue; Betty Martin,
Comptroller, Treasury Division, Dept. of Revenue; Dean
Paddock, Executive Director, Bristol Bay Driftnetters'
Association; Jim Kelly, Research and Liaison Officer, Alaska
Permanent Fund Corporation, Dept. of Revenue; and aides to
committee members and other members of the legislature.
ALSO PARTICIPATING VIA TELECONFERENCE FROM KETCHIKAN:
Former Representative Oral Freeman.
SUMMARY INFORMATION
HB 468 - APPROP: SUPPLEMENTAL & OTHERS
Discussion regarding requests by the Dept. of Law,
Dept. of Natural Resources, Dept. of Military and
Veterans Affairs, and AHFC as well as stale dated
warrants and ratification of overexpenditures was
had with department representatives. The bill was
held in committee for continued review at 9:30
a.m., Monday, April 1, 1996.
SB 51 - DISPOSITION OF PERMANENT FUND INCOME
Discussion was had with Jim Kelly, and former
Representative Oral Freeman testified via
teleconference from Ketchikan. The bill was held
in committee for additional review.
SB 152 - GEOGRAPHIC PAY DIFFERENTIALS
Discussion and review of a draft CSSB 152 (Fin)
(3/29/96) was had with Alison Elgee. CSSB 152
(Fin) was adopted and REPORTED OUT of committee
with a zero fiscal note (indicating future
savings) from the Office of the Governor, applied
to all departments.
SB 265 - RECEIPTS OF TEST FISHING OPERATIONS
Testimony was provided by Kevin Brooks, Paul
Larson, and Dean Paddock. The bill was
subsequently held in committee for further review.
CS FOR HOUSE BILL NO. 468(FIN) am
An Act making supplemental appropriations for the
expenses of state government and making and
amending appropriations; ratifying certain state
expenditures; and providing for an effective date.
Co-chairman Frank directed that the FY 96 supplemental
budget be brought on for continued committee review.
Dept. of Military and Veterans Affairs
NICO BUS, Acting Director, Division of Administrative
Services, Dept. of Natural Resources, came before committee
and advised that he would be representing the Dept. of
Military and Veterans Affairs on supplemental items. The
$6.5 million for the National Guard and Naval Militia
Retirement Program will provide additional solvency to the
fund. The program is now funded at 17 percent. Co-chairman
Frank inquired concerning the ratio of future savings to up-
front moneys placed in the fund. Mr. Bus explained that the
Governor requested $2.5 million for FY 97. The department
asked the actuary to calculate the impact of the $5.5
million. The result was that for FY 97 the operating budget
could be reduced by $850.0. If additional FY 96 funding is
provided, the FY 97 operating budget could be further
reduced. Co-chairman Frank asked that the department
provide numbers "all the way up to full actuarial
soundness." NANCY SLAGLE, Director of Budget Review, Office
of Management and Budget, explained that projections
indicate that a $10 million lump-sum contribution would
reduce the FY 97 number to $1.2 million.
At the request of Senator Randy Phillips, Mr. Bus provided a
history of the program. He explained that a 1988 provision
in the National Guard Retirement System allowed for lump-sum
payments. Many of the participants request this payment
when they retire. The fund was thus drawn down much faster
than anticipated. That is the main reason for the present
situation. Lump-sum payments are continuing, but the
department is working with the division of retirement and
benefits to solve the problem and will bring forth
recommendations next year.
Discussion followed between Senator Rieger and Mr. Bus
regarding the target funding ratio for the program. Nancy
Slagle advised that adding $5 million to the fund would
raise the ratio from the present 17 percent to 53 percent.
If $10 million were appropriated, funding would be at 88
percent.
In response to questions from Senator Phillips, Mr. Bus
voiced his understanding that with the requested $6.5
million in the supplemental plus FY 97 operating budget
funding, the program should be stabilized.
Mr. Bus explained that the $1.5 million for disaster relief
has two elements. The first is $557.0 for floods in the
Kenai area. The total cost of the flood exceeded $3
million. The department found most of the needed funding
within existing appropriations. The $557.0 request
represents the remainder. The second part of the
supplemental seeks $1 million for activity between the
present time and June 30, 1996.
In response to a question from Co-chairman Frank concerning
House Finance action, Mrs. Slagle explained that the House
funded the $1 million. The Governor included $1.5 million
in his original request, for response to emergency needs.
Mrs. Slagle voiced concern on behalf of the administration
that "We have no other moneys available to respond to
disasters through the end of the fiscal year." The
department has functioned thus far on outstanding balances
from previous disasters.
Dept. of Natural Resources
NICO BUS again came before committee to speak to the
$5,258.6 for fire suppression which he said would fund
remaining activity through FY 96. Included is the balance
of fixed costs for aviation contracts, suppression, and
other efforts. It also includes $750.0 for routine
suppression activity (initial attack) as well as $2 million
for project fires. Mr. Bus referenced $1.5 million that was
to carry over from FY 96 to '97. Due to a fire in June, the
funding was used in 1995. The department presently has
$9,000.00 remaining. Aviation contracts are due April 1.
The department should not technically obligate these $200.0
payments to vendors if there is not sufficient funding. If
contracts are cancelled, vendors may commit their aircraft
to other uses. Total need for these fixed costs is
$2,256.4. That includes aviation, helicopters, tanker
craft, fixed wing craft, etc. These are basic commitments
the department makes to prepare for the fire season.
Discussion of past fire seasons followed. Mr. Bus
acknowledged that last year's season was one of the lowest
on record.
In response to a question from Co-chairman Halford
concerning costs for the $236.0 listed as "aviation
section," Mr. Bus explained that it relates to in-house
expenditures for staff that manages aviation contracts. Mr.
Bus advised that he would provide a spread sheet listing
individual items of the supplemental request. Discussion
followed among the co-chairmen and Mr. Bus concerning
whether this effort should be included within fixed
operating costs or within the supplemental. Mr. Bus noted
that last year the department used a portion of its fixed
cost funding for actual fire suppression because funding for
suppression was so small.
Further discussion followed regarding the nature of aviation
and BLM smoke-jumper contracts.
In response to a question from Senator Phillips, Mr. Bus
said that predictions indicate this is a potentially high
fire year, mainly in the interior.
Co-chairman Frank asked that Mr. Bus speak to the $1,457.0
in uncollectible federal receivables. Mr. Bus advised that
both the department and the Dept. of Law are working with
federal agencies to obtain a settlement.
Dept. of Law
Co-chairman Frank directed that review revert to discussion
of Dept. of Law requests. BARBARA RITCHIE, Deputy Attorney
General, Civil Division, Dept. of Law, came before committee
to speak to Berger v. State. She explained that the
situation commenced in 1989 when Roger Berger, dba Frontier
Financial Services, began to purchase permanent fund
dividends for $325 to $400. In return for the cash, Mr.
Berger received an assignment of individual rights to the
$873 dividend. The Dept. of Revenue, permanent fund
division, began to experience an escalation in the number of
assignments. As a result, it took action to adopt a
regulation under which it would decline to honor assignments
other than those to governmental agencies. Frontier then
required individuals who made assignments to complete a
change of address form and power of attorney so that the
dividend went directly to Frontier and was subsequently
signed over by the borrower. The Dept. of Revenue noted
circumvention of the new regulation and all parties were
notified. In December of 1989, Frontier filed suit
challenging the regulation and department refusal to
implement the address changes. The superior court
determined that the regulation was beyond statutory
authority and thus invalid. The statute has since been
changed to allow assignment only to a court or governmental
agency. In arguing the case, the state raised issues of
usury and violation of the small loans act. In December of
1995 the supreme court ruled that the transactions were not
loans and returned the case to the superior court for a
determination of "what was owed to Mr. Berger." In the
meantime, the $873.00 permanent fund dividend was paid to
the recipients.
Discussion followed regarding advice in the above matter
provided by the Dept. of Law to the Dept. of Revenue. VINCE
USERA, Assistant Attorney General, Dept. of Law, voiced his
understanding that former Assistant Attorneys General, Jeff
Bush and Peter Froehlich, advised the Dept. of Revenue that
it should not adopt the regulation. Co-chairman Halford
voiced his understanding that the department was advised
against adoption but did so anyway. He then asked for
copies of memos containing Dept. of Law recommendations to
the department.
Discussion of the failed petition for rehearing before the
supreme court followed between Mr. Usera and Senator Rieger.
Further discussion followed regarding the stipulated
judgment settling the amount versus a superior court trial
to determine the amount.
Addition discussion occurred regarding the legal standing of
those who received both the advance from Mr. Berger and the
dividend as well as Dept. of Revenue notification to
recipients that the assignments would not be honored by the
department.
Senator Sharp noted that the $873.00 dividend for 1989,
times the number of assignments (2,600), plus interest and
attorney fees, does not approximate the requested $3.5
million. It thus appears that the "individual was made more
than whole." Mrs. Ritchie noted that statutory interest on
the $2.2 million at 10.5 percent for 74 months totaled
"almost $1.3 million."
Dept. of Public Safety
NANCY SLAGLE again came before committee. She explained
that the House decided the request for manuals and equipment
should be considered within the capital budget. It was thus
removed from the supplemental.
Dept. of Revenue
NANCY SLAGLE advised that the $198.2 request from Alaska
Housing Finance Corporation relates to consolidation of
leased facilities. Inability to construct a facility for
AHFC has necessitated additional lease costs. JOHN BITNEY,
Alaska Housing Finance Corporation, came before committee.
He explained that the FY 96 budget contained funding for
lease payments for six months in anticipation that AHFC
would occupy its own facility when leases expired in
December. Since the corporation will be remaining in
current facilities, the above request is for the remaining
six months of this fiscal year as well as a rate increase
which incurred. In response to a question from Co-chairman
Frank, Mr. Bitney noted that the overall budget was reduced
by $2.5 million. He said he had no answer to a question
regarding where moneys would be derived if supplemental
funding is not provided. Responding to a question from
Senator Sharp, Mr. Bitney advised that the rate increased
from $1.27 to $1.30 per square foot. Co-chairman Frank
asked that Senator Sharp, chairman of the subcommittee on
the Dept. of Revenue budget, review the matter and forward a
recommendation to committee.
Co-chairman Frank inquired concerning the status of space
for the corporation. Mr. Bitney acknowledged an RFP for new
leases and receipt of six bids. No new leases would be
entered before July 1, 1996. The RFP has no relation to the
supplemental request.
END: SFC-59, Side 1
BEGIN: SFC-59, Side 2
NANCY SLAGLE noted that Sec. 12(b) involves a fund source
change between PERS and benefit system receipts. The FY 96
budget inadvertently cut too much out of receipts and
brought the total to $19,200.00. The shift will cover costs
and ensure that charges are made to proper benefit system
accounts. BETTY MARTIN, Comptroller, Division of Treasury,
Dept. of Revenue, came before committee. She explained that
a portion of the shortage results from the fact that "the
SBS accounts went participant directed over the last year .
. . ." Management fees for the change were not in the FY 96
budget when it was prepared. The remainder is due to a
miscalculation in performance measurement fees. There are
two structures for these fees. One is for active management
and the other is for passive management. Fees included in
the budget reflect passive management when SBS accounts are
actively managed.
Dept. of Law
Discussion next reverted to Sec. 9(c), the $66.6 for a
district attorney in Bethel. LAURIE OTTO, Deputy Attorney
General, Criminal Division, Dept. of Law, came before
committee. She attested to three-person offices for both
the public defender and the district attorney in Bethel.
Last August, two of the public defenders quit. One of them
was hospitalized for a stress-related disease. One of the
district attorneys quit, and another actively began asking
for transfer to another job. The third described himself as
desperate. Ms. Otto said that, when she visited the area
and reviewed statistics, she found that staff in Bethel is
carrying double and sometimes triple the caseload of other
offices.
In response to a question from Senator Phillips, seeking the
root of the heavy caseload, Ms. Otto attested to a high rate
of crime between ages 15 and 30. The Bethel region has "a
very large number of people" in that age range. The Bethel
office covers all 56 villages in the region.
Comments followed by Ms. Otto and committee members
regarding the impact of alcohol and prohibitions against
alcohol in the area. Ms. Otto noted that Anchorage appears
to be the source of much alcohol bootlegged into the region.
Over 50 percent of the crime in the DA's office in Bethel
comes for the villages. Serious crime in Bethel itself
appears to involve local residents.
A review of files, indicates that the office is not
overcharging criminal actions. It appears that staff
undercharges and does not pursue cases it should because of
the overload. Staff is routinely working 70 to 80 hours a
week and is only paid for 37.5. Ms. Otto said she returned
from her review much alarmed by the situation and conveyed
her concern to both the Governor and the Attorney General.
Further review by staff from the Dept. of Corrections, Dept.
of Health and Social Services, and Dept. of Public Safety
concluded that an emergency situation exists. There is need
for the fourth position requested in the supplemental. A
similar position has been requested in the public defender
agency. The effect of the fourth attorney is that staff
will work six days a week instead of seven.
In response to an inquiry from Senator Rieger, Ms. Otto
cited sexual assault and domestic violence as the most
frequently committed crimes in the area. In the state of
Alaska, most crimes are alcohol-related. That is true in
the Bethel region among its 30,000 residents.
Responding to further questions from Senator Zharoff, Ms.
Otto attested to an 82 percent increase in the amount of
crime in Bethel while Nome and Dillingham have remained
stable. She speculated that much of the increase is due to
the fact that Bethel has the highest rate of unemployment,
and there is no significant economy. It also has the
highest rate of social problems such as child abuse and
suicide. The problem is primarily economic. Co-chairman
Halford concurred in the foregoing assessment.
University of Alaska
NANCY SLAGLE spoke to the request for monetary terms for the
classified employees association and the Alaska community
college federation of teachers for FY 96. The House wished
to consider all monetary contracts at one time.
Stale Dated Warrants
Senator Randy Phillips asked if the state had developed
general policies regarding stale dated warrants. NANCY
SLAGLE said she was unaware of a time frame after which the
state is no longer obligated to pay. The money was owed at
some point in time. Statutes require an appropriation to
cover warrants that are over two years old.
Ratification of Overexpenditures
NANCY SLAGLE explained that the administration has reviewed
this area of concern. Legislative Audit identified several
places where accounting records do not balance expenditures
with appropriation levels, for a variety of reasons. Mrs.
Slagle referenced audit and management review of the process
and noted that the result of that review was furnished to
members. The administration will continue to work with
agencies to attempt to bring accounting records up to date.
The next legislative session has been established as the
deadline for cleaning up everything through FY 94. The
intent is to clean up accounts on an annual basis and
attempt to avoid need for ratifications in the future.
Mrs. Slagle noted that much of the $6,877.5 total involves
the Dept. of Transportation and Public Facilities. It
relates to conversion from the old PBA accounting system to
the new system in 1983. Much of the problem resulted from
lack of understanding, lack of training, lack of educated
staff, etc. Backtracking has been difficult because of lack
of documentation in early years. Mrs. Slagle reiterated
that much of the problem within DOTPF occurred because
moneys were received in a different year than expenditures
were made. Collection of revenues was not aligned with
expenditures.
Co-chairman Frank announced that the committee would again
meet at 9:30 a.m., Monday, April 1, 1996, to conclude review
of supplemental requests.
RECESS - 9:15 A.M.
RECONVENE - 9:30 A.M.
SENATE BILL NO. 152
An Act relating to geographic differentials for the
salaries of certain state employees who are not members
of a collective bargaining unit; relating to periodic
salary surveys and preparation of an annual pay
schedule regarding certain state employees; relating to
certain state aid calculations based on geographic
differentials for state employee salaries; and
providing for an effective date.
Co-chairman Halford directed that SB 152 again be brought
before committee and referenced a draft committee substitute
(0-GS0049\F, Cramer, 3/29/96). ALISON ELGEE, Deputy
Commissioner, Dept. of Administration, came before committee
and provided the following review of the draft:
Secs. 1, 2, and 3 are from the original bill.
Sec. 4 was redrafted to include committee amendments to
place the Fairbanks area in the 5 percent geographic
differential and employees in Washington State at -20.
Sec. 4 (b) reflects amendment of the base salary amount
from $30.0 to $50.0.
Sec. 4(c) allows for premium pay situations for those
practicing law or medicine in rural districts 37
through 40.
Sec. 5 remains the same as in the earlier version.
Secs. 6, 7, 8, and 9 contain technical amendments to
reflect the renumbering of the geographic differential
section.
Sec. 10 contains transition provisions. It has been
amended to reflect a hold harmless period in year one,
a limited reduction of no more than 5 percent of salary
in year two, and full implementation in year three.
Ms. Elgee directed attention to a handout (copy on file in
the Senate Finance Committee master file for SB 152) and
explained that it sets forth figures under both the current
and new differential for a $60.0 employee in Fairbanks and
an employee at the same pay level in Nome.
Senator Randy Phillips questioned the repeal date of July 1,
1998, set forth in Sec. 12, suggesting that it should
reflect 1997. Ms. Elgee explained that 1997 would be
correct in the event of a one-year hold harmless and no
transition. July 1, 1998, allows for the second year of
transition per the proposed draft.
Discussion followed between Senator Rieger and Ms. Elgee
regarding operation of hold harmless provisions. In
response to a scenario presented by the Senator, Ms. Elgee
said the department would freeze the salary of an employee
who is overpaid based on the new differential. Freezing the
salary would not preclude award of merit increases or cost-
of-living adjustments. Those amounts would be calculated
against the revised salary. The employee is frozen at the
current salary, or transitioned down to the 5 percent, and
the bookkeeping entries are applied against what the new
salary would be. At the point that the adjusted salary
meets or exceeds the frozen salary, the employee would begin
to realize "some benefit from those increases."
Senator Sharp referenced Sec. 10(a)(2) and suggested that it
would appear to produce a savings, yet none is shown on the
fiscal note. Ms. Elgee agreed that there would be savings,
in FY 98, as employees turn over or relocate out of their
current geographic differential areas. It is impossible to
project what those savings might be. The fiscal note
represents application of this legislation upon full
implementation in FY 99.
Senator Sharp MOVED for adoption of the draft CSSB 152
(Finance) as a mark-up vehicle. No objection having been
raised, CSSB 152 (Finance) was ADOPTED.
Senator Zharoff voiced concern for election districts 5
through 9 and asked how the index and union differential
work. Ms. Elgee explained that the index reflects the
statutory schedule applied to non-covered employees. It has
been in place since 1972. In 1985 an extensive cost-of-
living study was conducted. As a result of that study, new
cost-of-living indices were adopted through the collective
bargaining process with unions. That union differential, in
place since 1986, applies to the bulk of unionized
employees.
Co-chairman Halford asked how many employees fall under the
statutory index. Ms. Elgee responded, "I think in the
executive branch we're talking about 1,200 people." Co-
chairman Halford voiced his understanding that approximately
15 percent of state employees would be directly impacted by
the proposed bill. The remainder would be negotiated into
the system. Ms. Elgee concurred. She added that not all
non-covered employees would be impacted because those in
Anchorage and Juneau will see no change since they do not
now receive a differential. The bill would affect
approximately 93 people in the Fairbanks area.
Senator Sharp MOVED for passage of CSSB 152 (Finance) with
individual recommendations and accompanying fiscal notes.
Senator Zharoff OBJECTED. He said that testimony indicates
arbitrary decisions were made in changing the index. He
reiterated concern for election districts 5 through 9,
saying that he was not comfortable with possible impact. He
expressed his belief that employees in those districts would
experience reductions because backup information indicates
the cost of living in those areas is much higher than what
is reflected in the proposed legislation. Co-chairman
Halford called for a show of hands on the motion for
passage. The motion CARRIED on a vote of 5 to 1, and CSSB
152 (Finance) was REPORTED OUT of committee with a zero
fiscal note from the Office of the Governor, covering all
departments. Co-chairmen Frank and Halford and Senators
Rieger and Sharp signed the committee report with a "do
pass" recommendation. Senators Donley and Phillips signed
"no recommendation." Senator Zharoff signed "do not pass."
SENATE BILL NO. 265
An Act relating to receipts of commercial fisheries
test fishing operations; and providing for an effective
date.
Co-chairman Halford directed that SB 265 be brought on for
discussion. Senator Zharoff explained that he introduced
the bill to enhance Dept. of Fish and Game ability to
successfully manage the changing nature of Alaska's complex
fisheries. It will form part of the management scheme to
utilize private sector vessels, gear, and expertise to
conduct test fisheries. Funds derived from these test
fisheries will accrue as designated program receipts. The
bill does not impact the legislature's ability to
appropriate, but it streamlines the process in conducting
test fisheries. A number of test fisheries have been
proposed, but the department has not, in the past, had the
flexibility nor the resources to follow through. Senator
Zharoff asked that department staff speak to the specifics
of the program.
END: SFC-96, #59, Side 2
BEGIN: SFC-96, #60, Side 1
KEVIN BROOKS, Director, Division of Administrative Services,
Dept. of Fish and Game, came before committee. He explained
that the bill would reclassify approximately $2.2 million in
program receipt authority that would not hereafter roll into
departmental caps.
As background information, Mr. Brooks noted that test
fishery receipts in the current year were part of OMB's
classification as designated program receipts because they
are based on a contractual relationship. Proceeds from the
sale of fish caught during a test fishery are used to pay
for the boat chartered to conduct the fishery. Test
fisheries have the potential to extend seasons or open new
seasons. Attempts to develop the sea urchin fishery in
Southeast was cited as an example. These efforts have been
hampered because the department cannot ask for additional
receipt authority "because it runs up against our caps and
shows as an increase to the general fund." OMB took the
first step in designating these program receipts. The
proposed bill would remove those funds from general fund
calculations. It does not cut dollars, it merely
reclassifies them. The test fishery receipt program has
been part of the department's management program since
before statehood.
Co-chairman Frank requested a comparison of the current flow
of funds versus that contemplated by the proposed bill. Mr.
Brooks explained that the department presently receives
authority, through the legislative process, to receive and
expend approximately $2.2 million in program receipts. That
is in the base budget. Under the proposed bill, receipts
would continue to flow through the general fund to be
requested by the department and appropriated by the
legislature. Moneys in excess of expenditures would flow as
unrestricted revenue to the general fund. The only change
is that the receipts would not roll into department general
fund totals. These moneys would show as other funds.
Senator Rieger referenced AS 37.05.146, which contains a
list of exclusions from what flows through the general fund.
It appears that these receipts are merely being added to the
list.
PAUL LARSON, Deputy Director for Fisheries, Division of
Commercial Fisheries, explained that test fishery funds have
been used to conduct research throughout the state. He
cited use in Prince William Sound to identify pollack
resources which had not previously been harvested because
the department had no information on abundance. Contract
with a local fisherman and sale of pollack caught during the
test generated sufficient funds to assess pollack resources
and conduct a new fishery in Prince William Sound.
Senator Sharp asked if a test fish fund presently exists.
Kevin Brooks explained that the proposed bill would not
establish a separate fund. Test fishery moneys do not
constitute designated funds in the same respect as the fish
and game fund. There is currently a test fishery account.
Discussion of potential for a sea urchin fishery followed.
DEAN PADDOCK, Executive Director, Bristol Bay Driftnetters'
Association, came before committee in support of the bill.
He concurred in comments that the legislation would
streamline department ability to manage.
Mr. Paddock advised that he instituted the first state test
fishery operation in 1960, based on a borrowed idea from the
sockeye commission on the Fraser River. Management
biologists need the information obtained through test
fishing. Commercial fishermen in Bristol Bay greatly depend
on test catches which precede openings. Management of
resources in this area would not be as precise without the
test fishery.
In response to comments concerning the impact of reduced
funding on fishery programs, Senator Sharp stressed that the
budget for the division of commercial fisheries increased in
FY 96 over what it was the previous year. Mr. Paddock
attested to increasing complexities associated with
effective management. Initial program budgets are not
keeping pace with overall demands. Senator Sharp reiterated
that while the division did not receive what it requested,
it received more than the previous year.
Comments followed by Mr. Paddock regarding smolt out-
migration on the Egegik River.
Senator Zharoff noted a request from Co-chairman Frank that
he be allowed a day in which to review the bill. Co-
chairman Halford voiced support for the legislation and
advised that it would be again taken up at the next bill
session.
SENATE BILL NO. 51
An Act relating to income of the permanent fund; and
providing for an effective date.
Co-chairman Halford directed that SB 51 be brought on for
discussion. Senator Rieger explained that the bill would
introduce the concept of real earnings into management of
the state's largest endowment account--the Alaska Permanent
Fund. Most endowments operate on a principle where earnings
considered usable are those that exceeded inflation in a
given year. These moneys are referred to as "real earnings"
in contrast to "nominal earnings" which reflect total cash
return to a fund compared to what is actually earned in
excess of inflation.
Given present dynamics and increasing numbers of proposals
for potential use of the permanent fund, the focus is on
total return, and inflation proofing is an afterthought.
Under a "real earnings" concept, inflation proofing becomes
the first priority. The remainder of the return is then
available for other use. That is how university endowments
and most other endowment funds operate. The first fiduciary
priority is to protect the principal. That would occur if
inflation proofing were automatic. The proposal contained
in the legislation is timely because the permanent fund has
enjoyed a banner "run up" over the past eighteen months.
"Real earnings" based on the new size of the fund are equal
to total return under the prior size of the fund. The time
is ideal to make the policy change without disruption in
what "people see when they look at what the return is and
what the legislature sees."
JIM KELLY, Director of Communications, Alaska Permanent Fund
Corporation, came before committee. He referenced
correspondence from the board of trustees indicating that
the board had discussed the legislation and did not intend
to take a position on the bill. The board is supportive of
any changes to existing law which would enhance board
ability to protect the principal of the permanent fund.
That portion of SB 51 which makes inflation proofing the
highest priority represents such a change.
Another portion of the bill, making a change in the dividend
formula by basing it on "real income" instead of net income,
falls outside the scope of the trustees' area of
responsibility.
The fiscal note for the bill is zero since changes
incorporated within the bill would have no operational
impact on the corporation.
Mr. Kelly explained that inflation proofing provisions were
enacted in 1982 at the request of the first board of
trustees. For the past fourteen years, each legislature has
taken a portion of annual income and appropriated it to
principal to protect the fund against inflation. Those
appropriations produced a cumulative total of $4.6 billion.
That action evidences the legislature's strong, long
lasting, and unwavering support for protection of principal.
The inflation rate for this year will be 2.82 percent, based
on the calendar year change and the consumer price index.
Since 1978, inflation has averaged 5.11 percent. The
expectation for the next five years is that it will average
"somewhere between 3.18 and 3.5 percent. As a percentage of
annual net income, inflation proofing has ranged from a high
of 55 percent (1991) to a low of 25 percent (1989). This
year, with high earnings of over $1 billion, inflation of
$400 million amounts to 24 percent. It is projected that
inflation proofing in future years will require
approximately 44 percent, on average. That is based on
assumptions that the fund will be able to earn a realized
return "on the order of 7.17 percent, and inflation will
average something like 3.18 percent."
For total principal of $15 billion, every one percent
increase in inflation requires approximately $150 million of
net income to be transferred to principal.
Mr. Kelly noted that the proposed legislation speaks to
"real income" and ensures that nothing but "real income"
would be distributed. With the exception of 1990 and 1991,
since conception of the fund, nothing but real income has
been distributed. The earnings goal of the corporation is
to beat inflation and produce real income at a rate of 3
percent. That 3 percent target is likely to be increased to
4 percent at the May 2, 1996, board meeting. The 3 percent
target was set when the permanent fund was largely into
fixed income investments. Over the years, the fund has
become more involved in equity investments which produce a
higher rate of return. Investment performance in the 1980s
and 1990s has been so good that it has beaten inflation by
5.5 percent in the nearly twenty years the fund has been in
existence.
Referencing a handout (copy on file in the committee master
file for SB 51), Mr. Kelly noted that the trustees are in
the process of setting asset allocations for the next year
and three-years hence. When this is accomplished,
assumptions regarding future earnings will likely change
based on capital market assumptions and new asset
allocations from the board. Based on the most likely choice
to be made by trustees, the total median return (cash plus
appreciation) over the next five years is 8.42 percent. If
the corporation is unable to gain appreciation because of
the market, the least that could be made would be a 4.68
percent median return.
The $1.7 billion in income for the current year reflects an
11 percent return. With inflation of 2.8 percent, there has
been over 8 percent of real return. Markets go up and down
as does inflation. In terms of income available for
distribution, if the tradition of protecting principal is
maintained (through the proposed bill or not) the state has
available the "real income" of the fund. Mr. Kelly
reiterated that the goal is 4 percent. On a $15 billion
fund that amounts to $600 million a year. As the fund
builds to $20 billion, there would be $800 billion of
distributable income.
Senator Rieger pointed to both the $1.7 billion return and
unrealized gains of $2.2 billion. He then directed
attention to a tabulation evidencing best and worst case
projections of future earnings and explained that it
incorporates the $2.2 billion in unrealized gains. One
scenario reflects total use of all funding in the earnings
reserve and the other reflects no use of those moneys. The
Senator noted that in one scenario, transfer to the general
fund (even after payment of a $1,000 dividend every year)
"hits a billion dollars by the end of the run, per year."
In the other case, the dividend grows to "just under
$2,000," but no cash is used in the general fund. That
results in $23 billion in the earnings reserve account.
Real earnings in the future are consistent with total return
in the past. The question of inflation proofing and the
potential threat to inflation proofing from those who might
propose use of earnings beyond what goes into dividends is
guarded against by passage of SB 51.
Discussion of past year gains and application of the
dividend formula followed between Co-chairman Halford and
Mr. Kelly. Senator Rieger stressed that the proposed bill
does nothing to corporate capital gains.
Co-chairman Halford voiced his understanding that the bill
would take inflation proofing out of corporate income before
the dividend formula is applied. Mr. Kelly concurred. The
Co-chairman next noted projections that inflation proofing
in the future would require 44 percent of future income and
asked what that would do to the formula for dividends. Mr.
Kelly responded that of the money made each year,
approximately 10.5 percent goes to dividends. For the
present year it would amount to a $40 million reduction.
Since the dividend is calculated on a five-year basis, that
amount would be compounded over time. Transitional
provisions in the bill would count four years of net income
and one year of real income for the first year. The second
year would count three years of net income and two years of
inflation proofing reduced net income. The $40 million
reduction would thus be $80 million the second year, $120
million the third, $160 the fourth, and $200 million by the
end of five years.
Co-chairman Halford raised concern regarding dividends and
explained that he asked permanent fund staff to provide
projections based on the status quo versus the proposed
bill. He then directed attention to tabulations (copies on
file in the master file) and noted that the bill would
reduce the constant value of the dividend to $606.00 in 2001
versus a real value of $1,002 in that same year. The
reduction would occur under the proposed bill because the
pool of funds for the dividend would be reduced by removal
of inflation proofing moneys before the dividend is
calculated. Mr. Kelly concurred. Co-chairman Halford
reiterated that the real value of the dividend is reduced by
$400 in "just five years." He acknowledged concern in some
sectors that the dividend would grow to "some huge amount."
He then pointed to the graph he distributed and noted that
"the dividend never gets to $1,200, in real dollars, before
2006 . . . ."
Senator Randy Phillips concurred in need for protection of
the permanent fund. He suggested that the fundamental issue
is protection of the fund versus protection of the dividend.
Co-chairman Halford noted that the permanent fund dividend
protects the principal in the eyes of the public.
Senator Sharp voiced his understanding that the proposed
bill would not require greater amounts for inflation
proofing than those presently provided. Senator Phillips
reiterated that the question should be how best to protect
the fund. Senator Rieger's proposal would inflation proof
first and pay dividends later. The question is, "Do we
protect the dividends, or do we protect the permanent fund
itself." Co-chairman Halford noted that the legislature
could change the priority for dividends versus inflation
proofing without changing the dividend formula. The
proposed bill applies the existing formula after inflation
proofing is removed. That has the effect of "reducing the
dividends pretty drastically over time." The Co-chairman
noted that the original debate on priority of dividends
versus inflation proofing was "almost a draw in advocates
and supporters of the permanent fund." The question of
priority is different from the taking of inflation proofing
before dividends are calculated. Co-chairman Halford
advised that he did not have as strong a feeling about
priorities are he does about the reallocation resulting from
the proposed bill.
Senator Phillips voiced agreement with protection of
permanent fund principal. The question is how that might
best be done.
END: SFC-96, #60, Side 1
BEGIN: SFC-96, #60, Side 2
Co-chairman Frank voiced support for use of "real income"
versus nominal income. He further spoke to the mitigating
effect of five-year averaging of dividends and inquired
regarding the impact of increasing the percentage from 21 to
25 percent. Senator Rieger noted that the increase would
represent a policy call for the legislature. He noted that
the corporation currently pays out 55 percent in dividends
rather than 50 percent as perceived by the public.
Senator Phillips asked that Mr. Kelly apply provisions of
the proposed bill to both past dividends and principal
amounts. Mr. Kelly advised that it would have had no effect
on the principal. He agreed to apply it to dividends from
inception in 1982 to the present time. Co-chairman Halford
reiterated that projections indicate that, over time, 44
percent of income would be required for inflation proofing.
If 44 percent is taken out of the formula before the
calculation is made, the dividend is reduced by that same 44
percent.
Senator Phillips again asked which of the two--inflation
proofing or dividends--would be the most effective in
protecting the principal of the fund. Co-chairman Halford
voiced his belief that both protect the fund. They are not
in conflict. The dividend and inflation proofing can be
paid. Over the history of the fund, there has continually
been a surplus. The legislature has deposited that surplus
into principal. That surplus could be used for other
activities.
FORMER REPRESENTATIVE ORAL FREEMAN next spoke via
teleconference from Ketchikan. He attested to the fact that
the permanent fund is working exactly as it was intended to.
There is no reason nor rationale for "tinkering or messing
with it when it's working great." The general public is
highly suspicious of changes in the fund.
Mr. Freeman referenced similar discussion of inflation
proofing in the late 1980s. At that time, he advised, he
posed questions regarding what would happen in a situation
where inflation equals earnings. If inflation proofing is
the first priority, all earnings would be used for that
purpose. The general public would soon question need for a
fund that produces no benefit for its people.
Mr. Freeman stressed that the dividend is the life insurance
policy for the permanent fund. When the fund loses the
confidence, backing, and support of the general public, the
permanent fund will disappear. He suggested that the
proposed bill is not worth the effort put into it.
In response to a hypothetical situation posed by Senator
Rieger, Mr. Freeman stressed that the second half of the
earnings of the permanent fund has taken care of inflation
since 1982 and has produced an excess of $2.2 billion. He
voiced his belief that the fund would be undamaged if
inflation proofing was short in a particular year since the
history of the fund indicates that would not happen year
after year. Co-chairman Halford remarked that moneys are
traditionally maintained in the earnings reserve account to
cover a shortfall in any particular year. Mr. Freeman
concurred.
Co-chairman Halford noted that Senator Rieger had prepared
an update based on nominal dollars using current income
numbers and requested that projections also be prepared
based on real dollars. Senator Zharoff asked if, at some
point, inflation proofing consumes all of the earnings.
Senator Rieger responded, "There's always a hypothetical
like that." He then explained that people have noted that
half is going to dividends and are wondering what is
happening with the other half. Proposals are offered with
increasing frequency concerning what to do with the other
half. Some of them will eventually garner enough support to
pass. When that happens, 100 percent of the nominal
earnings of the permanent fund will be spoken for. The
loser will be inflation proofing.
SB 51 reflects truth in advertising of what the permanent
fund is really achieving. At the present time, the fund
pays out half of the inflation component as a dividend.
That misleads the public into thinking that "this was only
half of the performance of the fund that is being paid."
The proposed change is timely because of fund performance.
The proposed bill could be effected without impacting "the
amount that is put on the table." Senator Zharoff noted
that the other half is not being spent. It "rolls right
into the corpus of the fund."
Co-chairman Halford voiced his belief that the public
understands that half the income is used for dividends while
the other half provides inflation proofing. He acknowledged
an advocacy that believes that some of the income should go
through government and "get spent through government." He
suggested that the combined effects of the proposed bill
would result in inflation proofing, a reduction in the
dividend formula, and a building account that would be used
to fund some governmental service. The public should
ultimately decide what services it wishes to buy. Senator
Sharp concurred. He suggested that inflation proofing first
and applying the dividend to half of the remainder would
cause the public to question the purpose for the remaining
half.
Co-chairman Halford suggested that the bill be held in
committee for updated projections. He said it could
possibly be heard again in the coming week.
ADJOURNMENT
The meeting was adjourned at approximately 11:00 a.m.
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