Legislature(2003 - 2004)

03/15/2004 09:02 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                              MINUTES                                                                                         
                     SENATE FINANCE COMMITTEE                                                                                 
                          March 15, 2004                                                                                      
                              9:02 AM                                                                                         
                                                                                                                                
                                                                                                                                
TAPES                                                                                                                       
                                                                                                                                
SFC-04 # 37,  Side A                                                                                                            
SFC 04 # 37,  Side B                                                                                                            
SFC 04 # 38,  Side A                                                                                                            
SFC 04 # 38,  Side B                                                                                                            
                                                                                                                              
CALL TO ORDER                                                                                                               
                                                                                                                                
Co-Chair Gary Wilken convened  the meeting at approximately 9:02 AM.                                                            
                                                                                                                                
PRESENT                                                                                                                     
                                                                                                                                
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice Chair                                                                                                   
Senator Fred Dyson                                                                                                              
Senator Ben  Stevens                                                                                                            
Senator Donny  Olson                                                                                                            
                                                                                                                                
Also Attending:  GOVERNOR FRANK MURKOWSKI; SENATOR  GENE THERRIAULT;                                                          
SENATOR RALPH  SEEKINS; SENATOR JOHN  COWDERY; SENATOR TOM  WAGONER;                                                            
SENATOR  BERT STEDMAN;  SENATOR  GARY  STEVENS; SENATOR  KIM  ELTON;                                                            
REPRESENTATIVE  MIKE HAWKER; REPRESENTATIVE  BRUCE WEYRAUCH;  CHERYL                                                            
FRASCA,  Director, Office  of Management  and  Budget; BILL  CORBUS,                                                            
Commissioner,  Department of Revenue;  DAN DICKENSON, Director,  Tax                                                            
Division, Department  of Revenue;  MIKE BURNS, Chair, Conference  of                                                            
Alaskans                                                                                                                        
                                                                                                                                
Attending   via  Teleconference:   There   were  no  teleconference                                                           
participants.                                                                                                                   
                                                                                                                                
SUMMARY INFORMATION                                                                                                         
                                                                                                                                
State's Fiscal Picture - Looking Forward                                                                                        
                                                                                                                                
The Committee  heard from  Governor Frank  Murkowski, the Office  of                                                            
Management and Budget,  and the Department of Revenue. No action was                                                            
taken.                                                                                                                          
                                                                                                                                
Conference of Alaskans                                                                                                          
                                                                                                                                
The Committee heard from the chairman of the Conference of                                                                      
Alaskans. No action was taken.                                                                                                  
                                                                                                                                
                                                                                                                                
             State's Fiscal Picture - Looking Forward                                                                           
                                                                                                                                
                                                                                                                                
Co-Chair Wilken stated  that the purpose of this meeting is to begin                                                            
consideration of the Resolutions  adopted by the 55-delegates of the                                                            
Conference of  Alaskans, which occurred at the University  of Alaska                                                            
campus in Fairbanks February 10 through 12, 2004.                                                                               
                                                                                                                                
GOVERNOR FRANK MURKOWSKI addressed the Committee.                                                                               
                                                                                                                                
     In  my  January  State  of the  State  message,  I  noted  that                                                            
     Alaskans  when  confronted   with  challenges  have  shown  the                                                            
     heartwarming  ability  and firm resolve  to balance  individual                                                            
     and shared  needs. And I think we would all agree  that we have                                                            
     that  challenge today,  and we obviously  need resolve.  Now we                                                            
     have  the recommendations  of the Conference  of Alaskans  that                                                            
     address   the  fiscal  gap  and  I  think  it's   time  for  us                                                            
     collectively to act.  Your responsiveness, to date, has been, I                                                            
     think, most noteworthy  and I want to thank you for agreeing to                                                            
     take  up the  recommendations  of the Conference  of  Alaskans,                                                            
     beginning  today, and work to resolve the issues  by the end of                                                            
     the  month. And I  am pleased  that a special  session  was not                                                            
     necessary. We all  agree that the State needs a resolution this                                                            
     Session to address  the long-term fiscal gap. It is a matter in                                                            
     which  we all share a responsibility  not to pass on  to future                                                            
     Legislators,  or future governors, the fiscal  gap, which I was                                                            
     confronted with when I came into office in 2002.                                                                           
                                                                                                                                
     The  previous budget  showed a  deficit of  some $800  million.                                                            
     Now,  the fiscal solution  that we need  must cover the  period                                                            
     between  now and the time when  revenue from gas pipelines  and                                                            
     other   natural  resource  development   starts  to   fill  our                                                            
     treasury. In short,  what we really need is a fiscal bridge, if                                                            
     you  will. With  regard to  the distance,  which the  financial                                                            
     bride would  have to span, I can report that  we are continuing                                                            
     to make significant  progress on the gas-line, which is a major                                                            
     pier, if you will,  on the side of the shore. I have of course,                                                            
     the continued  interest in the petroleum reserve  and I want to                                                            
     highlight a little bit on the gas line.                                                                                    
                                                                                                                                
     We,  as you  know, have  met and  are continuing  to meet  with                                                            
     producers  who have lease  rights to  the gas and TransCanada,                                                             
     which  has pipeline rights  in Canada  and proposes to  build a                                                            
     1,000 mile pipeline  from the Alaska-Yukon border into Alberta.                                                            
     MidAmerica  Company is working on a plan to construct  the line                                                            
     in Alaska  from Prudhoe  Bay to the  Canadian border.  Now this                                                            
     Administration  intends  to have  a firm commitment  if at  all                                                            
     possible, and to get  the line committed before the end of this                                                            
     year. These proposals will be referred to you for approval.                                                                
                                                                                                                                
     Collectively  of  course,  they  will  help  solve  our  budget                                                            
     shortfall.  A good deal of deliberation will  focus on the risk                                                            
     that  the State may  have to  take as we  evaluate the  various                                                            
     proposals.  A prompt  fiscal solution  is necessary so  that we                                                            
     can avoid the harms  which would otherwise come to our citizens                                                            
     from a loss of public  services between now and when we receive                                                            
     our revenues  from the line and  other resource development.  I                                                            
     think  we would all agree that  we have done pretty  well in FY                                                            
     04 due to  the high price of oil and by keeping  our commitment                                                            
     to  follow  our plan  to  keep government  spending  below  the                                                            
     previous  year. And by limiting the CBR draw  to less than $400                                                            
     million.  Again, of course, we've  been blessed by an  increase                                                            
     in oil prices.  But we cannot bet our children's  future, their                                                            
     education,  our  families,  our public  safety,  or our  social                                                            
     obligations  on the  continuing high  price of  oil. It  is our                                                            
     obligation to act  now. Nor can we continue to count on the CBR                                                            
     to bail Alaska  out each and every year. One  can only suggest,                                                            
     what might  happen were the price of oil to drop  significantly                                                            
     over the next couple of years.                                                                                             
                                                                                                                                
     If it  dropped, this would result  in a major draw on  the CBR.                                                            
     And  as you  know,  I will  not allow  the  CBR to  go below  a                                                            
     billion dollars.  This minimum balance is absolutely  necessary                                                            
     to  provide a  cushion against  dramatic  disruptions in  State                                                            
     revenues. The CBR is not a permanent crutch for the State.                                                                 
                                                                                                                                
     Now on the revenue  side, we must look for some new revenue. On                                                            
     February  second we provided  the Senate and House with  a list                                                            
     with  $212 million in  potential and new  revenues of  which we                                                            
     need approximately  $150 million  for FY 05. Among other  items                                                            
     we've  been  discussing  a  one-dollar  pack  increase  in  the                                                            
     tobacco tax, which  would raise some $36 million. You know I've                                                            
     have  been traveling around  the State  a great deal,  and been                                                            
     meeting  with some of  the groups that  are concerned  with the                                                            
     social welfare  of those less fortunate in our  State and spent                                                            
     a little  time with  those service folks.  Spent a little  time                                                            
     with  those  who are  committed  with fetal  alcohol  syndrome,                                                            
     which is prevalent  in our State, and I cannot help but reflect                                                            
     on  the scourge  of  alcohol  in Alaska.  The cost  of  alcohol                                                            
     treatment in our State  is $453 million dollars, more than half                                                            
     of  what we  spend in  this State  on education.  Education  is                                                            
     approximately  $722 million in  the general fund or  a total of                                                            
     $755 million.  But we spend $453 million on alcohol  treatment.                                                            
     State revenue  raised from alcohol tax is only  $25 million. We                                                            
     average  the  highest  alcohol  consumption  in the  nation  an                                                            
     average of 513 drinks  per year for every man, woman and child.                                                            
     A  lot of people  don't  drink at all.  I was  looking at  some                                                            
     statistics  the other day. Over 126 Alaska births  per year are                                                            
     affected  by pre-natal  exposure to  alcohol, representing  the                                                            
     highest  documented rate  in the United  States. I think  these                                                            
     statistics  speak for  themselves. I think  we have to  do more                                                            
     than think  about it. It begs for a solution.  We must continue                                                            
     to  increase  State government  efficiency  and  reduce  waste.                                                            
     While  we've cut  spending by  $245 million,  our Missions  and                                                            
     Measures  process  continues  to  allow  us to  identify  lower                                                            
     priorities and less  effective programs that can be eliminated.                                                            
     We  have  nearly completed  our  review  of the  various  State                                                            
     Departments.  It is  my understanding  that  this is the  first                                                            
     time this has been done in some 27-years.                                                                                  
                                                                                                                                
     Now, going back to  the Conference of Alaskans in Fairbanks, we                                                            
     received  some  good direction  from  that group.  Among  their                                                            
     recommendations  were:  passed  a POMV,  or Percent  of  Market                                                            
     Value,  which would limit to  five-percent the amount  of money                                                            
     which  the   Legislature  can  use  from  the  Permanent   Fund                                                            
     earnings;  second, maintain a prudent level in  the CBR; third,                                                            
     protect  the Dividend; fourth,  use some of the Permanent  Fund                                                            
     earnings  to maintain  essential  public services;  and  lastly                                                            
     consider broad-based  taxation. Now, I do not intent to propose                                                            
     a  specific package  for  the Legislature  or  for the  Finance                                                            
     Committee  today. You will want to consider the  results of the                                                            
     hearings  that you have undertaken through the  balance of this                                                            
     week,  and I  am going  to  be working  with  you and  watching                                                            
     closely  as you have  witnesses come in  from around Alaska  to                                                            
     indicate  their attitudes towards our budget  shortfall. As you                                                            
     put  your  fiscal package  together,  I  would suggest  you  be                                                            
     guided  by the  following criteria,  which may  help you.  One,                                                            
     will  it raise  the revenue  needed  to meet  the State  fiscal                                                            
     needs  during the budgeting  period.  Secondly, while  it might                                                            
     fall short  of any individuals  or group's maximum desires,  is                                                            
     it better  than the  adverse impacts of  the loss of  essential                                                            
     public  services if  there is  no solution.  Thirdly, would  it                                                            
     have bipartisan  support both  in the Legislature and  with the                                                            
     public.  Fourth,  is  it  consistent  with the  spirit  of  the                                                            
     resolutions  adopted  by  the  Conference  of Alaskans.  Is  it                                                            
     basically  fair to all  Alaskans, will  it unreasonably  impact                                                            
     Alaskans  current reasonable  expectations for the amount  of s                                                            
     Permanent  Fund  Dividend.  Will  the Permanent  Fund  and  the                                                            
     dividend  be protected?  How will it  affect Alaska's  economy,                                                            
     with  special emphasis  on the Rural part  of our State.  Is it                                                            
     good for Alaska, not  only for today but in the future? Does it                                                            
     provide Alaskans  the opportunity to have their  say to vote on                                                            
     the  matter? I  know that  members  of the  Legislature have  a                                                            
     number  of proposals  and  ideas of their  own  on how best  to                                                            
     proceed and I respect  that. And I look forward to working with                                                            
     you  in reviewing  the package  that  you develop  and build  a                                                            
     consensus,  which meets, hopefully,  these criteria.  Each step                                                            
     in this  year's long  process to secure  Alaska's future  is of                                                            
     critical importance,  and that first step was the Conference of                                                            
     Alaskans  last  month. The  55 men  and women  from across  the                                                            
     State  did well.  Now it's our  turn, the  Legislature and  the                                                            
     Governor's  Office, to consider  their recommendations  and put                                                            
     our State on a sound  fiscal footing. As you may have observed,                                                            
     I have  been reading  a little philosophy  from Yogi Berra,  of                                                            
     late,  and   Yogi  Berra  explained  that,  "tragedy   lies  in                                                            
     paralysis, not in choice." Doing nothing is not a solution.                                                                
                                                                                                                                
Governor  Murkowski concluded  his  comments and  noted that  Cheryl                                                            
Frasca  would  further  explain  the reasons  that  the  State  must                                                            
resolve its fiscal dilemma this year.                                                                                           
                                                                                                                                
Co-Chair  Wilken commented  that this is a  special occasion  as the                                                            
Governor's  attendance at  a Senate Committee  meeting is rare.  His                                                            
attendance underscores the importance of resolving this issue.                                                                  
                                                                                                                                
Co-Chair Wilken  reviewed the week's agenda. Today's  schedule would                                                            
include a  presentation from  the Office  of Management and  Budget,                                                            
titled "Looking Forward;"  testimony from the Department of Revenue;                                                            
and a report  on the Conference  of Alaskans  from its Chairperson,                                                             
Mike Burns. Additionally,  Senator Kim Elton, who  also attended the                                                            
Conference,  would share,  as a  Conference observer,  some  remarks                                                            
from  the Senate's  standpoint.  The  weeklong  schedule  should  be                                                            
viewed as  a guideline  in that it  would be  flexible and could  be                                                            
altered to allow discussions  to be extended as necessary. While the                                                            
focus of the week  would be to discuss the five resolutions  adopted                                                            
by the Conference of Alaskans,  time would be provided for Senators'                                                            
comments and concepts  as well as for public testimony.  He detailed                                                            
the protocol  for visiting  Senators' and  others' participation  in                                                            
the discussions.                                                                                                                
                                                                                                                                
CHERYL FRASCA, Director,  Office of Management and Budget, Office of                                                            
the Governor,  informed that the goal of today's presentation  is to                                                            
provide  several  fiscal  scenarios,  which  might  occur  were  the                                                            
present  fiscal  situation  to  continue  without  relief  from  the                                                            
development  of  a new  fiscal  structure  that would  provide  more                                                            
"certainty" to  the State. It is important to realize  "that this is                                                            
more than  a math problem",  it is a problem  in regards to  whether                                                            
Alaskans could  count on the State to meet its education  and public                                                            
safety responsibilities  as well as being able to provide dependable                                                            
assistance to those most  in need. In addition, the establishment of                                                            
an  adequate   financial  structure   would  provide  the   economic                                                            
stability  needed   to  allow  private  industry  "to   invest  with                                                            
confidence"  and  provide  jobs.  While  oil  prices  are  currently                                                            
elevated,  four month  earlier, when  the State's  budget was  being                                                            
developed,  "it was a dramatically  different revenue picture."  The                                                            
fact that  revenues were  approximately 25-percent  lower than  what                                                            
was  required  to  balance  the  budget,  severely  impacted  budget                                                            
decisions. While  the Administration understands that  it is part of                                                            
their "job to  cope with this uncertainty," the ultimate  unfairness                                                            
is  to  those  Alaskans  who  count  on  the  State  to  meet  these                                                            
traditional responsibilities  and to our State employees who deliver                                                            
valued services  everyday. "It's time  to get off the rollercoaster                                                             
of looking  to the Spring  forecast and either  breathing a  sigh of                                                            
relief or going to the  end of session scurrying around to find one-                                                            
time fund  sources to cover  spending and  to further draw  down the                                                            
balance in  the CBR." As  the Governor stated,  this problem  should                                                            
not  be left  to future  Legislatures  or Alaskans.  Therefore,  the                                                            
purpose of  today's presentation would  be to provide the  framework                                                            
of how to address this situation.                                                                                               
                                                                                                                                
BILL CORBUS, Commissioner,  Department of Revenue, utilized a power-                                                            
point presentation  to convey three aspects of State  revenues: one,                                                            
"why the State  hasn't fallen off  the cliff yet, financially;  two,                                                            
the outlook of oil production; and three the revenue outlook."                                                                  
                                                                                                                                
Commissioner  Corbus commented  that the State  "has not fallen  off                                                            
the cliff"  due to  higher than  expected oil  prices combined  with                                                            
spending   reductions   that  have   extended   the   life  of   the                                                            
Constitutional  Budget Reserve Fund  (CBR) beyond the December  2005                                                            
depletion date  identified in the  Department's Fall 2000  Forecast.                                                            
As a result, the Fall 2003  Forecast projects that the CBR would not                                                            
be depleted until May 2007.                                                                                                     
                                                                                                                                
Commissioner  Corbus  noted that  oil production  projections  "have                                                            
been quite accurate,"  reflecting a slight falloff.  Referencing the                                                            
power point slide titled  "Possible Increases to ANS Production," He                                                            
noted that  "known identified oil  reserves" in FY 05 are  projected                                                            
to be 996,000  barrels per day with a gradual decline  to 941,000 in                                                            
the year 2012.  That year, approximately 25-percent  of oil produced                                                            
would be  gleamed from reserves  that have  been identified,  but of                                                            
which no development  work has yet to begin. The graph  also depicts                                                            
other new  oil sources that  might occur  in the National  Petroleum                                                            
Reserve-Alaska  (NPRA), the Arctic National Wildlife  Refuge (ANWR),                                                            
Bristol Bay,  Beaufort Sea,  and Central  Satellites of the  Prudhoe                                                            
Bay field.                                                                                                                      
                                                                                                                                
Commissioner  Corbus  referred  to the  chart titled  "General  Fund                                                            
Unrestricted Revenue" which  identifies the oil revenue projected in                                                            
the  Fall 2003  forecast.  Non-oil Revenue  and  potential  revenues                                                            
based on the  futures market, as projected  by the financial  market                                                            
today, are also  depicted on the chart. Beginning  in the year 2006,                                                            
the  price is  projected  to be  $22 per  barrel.  This might  raise                                                            
questions,  being  that  the most  recent  price  has been  $35  per                                                            
barrel. However,  this is  the projection  going forward from  2006,                                                            
as, based on historical  records, the average price between 1982 and                                                            
2003 was $20.50 per barrel.                                                                                                     
                                                                                                                                
Commissioner  Corbus stated  that the  State has  been fortunate  in                                                            
experiencing four  years in which the price of oil  exceeded revenue                                                            
expectations.  Yet, the State  was still  required to withdraw  more                                                            
than  one billion  dollars from  the CBR.  Other  revenues would  be                                                            
necessary   to  compliment  oil  revenues.   The  natural   resource                                                            
development  projects being furthered  by the Governor would  not be                                                            
expected  to generate  revenue  until the  years 2011  and 2012.  In                                                            
addition, a "'Pendulum  Swing' might occur in which commodity prices                                                            
may decline  before  new resource  revenues  appear …  It's time  to                                                            
prepare  for lower  oil prices  now." In  the short  run, the  State                                                            
could not support  its financial obligations  on oil revenue.  "This                                                            
way out is not available to us."                                                                                                
                                                                                                                                
Co-Chair Wilken  asked whether the Commissioner had  received a copy                                                            
of  a chart  [copy  not  provided]  developed  by  the  Division  of                                                            
Legislative Finance that  depicts the price of oil on an axis. Being                                                            
that  the Commissioner   was unfamiliar  with  the  chart,  Co-Chair                                                            
Wilken  stated   that  it  would   be  provided.  It  reflects   the                                                            
sensitivity of the State's budget as the price of oil alters.                                                                   
                                                                                                                                
Senator Bunde understood  that the addition of an income tax, alone,                                                            
could  not  balance the  budget  shortfall,  "without  some  serious                                                            
negative impacts to our economy."                                                                                               
                                                                                                                                
Commissioner  Corbus agreed that "an  income tax would have  certain                                                            
adverse impacts" on the State's economy.                                                                                        
                                                                                                                                
Senator Bunde stated that  an income tax would be required to remove                                                            
$500 million from  the economy in order to balance  the budget. This                                                            
would have "a serious negative impact on the economy."                                                                          
                                                                                                                                
Commissioner Corbus agreed.                                                                                                     
                                                                                                                                
Senator  Dyson asked  whether it would  be prudent  to consider  the                                                            
impacts that might  occur were a State income tax  or other user tax                                                            
implemented,  as there  is  a sensitivity  tolerance  to taxes.  For                                                            
instance,  taxing  cruise  ship passengers  at  one level  might  be                                                            
tolerated  but at another  level might tend  to drive passengers  or                                                            
ships elsewhere.                                                                                                                
                                                                                                                                
Commissioner  Corbus responded that  the Governor has proposed  five                                                            
or six  revenue generating  options that are  based on some  type of                                                            
user fee  or tax.  These options  could be  enacted without  adverse                                                            
impact on the economy.                                                                                                          
                                                                                                                                
Senator Dyson understood  therefore that were a report developed, it                                                            
would depict zero or negative impacts.                                                                                          
                                                                                                                                
Commissioner  Corbus  responded  that while  he  is unsure  in  that                                                            
regard, the State would fare better were the taxes implemented.                                                                 
                                                                                                                                
Ms. Frasca  pointed  out that  were the  tobacco  tax increased,  it                                                            
might  change  behavior  in  addition  to  producing   revenue.  The                                                            
Department  of  Revenue's  Tax  Division  could  more appropriately                                                             
address discussion regarding any tax impact.                                                                                    
                                                                                                                                
Senator Dyson  reiterated that national historical  patterns reflect                                                            
that when  taxes are  raised, the  tendency is  to attempt to  avoid                                                            
paying  the tax. He  asked whether  information  is available  which                                                            
would estimate  the length of time  required before the State  would                                                            
benefit  from any behavioral  changes associated  with an  increased                                                            
alcohol or tobacco tax.                                                                                                         
                                                                                                                                
Ms Frasca responded  that this information  might be available  from                                                            
the Department of Health and Social Services.                                                                                   
                                                                                                                                
Senator  Olson  asked regarding  the  types  of impacts  that  might                                                            
result from increased taxes.                                                                                                    
                                                                                                                                
Commissioner Corbus responded  that while he could not speak to what                                                            
tax level would be viewed  as intolerable, one negative impact would                                                            
be that a tax would remove money from people's pockets.                                                                         
                                                                                                                                
Senator  Olson   asked  whether  an   example  could  be   provided;                                                            
specifically in regards to adverse affects on constituents.                                                                     
                                                                                                                                
Commissioner  Corbus  could  not  provide  a  specific  example.  He                                                            
concluded his presentation.                                                                                                     
                                                                                                                                
Senator Bunde shared that  states whose primary revenue source is an                                                            
income tax,  claim that when an economic  downturn occurs,  they are                                                            
more adversely  affected,  as this revenue  source is more  volatile                                                            
than a sales tax.                                                                                                               
                                                                                                                                
Co-Chair  Wilken asked  that debating  the benefits  of a sales  tax                                                            
verses an income  tax be refrained,  as the purpose of this  hearing                                                            
is to focus on the presentations.                                                                                               
                                                                                                                                
DAN  DICKENSON,  Director,  Tax  Division,  Department  of  Revenue,                                                            
verified that an income  tax is more volatile that a sales tax. When                                                            
plotted against income  from a severance tax, the two taxes would be                                                            
reflected as  flat lines that "wiggle  while the severance  tax goes                                                            
up and down." This is the scenario that Alaska is familiar with.                                                                
                                                                                                                                
Ms. Frasca  noted that Commissioner  Corbus' presentation  reflected                                                            
the  revenue   picture  of   the  State   whereas  her  power-point                                                             
presentation,  titled "The  Fiscal Gap  & State  Spending" [copy  on                                                            
file] would  focus on the State's  spending situation, which  is the                                                            
other side of the equation.                                                                                                     
                                                                                                                                
Ms. Frasca noted that the  graph titled, "The Gap: Looking Forward,"                                                            
depicts  actual State  spending  and  revenue comparisons  for  1984                                                            
through 2004,  and projections  for 2005 through  2010. The  CBR was                                                            
established in  1991, and "coincidently" the chart  depicts a number                                                            
of times in which there  existed a gap between spending and revenue.                                                            
This underscores  the extent to which the State is  dependent on the                                                            
CBR. The State  did not require money from the CBR  in 1997 and 2001                                                            
even  though  a  $400  million  draw  was  projected  for  1997  and                                                            
approximately  a $250  million  draw was  projected  for 2001.  This                                                            
illustrates   the  volatility  and   unpredictability  of   budgets.                                                            
However,  a billion dollar  draw was required  in subsequent  years.                                                            
Attempting   to  develop  a  balanced   budget  is  difficult.   The                                                            
assumptions  going forward  are based  on a flat  spending level  as                                                            
determined  by the Fall 2003  forecast utilizing  $22 per barrel  as                                                            
the revenue base. "A fiscal gap continues to exist."                                                                            
                                                                                                                                
Ms.  Frasca  stated that  the  chart  titled,  "CBR has  Propped  Up                                                            
Spending" "illustrates the structural nature of the gap."                                                                       
                                                                                                                                
Ms. Frasca  stated that the  chart titled,  "Impact on CBR  Balance"                                                            
which is  based on  the Governor's  proposed FY  05 budget,  depicts                                                            
July 2006 as being the  date when the CBR balance would lower to one                                                            
billion  dollars. However,  were an  increase  in education  funding                                                            
factored in, as  is being discussed, the CBR would  hit that mark in                                                            
April 2006.                                                                                                                     
                                                                                                                                
Ms. Frasca noted that the  chart titled, "FY2005 Governor's Proposed                                                            
Operating Budget" is a  pie chart that depicts the services provided                                                            
to Alaskans: K-12  Budget is the largest at 35-percent  of the FY 05                                                            
budget;  the Department  of  Health and  Social Services  would  24-                                                            
percent;  the  University  of  Alaska  would   be ten-percent;   the                                                            
Department  of Transportation and  Public Facilities would  be four-                                                            
percent; and  all other departments  including the Legislature,  the                                                            
Governor's Office, the  Department of Administration, the Department                                                            
of  Law,   the  Department   of  Environmental   Conservation,   the                                                            
Department  of Public Safety, the  Court system, and the  Department                                                            
of Natural  Resources would  total 16-percent  or $325 million.  The                                                            
budget  for these  other departments  could  be eliminated  and  the                                                            
State would still experience a budget shortfall.                                                                                
                                                                                                                                
                                                                                                                                
SFC 04 # 37, Side B 09:49 AM                                                                                                    
                                                                                                                                
                                                                                                                                
Ms. Frasca  stated that the chart  titled, "K-12 Funding  * FY 94-05                                                            
Gov. Amended"  depicts fund sources for K-12 education  which is the                                                            
largest State  funded operating  budget program.  To keep pace  with                                                            
inflation,  the  funding  for  K-12  should   reflect  a  17-percent                                                            
increase between  1994 and 2004; however the chart  depicts that the                                                            
general fund  funding has  increased 16-percent  which is below  the                                                            
rate  of  inflation.  With  all  funds  included,  the  program  has                                                            
increased approximately 12-percent.                                                                                             
                                                                                                                                
Ms. Frasca declared that  challenges in developing a budget based on                                                            
the revenue  forecast would include  such things as determining  how                                                            
to control spending  in the larger component or whether  to decrease                                                            
funding in the smaller budgets.                                                                                                 
                                                                                                                                
Ms. Frasca continued  that the Chart for the "University  Funding FY                                                            
94-05 Gov.  Amended" depicts  that over time  the GF funding  of the                                                            
University  has increased from 1994  to 2005 by 24 percent.  Its All                                                            
Funds, which  includes such things  as tuition and federal  funding,                                                            
has increased 68 percent.                                                                                                       
                                                                                                                                
Ms.  Frasca  noted  that  the  proposed  FY 05  GF  budget  for  the                                                            
Department  of Public  Safety is approximately  the  same as  it had                                                            
been  in FY  94.  Other  Funds have  increased  21-percent  in  that                                                            
timeframe.  Any further GF funding  reduction in this program  would                                                            
be detrimental.                                                                                                                 
                                                                                                                                
Ms.  Frasca informed  that  the Department  of  Corrections'  prison                                                            
facilities are  at capacity. The "Corrections Funding  FY 94-05 Gov.                                                            
Amended" proposed budget  is 31 percent higher than the FY 94 budget                                                            
and all  other funds have  increased 53-percent  in that  timeframe.                                                            
This is "a population driven" program.                                                                                          
                                                                                                                                
Ms. Frasca pointed  out that as depicted on the "DOT  M&O Funding FY                                                            
94-05  Gov. Amended"  chart,  FY 05 budget  would  be seven  percent                                                            
higher  than the  FY 94  budget,  and All  Funds have  increased  21                                                            
percent  in that time  period. While  not many  new roads have  been                                                            
constructed,  lane miles have been  added. This budget has  not kept                                                            
in line with inflation.                                                                                                         
                                                                                                                                
Ms.  Frasca  characterized  the  "Medicaid  Funding  FY  94-05  Gov.                                                            
Amended" FY  05 budget as one of the  most interesting as  there has                                                            
been a 95 percent GF increase and an All Funds increase of 461-                                                                 
percent since FY 94. The  FY 05 Medicaid services budget would total                                                            
approximately one billion dollars.                                                                                              
                                                                                                                                
Ms. Frasca  noted that the chart titled  "FY 05 Spending:  $5,058.00                                                            
Per Capita*" depicts the  Governor's proposed FY 05 budget in a per-                                                            
program per-capita  basis.  She noted that  at one time the  State's                                                            
budget was  presented in  a by program rather  than a by  department                                                            
basis.  The highest  per capita budget  general  fund amount  is the                                                            
Education  program  at $1,116  per resident,  followed  by $738  per                                                            
capita general  funds for  the Health/Human  Services program.  Were                                                            
the alternate  "B" budget  that was discussed  at the Conference  of                                                            
Alaskans implemented, it  would lower the total per capita amount by                                                            
$483. A reduction of this amount would be challenging.                                                                          
                                                                                                                                
Senator Bunde,  noting that the FY 05 budget would  amount to $5,058                                                            
per capita, shared  the understanding that the State  expends $6,000                                                            
in services  per capita  for each  new resident,  but only  receives                                                            
$5,000  in income per  capita. This  is referred  to as the  "Alaska                                                            
Disconnect."                                                                                                                    
                                                                                                                                
Ms. Frasca responded that  she was unfamiliar with this equation but                                                            
would further analyze the per capita component.                                                                                 
                                                                                                                                
Senator  Bunde asked  for confirmation  that the  per capita  amount                                                            
depicted in the chart would double were federal funds included.                                                                 
                                                                                                                                
Ms. Frasca affirmed.                                                                                                            
                                                                                                                                
Senator  Dyson, commenting  that charts are  helpful, asked  whether                                                            
prior years' funding could  be depicted in the per capita format, as                                                            
he understood that while  Alaska still spends, per capita, more than                                                            
other state, the amount has decreased over time.                                                                                
                                                                                                                                
Ms. Frasca  affirmed that  Alaska's per capita  amount is  different                                                            
from other  states, particularly  were the  Permanent Fund  Dividend                                                            
and inflation proofing included.                                                                                                
                                                                                                                                
Senator  Bunde  asked  for  confirmation  that  the  Permanent  Fund                                                            
Dividend is included in the $5,058 per capita amount.                                                                           
                                                                                                                                
Senator Bunde  commented that  the largest  component of the  $5,058                                                            
total  per  capita  amount  is  the  Permanent   Fund  Dividend  and                                                            
inflation proofing.                                                                                                             
                                                                                                                                
Ms. Frasca affirmed that to be true.                                                                                            
                                                                                                                                
Senator  Bunde stated  that were  the POMV methodology  enacted,  it                                                            
would be  interesting to  see whether the  Permanent Fund  component                                                            
would continue to be the largest per capita expenditure.                                                                        
                                                                                                                                
Senator  B. Stevens suggested  that royalty  deposits be  calculated                                                            
into the Permanent  Fund earnings and inflation-proofing  component,                                                            
as "they are an expenditure."                                                                                                   
                                                                                                                                
Ms. Frasca  replied  that royalty  deposits were  excluded from  the                                                            
chart, as the  focus of it was to  reflect monies that are  included                                                            
in the  budget process.  Royalty deposits  are dedicated funds  that                                                            
are deposited  directly into the Permanent  Fund, rather  than being                                                            
an appropriation.                                                                                                               
                                                                                                                                
Senator B. Stevens countered that it is still an expenditure.                                                                   
                                                                                                                                
Co-Chair  Wilken stated that  while it might  not be an appropriate                                                             
item to  include in the  chart, knowing the  royalty deposit  amount                                                            
would be a helpful tool.                                                                                                        
                                                                                                                                
Ms. Frasca  continued that department  processes are being  reviewed                                                            
to determine the  best way to conduct business "so  that we can save                                                            
some  dollars  internally."   The  goal  is to  minimize   budgetary                                                            
reduction  impacts  on direct  services to  residents.  Some of  the                                                            
internal measures  in this regard include "the consolidation  of the                                                            
Human Resources  function in the Department of Administration  which                                                            
will  save  approximately  $600,000  in FY  05;"  implementation  of                                                            
Information  Technology (IT) standards  and coordination  by sharing                                                            
information and services  within the departments; eliminating middle                                                            
management;  reviewing  the usage  and coordination  of the  State's                                                            
equipment  fleet; planning  and  control of  commodities'  purchases                                                            
such as  office supplies;  better  management of  overtime with  the                                                            
goal of reducing  it from 16 or 18-percent  to four percent;  better                                                            
management  of travel  and  reducing  travel expenses  by  increased                                                            
utilization  of such things  as teleconferencing;  renegotiation  of                                                            
leases to lower  expenses; and furthering departments'  missions and                                                            
measures   in  order  to   increase  efficiency   and  provide   the                                                            
appropriate service.                                                                                                            
                                                                                                                                
Ms. Frasca stated  that looking forward, the chart  titled "Building                                                            
a Fiscal  Bridge to New  Resource Revenues,  Scenario: No Use  of PF                                                            
Earning  to Support Essential  Services" depicts  two future  fiscal                                                            
scenarios: one based on  the Governor's FY 05 Proposed flat-spending                                                            
budget;  and  the second  being  that  budget  plus an  increase  in                                                            
education   spending   and  a   one-point-four   percent   inflation                                                            
adjustment.  Even  were the  flat spending  scenario  adopted  there                                                            
would be a $4.3  billion gap in spending verses revenue,  absent new                                                            
revenue sources.  There would be approximately  $1.6 billion  in the                                                            
CBR.                                                                                                                            
                                                                                                                                
Ms. Frasca  stated  that the spending/revenue  gap  would amount  to                                                            
$6.5 billion  even were the spending  limit that is currently  being                                                            
considered  to accompany  the increased  education  funding and  the                                                            
inflation adjustment proposed in scenario two.                                                                                  
                                                                                                                                
Ms. Frasca stated  that the final chart in the presentation  titled,                                                            
"Building a  Fiscal Bridge to New  Resource Revenues, Scenario:  50%                                                            
PF Earnings  to Dividends; 50% to  Fund Essential Services"  depicts                                                            
the same  revenue forecast  for the  two budget  scenarios with  the                                                            
exception  being that  50-percent  of the Permanent  Fund  earnings,                                                            
after  Permanent Fund  Dividends were  paid, would  be allocated  to                                                            
support  the  budget.  This  scenario  would  serve  to  reduce  the                                                            
spending  gap.  Under  this  scenario,   the  budget  providing  for                                                            
increased  education  spending  and an  inflation  adjustment  would                                                            
experience a $1.9 billion rather than a $6.5 billion gap.                                                                       
                                                                                                                                
Senator Bunde  surmised from this  chart that new resource  revenues                                                            
would  be online  in approximately  2011  and would,  at that  time,                                                            
close the fiscal gap.                                                                                                           
                                                                                                                                
Ms. Frasca  concurred  that, under  a flat spending  scenario,  this                                                            
would be correct.                                                                                                               
                                                                                                                                
Co-Chair Wilken  asked whether all  states are experiencing  "sharp"                                                            
Medicaid expense increases.                                                                                                     
                                                                                                                                
Ms. Frasca stated that  a national survey has been conducted in this                                                            
regard. That information would be provided.                                                                                     
                                                                                                                                
Co-Chair  Wilken   expressed  that  the  chart  depicting   Medicaid                                                            
expenses is "amazing."                                                                                                          
                                                                                                                                
Senator Olson understood  that, in addition to the 7,000 vehicles in                                                            
the State fleet, the Department  of Public Safety would be, with the                                                            
assistance of federal funds,  purchasing helicopters. He inquired as                                                            
to the maintenance plans for these craft.                                                                                       
                                                                                                                                
Ms.   Frasca   voiced   being  unaware   of   this   purchase.   The                                                            
Administration  is working with the Department of  Fish and Game and                                                            
Department of  Public Safety to determine the most  efficient use of                                                            
vehicles  with cooperation  and  coordination  of vehicles  being  a                                                            
consideration.  Consideration   is also  being  given  to  disposing                                                            
vehicles that  are expensive or dangerous  to maintain and  operate.                                                            
Were  helicopters   purchased,  their  maintenance   needs  must  be                                                            
addressed. This matter would be investigated.                                                                                   
                                                                                                                                
Senator Olson  asked how, as a means  to control spending  and close                                                            
the  budget   gap,  a  uniform  percentage   reduction  across   all                                                            
departments would affect State operations.                                                                                      
                                                                                                                                
Ms. Frasca stated that  the Administration seeks to avoid across the                                                            
board  reductions as  "that  suggests that  everything  is equal  in                                                            
terms of the services  that we deliver." Determining  which programs                                                            
required more funding influenced  the FY 04 budget. Educations is an                                                            
example of a program  that requires more funding,  and were that not                                                            
a consideration, the results would be devastating.                                                                              
                                                                                                                                
Ms.  Frasca informed  the  Committee that  due  to the  fact that  a                                                            
presenter  from the Department  of Labor  and Workforce Development                                                             
was unavailable  today, the impact of stable revenue  funding on the                                                            
private sector economy component could not be presented.                                                                        
                                                                                                                                
Co-Chair Wilken stated  that that presentation would be rescheduled.                                                            
                                                                                                                                
Senator Olson  commented that while the Committee  has been informed                                                            
of  the negative  affects  of  a  state  income  tax, what  are  the                                                            
negative affects of not having one.                                                                                             
                                                                                                                                
Commissioner  Corbus  responded  that the  negative  affects of  not                                                            
having  additional revenue  sources  would be a  reduction of  State                                                            
services.  He reiterated  that the Administration  does not  support                                                            
the implementation  of  a State  income tax.  Other revenue  sources                                                            
would be more desirable.                                                                                                        
                                                                                                                                
Senator Olson  opined that one of negative outcomes  of not having a                                                            
state income tax  is that its absence is a draw that  attracts "less                                                            
desirables" to the State.                                                                                                       
                                                                                                                                
Ms. Frasca  commented that  Governor Murkowski's  view of an  income                                                            
tax is that there  "are a number of tools in the tool  box," and the                                                            
question  is in what  priority order  should they  be utilized.  The                                                            
income tax would be the last resort.                                                                                            
                                                                                                                                
Co-Chair Wilken  thanked Ms. Frasca and Commissioner  Corbus for the                                                            
presentations.                                                                                                                  
                                                                                                                                
AT EASE: 10:14 AM / 10:15 AM                                                                                                    
                                                                                                                                
Co-Chair  Wilken  announced  that  the  aforementioned  Division  of                                                            
Legislative Finance "fiscal  gap sensitivity chart titled "Projected                                                            
Fiscal  Gap/Surplus at  Various Year-End  Average  ANS Crude  Prices                                                            
Given $2.3  Billion  FY 04 General  Fund Budget"  has been  provided                                                            
[copy on file].                                                                                                                 
                                                                                                                                
                                                                                                                                
     Presentation by the Conference of Alaskans                                                                                 
                                                                                                                                
                                                                                                                                
Co-Chair Wilken announced  that Mike Burns, a retired banker and the                                                            
Chair of the Conference  of Alaskans, would be presenting a synopsis                                                            
of the Conference.                                                                                                              
                                                                                                                                
MIKE  BURNS,  Chair, Conference  of  Alaskans,  explained  that  the                                                            
Conference's 55-delegates  conducted the Conference in an unofficial                                                            
and un-attributed  discussion  and debate  that led  to a series  of                                                            
final votes. The  delegates were not required to negotiate  with the                                                            
Administration  or the Legislature.  They  "were simply an  advisory                                                            
group to the Administration"  and were a fair representative  of the                                                            
people  of  the  State  and Legislators'   constituents.  They  were                                                            
charged  with discussing,  debating,  and answering  four  questions                                                            
regarding their view of Alaska's future.                                                                                        
                                                                                                                                
Mr. Burns  shared  that the  goal of  the seven  conveners who  were                                                            
charged with  selecting the 55 Delegates  was to provide  balance on                                                            
the premises of geography,  gender, rural/urban, ethnicity, age, and                                                            
bi-partisanship.  During  the selection  process, no  one was  asked                                                            
their  position  on  any  of  the  four  questions.   Early  in  the                                                            
discussions,  it  was determined   that rather  than  selecting  the                                                            
"usual" individuals,  the goal was  to select "the undiscovered."  A                                                            
difficult  undertaking, it  took more  than 25 hours  to select  the                                                            
final 55 delegates from  a list exceeding 1,000 applicants. It was a                                                            
fair process  that strived  to select a  re-assuring and  refreshing                                                            
group with a history  of public policy experience  in these types of                                                            
issues and  "new undiscovered  faces." The  conveners "were  pleased                                                            
with the make-up of the group."                                                                                                 
                                                                                                                                
Mr.  Burns  shared  that  the 55  Alaskans  could  have  provided  a                                                            
multitude  of  solutions.  In order  to complete  "the  breadth  and                                                            
depth"  of  the Conference's   agenda in  a  three-day  period,  the                                                            
Conference utilized  consenser technology which allowed  votes to be                                                            
"un-attributed  to a delegate" and  thereby assisted in keeping  the                                                            
discussion  moving   by  allowing  for  a  support  or  non-support                                                             
consensus  of an issue  "or simply  the desire to  move on with  the                                                            
discussion." The voting options kept the Delegates on track.                                                                    
                                                                                                                                
Mr.  Burns  shared   that  rather  than  "the  wide  variations   in                                                            
solutions"  catching  his attention,  it  was "the  two over-riding                                                             
factors  that  united  the  delegates":  the  sense  of frustration                                                             
relating to what was happening  to State services such as education;                                                            
and the  sense of  anxiety as the  result of  non-resolution  of the                                                            
State's  fiscal situation  and its  effect on the  economy, the  job                                                            
market, and the  investment climate. In addition,  there was anxiety                                                            
resulting  from the realization  that currently  favorable  interest                                                            
rates could change,  that revenue from crude oil could  diminish due                                                            
to  lowering  prices, and  that  federal  aid to  the  State is  un-                                                            
sustainable. "Time is not our friend."                                                                                          
                                                                                                                                
     1. Should  the use of income for the Permanent  Fund be limited                                                            
     by  the  Constitution  to  5%  of  the  Fund's  value,  as  the                                                            
     Permanent Fund Trustees have proposed?                                                                                     
                                                                                                                                
Mr.  Burns  stated  that  the first  question  posed  to  the  group                                                            
received  an "overwhelming"  yes response.  Referring to the  letter                                                            
[copy on file] dated February  12, 2004 from the delegates to Fellow                                                            
Alaskans, he read as follows.                                                                                                   
                                                                                                                                
     We must inflation-proof  the Permanent Fund in order to keep it                                                            
     and the Permanent  Fund Dividends (PFDs) from  evaporating away                                                            
     in  the  future.  The "percent  of  market  value"  (POMV),  as                                                            
     suggested by the trustees  will put inflation proofing into the                                                            
     Constitution,  instead  of  leaving  it  to  the Legislature's                                                             
     discretion. POMV is  a technical change in determining how much                                                            
     money from  the Fund is available, but it has  nothing directly                                                            
     to do with the choice  of using it for Dividends or spending it                                                            
     on anything else. That's the next question.                                                                                
                                                                                                                                
Mr. Burns  shared the  second question  posed to  the group  and the                                                            
group's response as follows.                                                                                                    
                                                                                                                                
     2.  Should a portion  of the  income of the  Permanent  Fund be                                                            
     used for essential state services, such as education?                                                                      
                                                                                                                                
     Our answer here is  "yes, but…" There are two conditions to our                                                            
     endorsement. One,  dividends must be paid out first under POMV.                                                            
     Only  what's  left  over  could be  used  for  essential  state                                                            
     services.  Two, the  delegates  to the Conference  of  Alaskans                                                            
     recommend  that the  governor  and legislature  take action  to                                                            
     balance  the state's revenues  and expenditures, including  but                                                            
     not limited  to, consideration of a personal  income tax, other                                                            
     broad-based taxes and other alternative sources of income.                                                                 
                                                                                                                                
Mr. Burns informed  that the response to question  number two passed                                                            
with only two "no" votes.                                                                                                       
                                                                                                                                
     3.  Should  the  state  maintain   a  minimum  balance  in  the                                                            
     Constitutional  Budget  Reserve  to  stabilize  state  finances                                                            
     against fluctuations in oil production or prices?                                                                          
                                                                                                                                
     Yes, a  prudent amount should  be in reserve at all  times, for                                                            
     two  reasons. We  can't  afford to  send home  all the  police,                                                            
     firefighters, teachers  or other critical personnel because the                                                            
     state  treasure is  empty due  to something  unforeseen.  It is                                                            
     critical   that   a  prudent   amount   be  retained   in   the                                                            
     Constitutional   Budget  Reserve   (CBR)  to  stabilize   state                                                            
     finances  against  fluctuations  in oil production  or  prices.                                                            
     This  is necessary to  maintain the  state's very good  credit-                                                            
     rating  which  will save  millions of  dollars  in the  future.                                                            
     Therefore, if oil  production is interrupted or prices fall, so                                                            
     that  we need to draw  the CBR below  the prudent balance,  the                                                            
     state needs  a plan to refill it back to that  level as soon as                                                            
     possible.                                                                                                                  
                                                                                                                                
Mr.  Burns  noted  that  this  resolution  passed   unanimously.  In                                                            
addition,  it should  be noted  that the  balance in  the CBR  was a                                                            
primary  focus  of  the Standard  &  Poors  (S&P)  financial  rating                                                            
company  presentation  to the  Delegates.  S&P conducts  its  credit                                                            
rating analysis  on a two-year basis,  this being the interim  year.                                                            
The  State  currently  has  a  favorable  credit  rating,  which  is                                                            
"heavily reliant  on the CBR balance.  A depletion of the  CBR would                                                            
be a negative trend" for S&P.                                                                                                   
                                                                                                                                
     4.  Should the  use of  the income  of the  Permanent Fund  for                                                            
     dividends  and  possibly   for other   purposes  be  determined                                                            
     annually  by the  Legislature,  as is  currently  the case?  Or                                                            
     should be it be dedicated in the Constitution?                                                                             
                                                                                                                                
     A reasonable  percentage of the Permanent Fund  money available                                                            
     under  POMV should  be constitutionally  dedicated  to PFDs  in                                                            
     order to make them  "permanent" like the Fund itself. All other                                                            
     uses of the  remaining Permanent Fund money should  be left for                                                            
     the  Legislature to  appropriate,  since it  is impossible  for                                                            
     this  generation  to predict  what the  needs will  be for  the                                                            
     next.                                                                                                                      
                                                                                                                                
Mr. Burns stated  that this was the  most contentious issue  and had                                                            
the most discussion.  It passed with  37 "yes" votes. "The  Dividend                                                            
is viewed as a unique Alaskan  economic and social factor." Delegate                                                            
Byron Mallott recounted  to the group a conversation he had had with                                                            
Elmer  Rasmussen,  when Mr.  Mallott  replaced  Mr. Rasmussen  as  a                                                            
member of the  Permanent Fund Board of Trustees. Mr.  Rasmussen told                                                            
him that on  the day the PFD is distributed,  all Alaskans  anywhere                                                            
in the State are  "treated exactly equal," and that  this "created a                                                            
real dignity for the dividend."  This is important to the State, its                                                            
individuals, and the Fund.                                                                                                      
                                                                                                                                
Mr. Burns  agreed with that  concept. He  noted that one  Conference                                                            
discussion  involved  the creation  of  a needs-based  dividend.  It                                                            
received  very  little  support, as  it  would  be contrary  to  the                                                            
concept regarding the dignity of the dividend.                                                                                  
                                                                                                                                
Mr. Burns voiced that discussions  on the dividend should be kept in                                                            
economic  perspective.  He stated  that line  seven  of the  federal                                                            
income tax  form asks one's annual  total wages, salaries  and tips.                                                            
This is the line that reflects  how we live, raise our families, and                                                            
build  our  future.   Line  20  of  the  form  asks   the  total  of                                                            
miscellaneous  or other income.  This is the  line where the  PFD is                                                            
noted.  While public  policy is  driven by  line seven,  as it  is a                                                            
reflection of  the job market, investment climate,  and the economy.                                                            
"Line 20 is treasured for its uniqueness and dignity."                                                                          
                                                                                                                                
Mr. Burns commented  that "Alaska  is blessed with an abundance  of"                                                            
natural, human, and financial  human resources. We "have the ability                                                            
to deal with this  challenge;" however, the Legislature  must be the                                                            
State's "champions."  He supported  the comment of one delegate  who                                                            
expressed that the goal  of the Conference was to, "Do good for all,                                                            
not the best for anyone."                                                                                                       
                                                                                                                                
Senator Bunde  thanked Mr. Burns.  Continuing, he shared  that it is                                                            
assumed by  the public, that  "some of the  earnings if not  all" of                                                            
the POMV  would be used  to support State  services. Therefore,  the                                                            
question  is whether the  Delegates approached  the POMV from  being                                                            
separate  from the  spending support  of State  services or  whether                                                            
their view mirrored the public's.                                                                                               
                                                                                                                                
Mr. Burns  responded that,  "if there was a  big winner, it  was the                                                            
POMV concept."  After  "a lot of  discussion and  education,  it was                                                            
able to separate  itself from the spending" and the  allocations. It                                                            
is a confusing  issue. The Delegates spent a lot of  time discussing                                                            
this and required  a lot of education;  however that separation  did                                                            
occur and it was recognized as "a management tool."                                                                             
                                                                                                                                
Senator Bunde stated that the public's confusion is of concern.                                                                 
                                                                                                                                
Senator Bunde  noted that,  from reading letters  to the editor  and                                                            
other  communication,  there  is a  general  sense that  the  public                                                            
perceives  that  "the State  spends  too  much money."  However,  he                                                            
understood that this was not the view of the Delegates.                                                                         
                                                                                                                                
Mr. Burns responded that  the three-consenser responses were akin to                                                            
"Yes, I agree, No, I don't  agree, or let's just move the discussion                                                            
along."  These  "straw  votes" were  helpful  in  moving  discussion                                                            
forward and  when a "straw vote" was  conducted, concern  over State                                                            
spending did not rate "too  high." This was supported by discussions                                                            
pertaining  to the level of education  funding which is of  concern.                                                            
He  contrasted  non-support  of education  to  equipment's  deferred                                                            
maintenance  needs in that when a  child's education is inadequate,                                                             
it is hard to regain that  lost ground, whereas a piece of equipment                                                            
could be rebuilt.                                                                                                               
                                                                                                                                
Senator Bunde asked whether  discussion occurred about the amount of                                                            
dividend money  that leaves the State in the form  of federal income                                                            
tax.                                                                                                                            
                                                                                                                                
Mr.  Burns shared  that  this  "leakage factor,"  as  referenced  by                                                            
economists,  did  not garner  as  much  discussion  as anticipated.                                                             
"There  is no  question that  the federal  treasury  is the  biggest                                                            
beneficiary"  of the PFD.  He "had hoped  that the S&P presentation                                                             
would be  the springboard"  for discussions  regarding investing  in                                                            
the State; however, this was not delved into.                                                                                   
                                                                                                                                
Senator  Dyson  stated   that  while  education  is  important,   he                                                            
disagreed  that the  negative affects  of low funding  could  not be                                                            
recoverable. Continuing,  he asked for assurance that  no effort was                                                            
made to stack  the group based on higher than the  norm income or by                                                            
those who might  benefit from government spending,  as was seemingly                                                            
the  case  presented  by  the media,  who  "wanted  to  impeach  the                                                            
process." His assumption  was that the individuals who applied for a                                                            
delegate  position were  those who  were interested  in the  State's                                                            
process and  were educated.  In addition,  the fact that  government                                                            
dominates our State is another issue that cannot be denied.                                                                     
                                                                                                                                
Mr. Burns reiterated  that income  was not a consideration.  Some of                                                            
the Delegates  might have been chosen because their  success lead to                                                            
name recognition  and experience.  People in Rural areas  might have                                                            
been  selected  due  to  their  being  leaders  in  health  care  or                                                            
education fields  which might be some  of the better paying  jobs in                                                            
Rural  Alaska. He  assured that,  in his perspective,  monetary  and                                                            
government connections  were not an issue. He himself  was surprised                                                            
at  the statistics  of  the  group,  but avowed  that  these  issues                                                            
probably would  not have changed the make-up of the  group, of which                                                            
he is not embarrassed.                                                                                                          
                                                                                                                                
Co-Chair Green voiced surprise  regarding the Delegates' position on                                                            
a State income  tax, particularly in light of the  financial make-up                                                            
of the group.  This exonerated the conveners' actions  in regards as                                                            
to whether the delegate's income was a factor.                                                                                  
                                                                                                                                
Co-Chair  Green   asked  for  further  explanation   in  regards  to                                                            
characterizing POMV as a management tool.                                                                                       
                                                                                                                                
                                                                                                                                
SFC 04 # 38, Side A 10:39 AM                                                                                                    
                                                                                                                                
                                                                                                                                
Co-Chair  Green specifically  asked  whether the  Department or  the                                                            
Legislature  or the Permanent Fund  Board of Trustees would  utilize                                                            
POMV as a management tool.                                                                                                      
                                                                                                                                
Mr. Burns  responded that  POMV would be a  management tool  for the                                                            
Permanent  Fund  Board  and  the money  managers  they  hire.  Money                                                            
managers  have  different  specialties;  including  such  things  as                                                            
managing  trust accounts or  investment accounts  and POMV  would be                                                            
used as a common management guide.                                                                                              
                                                                                                                                
Co-Chair Green  asked how POMV would  differ from what is  currently                                                            
provided in this regard.                                                                                                        
                                                                                                                                
Mr. Burns expressed that  one major difference, and this is "the key                                                            
thing," is that when the  Fund was created "it was entirely in fixed                                                            
income."  The "concept of  paying out dividends  from only  realized                                                            
gains made  a great deal  of sense." Today,  however, 60-percent  of                                                            
the Fund is  comprised of equity investments.  Unrealized  gains are                                                            
as important  or more important in  an equity portfolio as  realized                                                            
gains.  The POMV  includes  both  unrealized  gains and  losses  and                                                            
realized  gains and  losses in  the Fund's  return.  The concept  of                                                            
isolating  the two  is  "not compatible  with  the way  the Fund  is                                                            
structured today."                                                                                                              
                                                                                                                                
Co-Chair Green understood  therefore that five percent of the total,                                                            
as  proposed  in  the  POMV,  would  consider  both  unrealized  and                                                            
realized gains.                                                                                                                 
                                                                                                                                
Mr. Burns concurred.                                                                                                            
                                                                                                                                
Co-Chair Green  asked for clarification  regarding whether  the POMV                                                            
approach would affect how the Fund is managed.                                                                                  
                                                                                                                                
Mr. Burns stated  that it could affect  how the Fund is managed.  He                                                            
could  not  recall  a time  when  gains  were used  to  support  the                                                            
Permanent Fund Dividend, but noted that this could occur.                                                                       
                                                                                                                                
In response  to a  question from  Co-Chair Green,  Mr. Burns  stated                                                            
that there could  be a time when the decision might  be made to sell                                                            
an investment to support  the payment of the Permanent Fund Dividend                                                            
(PFD). While  he could not  recall it ever  occurring, he  explained                                                            
that under  the current system, a  bad investment decision  could be                                                            
made were the  decision made to sell, for example,  a stock that was                                                            
purchased at  $20 at $120 in order  to have a realized gain  to fund                                                            
PFDs.  The stock  might be  sold even  were the  Fund's analysts  to                                                            
predict that  the stock's  price would continue  to increase.  Under                                                            
the POMV  program, this  unrealized  gain would  be factored  in, at                                                            
market value, without having to sell the stock.                                                                                 
                                                                                                                                
Senator  Bunde asked  whether a  representative  from the  Permanent                                                            
Fund Corporation (PFC) would be presenting to the Committee.                                                                    
                                                                                                                                
Co-Chair  Wilken  answered  in the  affirmative;  the  PFC would  be                                                            
presenting at the next Committee meeting.                                                                                       
                                                                                                                                
Mr. Burns stated that another  difference imposed by "Pure POMV", is                                                            
that the  valuation of the  Fund would be  determined on a  year-to-                                                            
year basis  and the corpus,  or principal,  "would go away,"  as the                                                            
Fund would be recognized as a whole.                                                                                            
                                                                                                                                
Co-Chair  Green  asked  whether the  ability  to  spend up  to  five                                                            
percent  of  the  Fund's  value  would  create   the  assumption  or                                                            
"pressure to  spend the entire five  percent." She noted  that while                                                            
the Legislature  has  the ability  to utilize  the Earnings  Reserve                                                            
account, it has not opted to do so.                                                                                             
                                                                                                                                
Mr. Burns replied that,  "only time will tell." He agreed "that this                                                            
same option is available to this body today."                                                                                   
                                                                                                                                
Co-Chair  Green shared that  when the State  is in a budget  deficit                                                            
situation,  all available sources  of funds, including the  Earnings                                                            
Reserve  Account and  the  CBR are  considered as  possible  funding                                                            
sources. Therefore,  she questioned  whether this POMV method  might                                                            
be utilized to address budget shortfalls.                                                                                       
                                                                                                                                
Mr. Burns  reiterated  that "time  and history"  would provide  that                                                            
answer.  What  people originally   thought about  the  language  and                                                            
purpose of the Permanent  Fund and how it is viewed today "are quite                                                            
different."                                                                                                                     
                                                                                                                                
Co-Chair Wilken agreed that, "it's definitely a change."                                                                        
                                                                                                                                
Senator Bunde declared  that, "we do spend the earnings. We spend it                                                            
for hold  harmless every  year." Money  is spent  on such things  as                                                            
processing  PFD applications.  It  has not  been used  to the  level                                                            
required to balance the budget.                                                                                                 
                                                                                                                                
Senator   Olson  asked   for  further  information   regarding   the                                                            
Delegates'  position pertaining to  whether State spending  was at a                                                            
sufficient level, specifically in regards to education.                                                                         
                                                                                                                                
Mr. Burns  recalled that  the wording  of the  question was  akin to                                                            
whether  State services  could be  reduced further.  He opined  that                                                            
education  funding  should  be  increased,   especially  as  federal                                                            
standards have placed additional demands on it.                                                                                 
                                                                                                                                
Co-Chair  Wilken interjected  that this  is a topic  that should  be                                                            
discussed as a separate issue.                                                                                                  
                                                                                                                                
SENATOR  TOM WAGONER voiced  concern about  constitutionalizing  the                                                            
POMV and the  payout of the PFD in  light of projected decreases  in                                                            
oil revenues; specifically how it would affect State services.                                                                  
                                                                                                                                
Mr.  Burns,  speaking   for  himself,  remarked   that  this  is  an                                                            
"excellent  point." He opined that  constitutionalizing the  payment                                                            
of a  PFD "could  tie our hands"  for future  generations.  "Untying                                                            
Constitutional  dividends  would be  very difficult."  However,  the                                                            
State is in a  difficult situation today and something  must be done                                                            
in the  interim.  If constitutionalizing   the dividend  is what  it                                                            
would take to  politically move the State forward  then it should be                                                            
done  for a  period of  time, perhaps  for  six or  eight years.  He                                                            
suggested incorporating  a termination date into the amendment. This                                                            
concept was  discussed with the Department  of Law and the  Attorney                                                            
General  prior to  the  Conference and  there  is no  reason that  a                                                            
specific  timeframe   could  not   be  specified.  This   should  be                                                            
considered  in order to  move the  State in a  direction that  would                                                            
allow it to balance its budgetary needs.                                                                                        
                                                                                                                                
In response to  a comment from Senator Wagoner, Mr.  Burns responded                                                            
that  incorporating  termination  language  into  the  amendment  is                                                            
"doable" and should be considered.                                                                                              
                                                                                                                                
SENATOR  RALPH SEEKINS  voiced  the  understanding  that the  income                                                            
information  attributable to the Delegates  was based on  the family                                                            
rather than the individual's income.                                                                                            
                                                                                                                                
Mr. Burns concurred.                                                                                                            
                                                                                                                                
Senator  Seekins, a  former member  of the Permanent  Fund Board  of                                                            
Trustees,  spoke  to the  comment  that  under  the POMV  plan,  the                                                            
principal   of  the  Permanent  Fund   would  become  "irrelevant."                                                             
Currently,  the  principal  is approximately   $23 billion  and  the                                                            
market  value is $28  billion.  Therefore, there  is an approximate                                                             
five billion difference  between the two. He asked whether there was                                                            
concern at  the Conference that the  principal of the account  might                                                            
be breached.                                                                                                                    
                                                                                                                                
Mr. Burns responded  that this issue was discussed.  However, it was                                                            
determined  that,  while   there  might  be  some  invasion  of  the                                                            
principal  from  time to  time,  in  the long-term,  "it  would  not                                                            
undermine the health of the Fund."                                                                                              
                                                                                                                                
Senator Seekins reiterated  that there is an approximate "$5 billion                                                            
cushion between market value and principal under the old rule."                                                                 
                                                                                                                                
Mr. Burns stated that POMV would utilize market value.                                                                          
                                                                                                                                
Senator  Seekins stated  that, under  the POMV  proposal,  inflation                                                            
proofing  would  be intrinsic  to  the Fund  rather  than being  "an                                                            
annual re-calculation."                                                                                                         
                                                                                                                                
Mr. Burns responded  that the inflation  proofing being proposed  in                                                            
POMV "is the difference  between the five percent and" the long-term                                                            
rate, which is approximately 7.9 percent.                                                                                       
                                                                                                                                
Senator Seekins interjected that it is "roughly eight percent."                                                                 
                                                                                                                                
Mr. Burns  stated that  this would  equate to  long term  realizable                                                            
returns in the market place."  The concept of inflation proofing was                                                            
very important to the Fund  when it was first created because it was                                                            
all fixed income.  Asset allocation "is a hedge against  inflation."                                                            
                                                                                                                                
Senator Seekins  understood therefore,  that the State is  currently                                                            
inflation-proofing "appreciating assets."                                                                                       
                                                                                                                                
Mr. Burns concurred.  This could be  likened to the State  having "a                                                            
belt and  suspenders policy  with the inflation  proofing and  asset                                                            
allocation."  We are basically double  inflation proofing  the Fund.                                                            
                                                                                                                                
Senator  Seekins concluded  that the  State is  more than  inflation                                                            
proofing the Fund.                                                                                                              
                                                                                                                                
Mr. Burns concurred.                                                                                                            
                                                                                                                                
SENATOR GENE  THERRIAULT asked regarding  the Delegates'  discussion                                                            
in regards to implementing  a needs test in regards to the Dividend.                                                            
                                                                                                                                
Mr. Burns  replied that the  discussion pertained  to a proposal  to                                                            
double the amount of the  PFD and then "claw it back." This would in                                                            
effect create  a needs based  dividend or  "a negative income  tax."                                                            
This  was considered  to  being an  affront  to the  dignity of  the                                                            
Dividend.                                                                                                                       
                                                                                                                                
SENATOR  KIM ELTON, a  Conference observer,  voiced being  initially                                                            
skeptical  as to  whether the  make-up  of the Delegates  was  truly                                                            
representative  of the State's citizens; however,  as the Conference                                                            
concluded,  he was "very,  very impressed with  how they dealt  with                                                            
the chore handed  to them." He reviewed  the Delegates responses  to                                                            
the four  questions presented  to them including:  their support  of                                                            
the POMV plan; their position  that earnings from the Permanent Fund                                                            
should be used  for essential State  services such as education  and                                                            
public safety  with the caveats being  that the PFDs should  be paid                                                            
first and that  the Administration and Legislature  also implement a                                                            
broad based  and other  taxes to  accompany usage  of the  earnings;                                                            
while the Delegates  did not specify  "how or at what amount,"  they                                                            
did support  a Constitutionally  dedicated  PFD; and that the  State                                                            
should  stabilize the  CBR  to support  State finances  against  the                                                            
fluctuation  of oil prices  and production  by specifying a  minimal                                                            
balance of approximately one billion dollars be maintained.                                                                     
                                                                                                                                
Senator  Elton  voiced surprise  at  the  scope of  the discussions                                                             
conducted  by the  Delegates  and highly  praised  the "straw  vote"                                                            
voting process  as it proved to be "instructive" to  the process. He                                                            
read the  following  excerpt from  the Letter to  Alaskans that  was                                                            
written at  the conclusion  of the Conference  by Delegates:  "These                                                            
were  challenging   discussions  with  no  easy  answers.   We,  the                                                            
Conferees,  sincerely believe  these  are the best  answers for  all                                                            
Alaskans  as a  whole and  we know  they are  superior  to the  easy                                                            
answers."                                                                                                                       
                                                                                                                                
Co-Chair  Wilken stated  that the  Conference's  straw poll  tallies                                                            
[copy on file] would be provided to the Committee.                                                                              
                                                                                                                                
Senator B. Stevens,  the Senate Majority Leader who  participated in                                                            
the Conference  as an Ex-Officio non-voting  member, specified  that                                                            
at no point  was there ever a roll  call vote at the Conference.  He                                                            
found  this  interesting.  Another  interesting  component  was  the                                                            
answer  options to  votes, such  as "Yes,  No, Yes  but, No but,  or                                                            
Maybe."  He characterized  the broad  range of voting  options  as a                                                            
confusing "phenomena."  The entire process was confusing  and it was                                                            
difficult  at  times to  understand  the  proceedings.  He left  the                                                            
Conference feeling  that the majority of the Conferencees  felt that                                                            
State spending  was insufficient.  76-percent of the Delegates  were                                                            
"directly  affected by  State spending  either by  their company  or                                                            
their organization  or their personal income." He  did not feel that                                                            
this percentage was truly  representative of the State's population.                                                            
"There  were  only 13  Delegates  who  were independently   business                                                            
oriented." Some questions  that were pertinent to education were not                                                            
addressed; for  instance, while education spending  has kept up with                                                            
the rate of inflation since  1994, had the enrollment rate of change                                                            
since  1994  kept  the same  pace.  He  left  the  Conference  still                                                            
wondering  if increased  spending was  the answer  or would  further                                                            
efficiencies through improved  management of State government be the                                                            
answer. He  felt that these questions  were not approached  and that                                                            
increased  efficiencies rather  than "the  sky is falling  mentality                                                            
that was  presented at  the Conference" should  be a consideration.                                                             
While  stating that  a solution  must be  reached  to address  State                                                            
spending, he declared  that the State has been consistently  able to                                                            
make payroll and support its obligations.                                                                                       
                                                                                                                                
Senator B.  Stevens stated that the  most important presentation  at                                                            
the Conference was that  of Standard & Poors credit rating agency in                                                            
which it was stated that,  since 1990, the State has not experienced                                                            
a downgraded credit rating.  How the State manages it money, not how                                                            
it conducts  business  is  a consideration  in the  credit  process.                                                            
Hurtles that  must be overcome  are whether  the State could  access                                                            
the Earnings  Reserve  Account  or be able  to utilize  the  State's                                                            
assets  or whether  the State  could attempt  to get  more money  to                                                            
spend more money.                                                                                                               
                                                                                                                                
Senator  B. Stevens  applauded  the  efforts  of the  Delegates  but                                                            
opined that whether  it was a known goal or not, the  outcome of the                                                            
Conference  was that  the State  should  have more  money to  spend.                                                            
Noting the  words attributed to Elmer  Rasmussen that the  dividends                                                            
were distributed  equally to everyone  in the State, he argued  that                                                            
was that the  case then, contrary  to the premise of the  "claw back                                                            
provision,"  it should  be taken back  equally.  He avowed that  Mr.                                                            
Rasmussen  would be  disappointed that  his words  were utilized  in                                                            
that scenario. In summary,  however the most positive outcome of the                                                            
Conference  was "that  it got  people engaged  in that  it got  them                                                            
talking about  PMOV, the importance of the CBR, and  it educated the                                                            
general  populace  about  the how  State  government  operates."  He                                                            
stated  that there  would  always  be a  difference  of opinions  in                                                            
regards  to whether  State  government  is operating  properly.  One                                                            
question  that would always  be debatable"  is whether the  State is                                                            
spending too much  or enough money. The question is  whether we have                                                            
enough money to spend. He opined that, "we do."                                                                                 
                                                                                                                                
Senator Stedman  reviewed  the process in  which the Permanent  Fund                                                            
evolved from originally  being a 100-percent fixed income portfolio.                                                            
He surmised  that a  bond portfolio  would not  experience a  lot of                                                            
capital gains  as they are offset  by capital losses. Therefore  the                                                            
dividend is extremely critical to the yield.                                                                                    
                                                                                                                                
Mr. Burns agreed,  however noted that  a large bond portfolio  would                                                            
be the exception  in that discounts under and over  par are received                                                            
and  amortized  premiums  are  a factor.  While  capital  gains  are                                                            
realized in  the bond market, "by  and large it is interest  rates."                                                            
That  is why the  realized  gains are  an important  indicator  in a                                                            
portfolio like that.                                                                                                            
                                                                                                                                
Senator  Stedman understood  that  the inflation  process  currently                                                            
being utilized was based on the original structure of the fund.                                                                 
                                                                                                                                
Mr. Burns affirmed.                                                                                                             
                                                                                                                                
Senator  Stedman  recalled  that the  asset  class of  equities  was                                                            
selected  for  growth  as well  as  their  long-term  offsetting  of                                                            
inflation impact.                                                                                                               
                                                                                                                                
Mr. Burns stated  that this would  be achieved due to their  growth.                                                            
                                                                                                                                
Senator Stedman understood  that real estate holdings in a portfolio                                                            
also serve to offset inflation.                                                                                                 
                                                                                                                                
Mr. Burns affirmed.                                                                                                             
                                                                                                                                
Senator  Stedman   understood  therefore   that  the  Fund's   asset                                                            
allocations  have, over time, been  changed to include real  estate,                                                            
equities, and other classes.  The calculation that is currently used                                                            
is a  two-year average  that does  not consider  what type of  asset                                                            
base, including cash, exists.                                                                                                   
                                                                                                                                
Mr. Burns voiced being  uncertain as to whether classes are weighted                                                            
differently.  All asset  bases  are inflation  proofed identically,                                                             
provided their length of time in the system is similar.                                                                         
                                                                                                                                
Senator Stedman  surmised therefore  that there are "inequities"  in                                                            
how inflation  proofing  is calculated,  as the  length of time  the                                                            
asset  is  in  the  portfolio  is  not  a  consideration.   Alaska's                                                            
inflation proofing mechanism differs from the norm.                                                                             
                                                                                                                                
Mr. Burns responded  that an energy-based economy  as experienced by                                                            
this State is substantially  different than other state's economies.                                                            
                                                                                                                                
Senator Stedman  asked whether the public would more  easily be able                                                            
to explain the  current Permanent Fund program or  the proposed POMV                                                            
plan.                                                                                                                           
                                                                                                                                
Mr.  Burns  responded  that,  "contrary   to  absolute  logic,"  the                                                            
existing  manner is  easier  to explain  because  it is incorrectly                                                             
understood. POMV "would  be infinitely easier to understand" were it                                                            
explained to people who had no experience with the current plan.                                                                
                                                                                                                                
Senator Stedman agreed.                                                                                                         
                                                                                                                                
Mr. Burns expressed  that the current  system has been altered  over                                                            
the years and  as a result, the average  citizen does not  correctly                                                            
understand how it works.                                                                                                        
                                                                                                                                
Senator  Stedman declared  therefore  that were the  goal to  create                                                            
something  that is  easily  understood, that  program  would be  the                                                            
POMV.                                                                                                                           
                                                                                                                                
Mr. Burns agreed.  An educational  process must occur in  regards to                                                            
the POMV program.                                                                                                               
                                                                                                                                
Mr. Stedman agreed.                                                                                                             
                                                                                                                                
                                                                                                                                
SFC 04 # 38, Side B 11:26 AM                                                                                                    
                                                                                                                                
                                                                                                                                
Senator Bunde  asked whether  a State spending  limit mechanism  was                                                            
discussed at the Conference.                                                                                                    
                                                                                                                                
Mr. Burns stated that while  a spending limit was not a component of                                                            
the Conference  agenda,  it was  "widely assumed"  by the  Delegates                                                            
that some  sort of  spending  limit would  be imposed,  as it  is an                                                            
issue currently being proposed in the Legislature.                                                                              
                                                                                                                                
Co-Chair Wilken thanked Mr. Burns for his presentation.                                                                         
                                                                                                                                
ADJOURNMENT                                                                                                                 
                                                                                                                                
Co-Chair Gary Wilken adjourned the meeting at 11:29 AM                                                                          

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