Legislature(2003 - 2004)

03/18/2004 01:47 PM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                              MINUTES                                                                                         
                     SENATE FINANCE COMMITTEE                                                                                 
                          March 18, 2004                                                                                      
                              1:47 PM                                                                                         
                                                                                                                                
                                                                                                                                
TAPES                                                                                                                       
                                                                                                                                
SFC-04 # 52, Side A                                                                                                             
SFC 04 # 52, Side B                                                                                                             
                                                                                                                              
CALL TO ORDER                                                                                                               
                                                                                                                                
Co-Chair Gary Wilken convened  the meeting at approximately 1:47 PM.                                                            
                                                                                                                                
PRESENT                                                                                                                     
                                                                                                                                
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice Chair                                                                                                   
Senator Ben Stevens                                                                                                             
Senator Donny Olson                                                                                                             
Senator Lyman Hoffman                                                                                                           
Senator Fred Dyson                                                                                                              
                                                                                                                                
Also  Attending:   SENATOR  JOHN  COWDERY;  SENATOR  HOLLIS  FRENCH;                                                          
SENATOR RALPH  SEEKINS; SENATOR BERT STEDMAN; SENATOR  GARY STEVENS;                                                            
SENATOR  GENE THERRIAULT;  SENATOR TOM WAGONER;  REPESENTATIVE  MARY                                                            
KAPSNER; JOE BALASH,  Staff to Senator Therriault;  BOB BARTHOLOMEW,                                                            
Chief  Financial   Officer,  Alaska   Permanent  Fund  Corporation,                                                             
Department of Revenue;  PHELAN STRAUBE, Staff to Senator B. Stevens;                                                            
                                                                                                                                
Attending  via  Teleconference:     There  were  no  teleconference                                                           
participants.                                                                                                                   
                                                                                                                                
SUMMARY INFORMATION                                                                                                         
                                                                                                                                
Presentation on POMV Proposal                                                                                                   
By Senator Therriault                                                                                                           
                                                                                                                                
SENATOR GENE THERRIAULT  noted he offered a proposal  in the form of                                                            
a committee  substitute working draft  to SJR 18, 23-LS1007\I  [copy                                                            
on file.] He indicated  this is because both his proposal and SJR 18                                                            
relate to a Percent of  Market Value (POMV) approach to managing the                                                            
Alaska Permanent Fund.  He recalled earlier discussions were held on                                                            
a POMV method  of management  and he cited  evidence that POMV  is a                                                            
good management formula.                                                                                                        
                                                                                                                                
Senator  Therriault  described that  in transition  to  a true  POMV                                                            
system the  concept of principal is  removed. He noted this  concept                                                            
is problematic  for  some.  He asserted  that before  Alaska  voters                                                            
would approve  any changes  to the  Permanent Fund,  they must  have                                                            
confidence  in the proposal.  He stated that  the complexity  of the                                                            
POMV proposal presented  by the Trustees of the Fund, presents "many                                                            
hurdles"  to win final  approval from the  general public.  Although                                                            
most  legislators   have  gained   an  understanding  of   the  POMV                                                            
methodology, he surmised that public concerns must be addressed.                                                                
                                                                                                                                
Senator  Therriault  explained  the  proposed  committee  substitute                                                            
provides  assurance   that  the  principal  of  the  Fund  would  be                                                            
protected  in  the  event  of  a series  of  "down"  years  of  poor                                                            
performance  of  the  stock  market. He  noted  the  proposal  would                                                            
preserve the existing  Constitutional language stipulating  that the                                                            
principal  of the  Fund could  only be  invested and  not spent.  He                                                            
furthered   that  the  committee   substitute   would  establish   a                                                            
Constitutionally  based earnings reserve sub-account  into which all                                                            
income  of the Fund  shall be  deposited immediately  upon  receipt.                                                            
Appropriations  from the  Permanent  Fund would be  limited to,  and                                                            
could only be made from,  this sub-account, he stated. Therefore, he                                                            
remarked the principal of the Fund would remain protected.                                                                      
                                                                                                                                
Senator Therriault relayed  a claim that once the legislature begins                                                            
spending  from the Permanent  Fund,  it would "only  be a matter  of                                                            
time  before the  entire Fund  is gone."  He suggested  that a  sub-                                                            
account would  provide assurance that  the principal were  protected                                                            
and could  not be spent.  He qualified that  the proposed  committee                                                            
substitute  retains POMV-type language  that would limit  the amount                                                            
that  could  be appropriated  in  any  fiscal  year to  prevent  the                                                            
legislature  from  appropriating  too  much  during  years  of  high                                                            
investment earnings. He  gave as an example the current situation in                                                            
which approximately $5  million of realized and unrealized gains are                                                            
contained in the  earnings reserve account. He pointed  out that the                                                            
legislature  would be  completely  within its  power to appropriate                                                             
this entire  amount in one fiscal  year. By contrast, he  stated the                                                            
proposed committee  substitute would  prevent such overspending  and                                                            
thereby  protecting the  value of  the Fund. He  explained the  sub-                                                            
account  establishment  that would  then be  managed as  a POMV  and                                                            
payouts from  that sub-account would  be limited to five  percent of                                                            
the value of the total Fund.                                                                                                    
                                                                                                                                
Senator Therriault  acknowledged concerns  voiced that the  dividend                                                            
program  would be  threatened  if any earnings  from  the Fund  were                                                            
utilized for any purpose  other than the dividend program itself. He                                                            
assured  this proposal would  provide Constitutional  protection  of                                                            
the dividend.                                                                                                                   
                                                                                                                                
Senator   Therriault   cautioned   against   amending   the   Alaska                                                            
Constitution  in a manner that removes  flexibility for determining                                                             
the amount  of future  dividend  payouts. This  proposal, he  stated                                                            
would retain flexibility if required in the future.                                                                             
                                                                                                                                
Senator Therriault  spoke to the limitations  of how funds  could be                                                            
withdrawn   from  the   Permanent   Fund  and   for  what   purpose:                                                            
expenditures  would be  restricted  to education  and dividends.  He                                                            
commented  that the  public questions  how funds  would be spent  if                                                            
used for  government  services. He  predicted  this provision  would                                                            
allay those concerns.                                                                                                           
                                                                                                                                
Senator Therriault  noted the various percentages  of POMV available                                                            
for appropriation proposed  by different legislators. He recommended                                                            
allowing each  legislature to make this determination.  He suggested                                                            
if the  voters approved this  proposal, a  second dividend  could be                                                            
offered in December  2004 that would represent the  amount available                                                            
for dividend  payouts if this procedure  had been in place  earlier.                                                            
He stressed this additional  dividend would be a one-time occurrence                                                            
during  the  current  calendar  year.   He  stated  this  additional                                                            
dividend would  demonstrate that dividends may not  benefit from the                                                            
peaks in  Fund performance,  but would  also be  insulated from  the                                                            
consequences  of years of poor market  performance or "valleys".  He                                                            
opined  that  most  Alaskans  understand  the  Fund  performance  is                                                            
currently in a valley and  is likely to remain for several years. He                                                            
emphasized this would be a separate issue for consideration.                                                                    
                                                                                                                                
Senator Therriault  noted the 30 days  normally required  to certify                                                            
an election and detailed  the timeframe in which this issue would be                                                            
decided,  as  well  as  timeframe  for  the  Department  of  Revenue                                                            
issuance of secondary dividend payment.                                                                                         
                                                                                                                                
Senator Therriault  commented this  is a method in which  to "bridge                                                            
the  gap" in  gaining approval  for  a POMV  method  and to  address                                                            
concerns relating  to spending from  the principal of the  Permanent                                                            
Fund.                                                                                                                           
                                                                                                                                
Senator Bunde appreciated  the addressing of public concerns, noting                                                            
they do not  "go away". He noted the  Legislature currently  expends                                                            
approx $5  million annually  to distribute  dividends and  implement                                                            
the program  and asked how the secondary  dividend process  would be                                                            
funded.                                                                                                                         
                                                                                                                                
Senator  Therriault replied  that  printing and  distributing  costs                                                            
would be the  only expenses of a secondary  dividend payout,  noting                                                            
that applications  would already be processed and  qualification for                                                            
the  secondary dividend  would  be based  on qualification  for  the                                                            
regular dividend of 2004.                                                                                                       
                                                                                                                                
Senator Therriault furthered  that status quo is likely to result in                                                            
larger dividends  in the near term,  but lower dividend payments  in                                                            
the future.                                                                                                                     
                                                                                                                                
Senator  Bunde agreed,  but  questioned the  expense  of a  multiple                                                            
dividend  distribution  and asked  if  it would  be  less costly  to                                                            
inform  residents  of  both  dividend amounts  with  the  intent  to                                                            
distribute  one  dividend  payment  in  December  2004.  He  relayed                                                            
concerns  of school  boards  in rural  areas  about  the receipt  of                                                            
dividends in October  causing school disruptions as  families travel                                                            
on  "week-long shopping  trips".  He  asked if  a delay  of  regular                                                            
dividend payments to December would accomplish the same result.                                                                 
                                                                                                                                
Senator  Therriault  noted this  would  be possible,  but  cautioned                                                            
against  such action.  He stated  that  people have  come to  expect                                                            
payment  in  October  and  would be  suspicious  of  any  delay.  He                                                            
suggested  the operating costs  of a secondary  dividend could  be a                                                            
lesser   amount  since   many   recipients  receive   the   payments                                                            
electronically.                                                                                                                 
                                                                                                                                
Senator  Hoffman   agreed  to  the  importance  of  securing   voter                                                            
confidence  before any changes  are made to  the Permanent  Fund. He                                                            
spoke  of  having  one  more  chance  to  convince   voters  of  the                                                            
legislators' intentions.  He cited language on page 2, line 6 of the                                                            
proposed committee substitute  and stated this does not provide that                                                            
assurance, noting,  "may". He commented this language  could also be                                                            
interpreted  as  "may not"  and  instead  recommended,  "shall".  He                                                            
predicted questions  would remain.  He then addressed the  dialog on                                                            
the varying percentages  proposed for distribution  of funds from 80                                                            
percent  for dividends  and 20  percent for  government services  to                                                            
equal percentages  to each. He asserted that a formula  providing at                                                            
least 60 percent  for dividends should be guaranteed.  He attributed                                                            
the failure in  the special election of September  1999 to approve a                                                            
plan  to utilize  a  portion  of the  Permanent  Fund  earnings  for                                                            
government services to the lack of understanding of the issue.                                                                  
                                                                                                                                
Senator Therriault  explained that  if the Fund performs  poorly and                                                            
no funds were available  for distribution for 2004, the issue of the                                                            
language  providing   for  a  second   dividend  payment   would  be                                                            
irrelevant.  However,  he deferred  on the  decision  of whether  to                                                            
include  "may"  or "shall"  in  the enabling  legislation.  He  also                                                            
stated that  a 50-50 division  of available  funds to dividends  and                                                            
government  services could result  in larger dividend payments  than                                                            
the  current   status  quo.  He  therefore   recommended   that  the                                                            
legislature  could adopt statutory  language to determine  an actual                                                            
percentage  division  that  is  contingent  upon  adoption  of  this                                                            
resolution  by  voters.  This,  he  stated  would  allow  voters  to                                                            
understand the impact on their dividend payments.                                                                               
                                                                                                                                
Senator Hoffman  agreed to the necessity of "may"  under the current                                                            
formula utilized  for calculating  the dividend, but expressed  that                                                            
under a POMV method funds would always be available.                                                                            
                                                                                                                                
Senator  Therriault clarified  that  under a  pure POMV methodology                                                             
this would be correct,  however if the formula were written with the                                                            
intention  to protect the  principal of the  Fund, the risk  remains                                                            
that there is always s chance of no earnings available to spend.                                                                
                                                                                                                                
Senator  Hoffman  commented  that  if in  the  future,  once  voters                                                            
understood and approved  a constitutional amendment would he support                                                            
"shall".                                                                                                                        
                                                                                                                                
Senator Therriault reiterated  "shall" would be more appropriate for                                                            
a pure  POMV  method; however,  'may"  would allow  flexibility  for                                                            
legislators.                                                                                                                    
                                                                                                                                
Senator   Hoffman  preferred   consideration   to  voters  than   to                                                            
legislators.                                                                                                                    
                                                                                                                                
Senator Olson referenced  other legislation to change the use of the                                                            
earnings  of the Fund  was introduced  in the  Senate State  Affairs                                                            
Committee  during  a previous  session  and  asked  why it  was  not                                                            
enacted.                                                                                                                        
                                                                                                                                
Senator  Therriault  replied  that  questions  arose  at  that  time                                                            
relating to federal  taxation if the fund were changed.  Since then,                                                            
he stated  the Alaska Permanent  Fund Corporation  has had  adequate                                                            
time to review  the matter and secure  a legal opinion that  federal                                                            
taxation of the Fund would not occur.                                                                                           
                                                                                                                                
Senator  Olson  asked if  any  other obstacles  are  anticipated  in                                                            
addition to the federal taxation issue.                                                                                         
                                                                                                                                
Senator Therriault  replied that the  federal taxation question  has                                                            
received a definitive answer. He knew of no other obstacles.                                                                    
                                                                                                                                
Co-Chair  Green asked if  further definition  of "public  education"                                                            
were considered.                                                                                                                
                                                                                                                                
Senator Therriault  suggested the  Committee could further  restrict                                                            
the definition if desired.                                                                                                      
                                                                                                                                
Co-Chair Green  asked if Senator Therriault's  intention  is that of                                                            
an expectation  that an appropriation from the established  earnings                                                            
reserve sub-account  for public education  would be higher  than the                                                            
normal appropriation for education.                                                                                             
                                                                                                                                
Senator  Therriault responded  this  funding might  only comprise  a                                                            
portion  of the  funding necessary  for  public education  with  the                                                            
remainder appropriated  from the general  fund. He noted  this would                                                            
depend on the amount needed  each year to adequately fund education.                                                            
He qualified that additional funding could be necessary.                                                                        
                                                                                                                                
Co-Chair Green  surmised that earnings  of the Permanent  Fund would                                                            
therefore be one component of education funding.                                                                                
                                                                                                                                
Co-Chair  Green asked clarification  of the  earnings that  would be                                                            
deposited into  the sub-account and  asked if this could  consist of                                                            
dividends on investments  and returns on investments,  or funds from                                                            
other  sources that  would be deposited  into  the earnings  reserve                                                            
sub-account.                                                                                                                    
                                                                                                                                
Senator Therriault answered  that only the earnings from investments                                                            
of the  Fund would be deposited  into the  proposed sub-account.  He                                                            
clarified that the provisions  relating to the deposits of royalties                                                            
from oil  and gas resource  development into  the Fund would  remain                                                            
unchanged.                                                                                                                      
                                                                                                                                
Senator Bunde  commented, "much has been made" of  the wisdom of not                                                            
allowing dedicated  funds. He noted this proposal  would provide for                                                            
dedicated funds.                                                                                                                
                                                                                                                                
Senator Therriault  stipulated that  if any funds were appropriated                                                             
from the  proposed earnings  reserve sub-account  those funds  could                                                            
only be allocated for education.  He agreed this would be a "flavor"                                                            
of dedicated funds.                                                                                                             
                                                                                                                                
Senator Bunde  understood that if  the "fiscal political  realities"                                                            
of the legislature chose  to make an appropriation from the Fund for                                                            
education,  such an appropriation  would supplant  the general  fund                                                            
appropriation to education.  He commented this could thus make other                                                            
general fund monies available for other State services.                                                                         
                                                                                                                                
Senator Therriault acknowledged this could occur.                                                                               
                                                                                                                                
Co-Chair  Green cited  from  Section 15  of the  proposed  committee                                                            
substitute, "All  income from the permanent fund shall  be deposited                                                            
in the general  fund unless otherwise  provided by law."   She asked                                                            
if  Senator  Therriault   anticipated  difficulty  obtaining   voter                                                            
approval to deposit income directly into the general fund.                                                                      
                                                                                                                                
JOE BALASH,  Staff to Senator Therriault,  testified that  currently                                                            
statute  provides  that funds  are deposited  into  the statutorily                                                             
established earnings reserve  account. He reminded that in the years                                                            
1976 through 1980, earnings were deposited to the general fund.                                                                 
                                                                                                                                
Senator Hoffman  asked if adequate funds would remain  for inflation                                                            
proofing  if  the  proposal  to issue  two  dividend  payments  were                                                            
adopted.                                                                                                                        
                                                                                                                                
Senator Therriault  replied  that the POMV  method does not  require                                                            
cash for inflation proofing,  but rather the Fund would retain three                                                            
percent of earnings for automatic inflation proofing.                                                                           
                                                                                                                                
Senator Hoffman  surmised this proposal  would not implement  a true                                                            
POMV method and  that an issuance of a second dividend  payout would                                                            
remove additional  funds from income earnings. He  wanted to know if                                                            
adequate  funds  would remain  to  ensure  the Fund  were  inflation                                                            
proofed.                                                                                                                        
                                                                                                                                
Senator Therriault  clarified  that although  not a pure POMV,  this                                                            
proposal would  allow the Fund to operate as a POMV  in that no more                                                            
than five percent of the  value of the Fund could be distributed. He                                                            
emphasized  this method would  retain a  "firewall between  earnings                                                            
and principal" to prevent  an "erosion of the principal". He pointed                                                            
out that a series  of "down years" could erode the  principle of the                                                            
Fund if it were operated  under a pure POMV. He qualified the chance                                                            
of this  is minimal,  but possible.  He qualified  that if a  second                                                            
payout were  made it would be possible  that adequate funding  would                                                            
not be  available  for appropriation  to education  services in  the                                                            
first year.                                                                                                                     
                                                                                                                                
Senator Therriault deferred  to the Corporation to address technical                                                            
issues.                                                                                                                         
                                                                                                                                
Senator  B. Stevens  noted that  inflation proofing  would occur  on                                                            
June  30 and that  the  projected balance  of the  earnings  reserve                                                            
account made  on December 31, 2003  is expected to change  and would                                                            
be approximately $850 million  after dividend a payout and inflation                                                            
proofing. Therefore, he remarked, the concerns are unwarranted.                                                                 
                                                                                                                                
Senator  Therriault  calculated  that during  the  first  transition                                                            
year,  after  inflation  proofing  and the  first  dividend  payout,                                                            
adequate funds  would be available  in the current earnings  reserve                                                            
account for  a second dividend payout.  In future years,  he stated,                                                            
management of the Fund would change to a POMV-type methodology.                                                                 
                                                                                                                                
Senator  Hoffman asked  how the  ballot resolution  would  guarantee                                                            
that dividends  would be made. Under  the current program,  he cited                                                            
claims  of  the potential  that  no  funds would  be  available  for                                                            
dividends in some  years. He stated that the assurance  of continued                                                            
dividends has  been a "selling point"  of a POMV proposal  according                                                            
to accounts  he has received.  He therefore  supported changing  the                                                            
aforementioned language  from "may" to "shall" to guarantee dividend                                                            
payments.                                                                                                                       
                                                                                                                                
Senator  Therriault responded  that  the current  proposed  language                                                            
would provide  no less  guarantee  of a dividend  than the  existing                                                            
program provides.                                                                                                               
                                                                                                                                
Co-Chair Wilken announced  that the proposed resolution would not be                                                            
reported from  Committee at this meeting. He stated  that the matter                                                            
of the specific language could be addressed at a future hearing.                                                                
                                                                                                                                
Co-Chair  Green  remarked that  the  proposed  committee  substitute                                                            
language  provides more assurance  of a dividend  than the  existing                                                            
program.                                                                                                                        
                                                                                                                                
Senator Bunde  commented that "shall"  would imply a guarantee  of a                                                            
dividend and would subsequently "enshrine" the dividend.                                                                        
                                                                                                                                
Senator Therriault  noted that "shall"  could result in a  challenge                                                            
similar  to the  situation  in  the litigation  Bess  versus  Ulmer,                                                          
relating  to the difference  between constitutional  amendments  and                                                            
constitutional changes.                                                                                                         
                                                                                                                                
SENATOR HOLLIS  FRENCH asked if the balance of the  earnings reserve                                                            
account  established  within  the  Fund  would be  included  in  the                                                            
calculation of the five percent to determine the POMV.                                                                          
                                                                                                                                
Senator Therriault affirmed it would.                                                                                           
                                                                                                                                
Senator French  asked if  public education,  in this context,  would                                                            
include the University of Alaska.                                                                                               
                                                                                                                                
Senator Therriault  replied  that the language  could be written  to                                                            
include or exclude  the University of Alaska and could  be contained                                                            
in either  the Constitution  or in  statute. He  commented that  the                                                            
Constitution  should only  contain language  that is necessary,  and                                                            
that he would  recommend a statutory definition of  public education                                                            
for this purpose.                                                                                                               
                                                                                                                                
Senator French expressed  concern that the proposal is a "hybrid" of                                                            
the  current  system and  the  POMV  system,  and that  rather  than                                                            
combining   the  benefits   of  each  system,   could  contain   the                                                            
weaknesses.  He remarked that the  public is able to understand  the                                                            
existing system;  that market performance affects  the amount of the                                                            
dividend. He stated that  this proposal does not provide the benefit                                                            
of the  POMV system  to the  Fund managers.  He  explained that  the                                                            
"insulation"  from dependence  on the amount  of funds available  in                                                            
the earnings  reserve  account for  a dividend payout  would  not be                                                            
provided.  This proposal,  he predicted  would  likely increase  the                                                            
public's  expectation  of  receiving  a dividend  and  would  create                                                            
pressure to provide dividends.                                                                                                  
                                                                                                                                
Senator Therriault  remarked that the risk would be  low, especially                                                            
given the  current balance  of the  earnings reserve  account  of $5                                                            
billion.  He furthered  this  would  not  increase pressure  on  the                                                            
trustees  of the Fund to  generate a profit  from the management  of                                                            
the Fund.                                                                                                                       
                                                                                                                                
BOB BARTHOLOMEW,  Chief  Financial  Officer, Alaska  Permanent  Fund                                                            
Corporation,  Department of Revenue,  understood the proposal  would                                                            
retain  the concept  of principal  in the Constitution.  He  relayed                                                            
that the Trustees  underwent significant  discussion on the  matter.                                                            
                                                                                                                                
                                                                                                                                
SFC 04 # 52, Side B 2:34 PM                                                                                                     
                                                                                                                                
                                                                                                                                
AT EASE 2:34 PM / 2:35 PM                                                                                                       
                                                                                                                                
Mr.  Bartholomew  emphasized  the importance  of  understanding  the                                                            
Permanent  Fund is  invested as  one entity,  although comprised  of                                                            
"three different  buckets" for accounting  purposes: $23  billion is                                                            
the principal,  which is the accumulation  of all revenues  from oil                                                            
development,  other special appropriations  and inflation-proofing;                                                             
$4 billion  is unrealized earnings,  which is the increase  value of                                                            
assets that had not been  sold; and, $1 billion of realized earnings                                                            
account,  which is actual  income from interest  payments on  bonds,                                                            
dividends  from  stocks,  rental income  from  properties,  etc.  He                                                            
qualified  that  the principal  is  actually  a combination  of  the                                                            
deposits and unrealized  gains. He stated that as long as the assets                                                            
are not  sold, the unrealized  gains are part  of the principal.  If                                                            
the Fund  managers  decide to  sell an  asset, the  unrealized  gain                                                            
converts   to   realized   income   and   becomes    available   for                                                            
appropriation.                                                                                                                  
                                                                                                                                
Mr. Bartholomew shared  that the Board decided to recommend a change                                                            
from this current method  to a POMV method because of the volatility                                                            
in  the  market.   He  noted  that  market  volatility   could  make                                                            
significant amounts of  money available in years of high performance                                                            
that could  be saved  as a "cushion"  for use  during years  of poor                                                            
market  performance.  However,  he  cautioned  that  if  the  market                                                            
"drops"  before  assets  are  sold and  the  value  of the  Fund  is                                                            
reduced, dividend  payouts would be  dependant upon future  earnings                                                            
and that possibly no money would be available for distribution.                                                                 
                                                                                                                                
Mr.  Bartholomew  relayed  that some  deem  it appropriate  that  if                                                            
earnings are not adequate dividends should not be paid.                                                                         
                                                                                                                                
Mr.  Bartholomew  stated that  historically,  the  earnings  reserve                                                            
system has  operated as intended,  although it peaked in  March 2000                                                            
at  $8 billion.  He  told of  four factors  in  the year  1999  that                                                            
reduced  the  amount   of  earnings  reserve  funds  available   for                                                            
dividends  the following  year  to $100  million:  approximately  $2                                                            
billion was  paid out in three dividends,  approximately  $1 billion                                                            
was transferred  from the earnings reserve account  to the corpus of                                                            
the  Permanent Fund  to  offset the  effects  of inflation,  and  an                                                            
extended bear market eliminated  much of the unrealized appreciation                                                            
of assets,  and the legislature in  FY 99 appropriated $250  million                                                            
to the principal  of the Fund. He cautioned of the  risk in years of                                                            
bear  markets if  the balance  of the  earnings  reserve account  is                                                            
diminished,  that no funds would be  available to pay dividends.  He                                                            
calculated the  probability of having no dividend  at ten to fifteen                                                            
percent  each year and  the probability  of paying  dividends  at 80                                                            
percent. He stressed this is a decision that must be made.                                                                      
                                                                                                                                
Senator  B.  Stevens referenced  the  witness'  statement  that  the                                                            
amount of realized  earnings was reduced to $100 million  as of July                                                            
1, 2003, and the  amount of unrealized earnings was  $1.1 billion as                                                            
of December 31, 2003 totaling  $1.2 billion. Senator B. Stevens also                                                            
cited the Corporation's  December 31, 2003 projection  of the amount                                                            
of  unrealized  earnings  on  June  30, 2004  of  $3.4  billion  and                                                            
realized earnings  balance of $850 million after inflation  proofing                                                            
and a dividend  payout. He calculated the total to  be $4.2 billion.                                                            
                                                                                                                                
Mr. Bartholomew affirmed.                                                                                                       
                                                                                                                                
Senator B. Stevens stressed  the need to clarify this for the record                                                            
because  the witness  had incorrectly  testified  that the  earnings                                                            
reserve account was reduced to less than $100 million.                                                                          
                                                                                                                                
AT EASE 2:43 PM / 2:45 PM                                                                                                       
                                                                                                                                
Co-Chair Wilken  referenced a spreadsheet titled,  "Alaska Permanent                                                            
Fund, Financial  Projections 2004  - 2014, as of December  31, 2003"                                                            
[copy on file.]                                                                                                                 
                                                                                                                                
Mr.  Bartholomew  outlined  the data  included  in  the spreadsheet                                                             
clarifying  the amounts  available  for distribution  and  inflation                                                            
proofing and the balances of the earnings reserve account.                                                                      
                                                                                                                                
Senator Therriault summarized  this proposal is a hybrid intended to                                                            
address concerns and offer solutions.                                                                                           
                                                                                                                                
AT EASE 2:50 PM / 2:52 PM                                                                                                       
                                                                                                                                
Sales Tax Proposal Worksession                                                                                                  
By Senator B. Stevens                                                                                                           
                                                                                                                                
Senator  B. Stevens  referenced a  handouts titled,  "Comparison  of                                                            
State and  Local Retail Sales  Taxes 2003  (January 2003)"  [copy on                                                            
file]  and  pointed  out  this  demonstrates   that  several  states                                                            
implement  a sales tax  in conjunction  with local  sales taxes.  He                                                            
referenced  a table titled, "Appendix  B. State Sales Tax  Rates, as                                                            
of  January  1,  2003"  from  the  Tax  Policy  Handbook  for  State                                                            
Legislatures [copy  on file.] He noted the three largest  exemptions                                                            
from sales  taxes as food, prescription  drugs and non-prescription                                                             
drugs.  He then referenced  another  spreadsheet  titled, "Table  1,                                                            
2002 Municipalities:  Class,  Populations  and Tax  Types" [copy  on                                                            
file], which lists  municipalities of Alaska, their  status as first                                                            
class cities,  home rule  boroughs, etc.,  population, and  types of                                                            
taxes imposed,  if any. He also distributed  draft legislation,  23-                                                            
LS1051\S, [which would  later be introduced as SB 366] relating to a                                                            
State sales tax [copy on file].                                                                                                 
                                                                                                                                
Senator B.  Stevens pointed out that  this State sales tax  proposal                                                            
allows  very few  exemptions.  He  stated  the old  methodology  has                                                            
depended upon  tangible objects; however,  a significant  portion of                                                            
Alaska's economy has shifted to non-tangible services.                                                                          
                                                                                                                                
Senator  B.  Stevens  noted  the inclusion   of heating  oil  as  an                                                            
exemption  from the  proposed sales  tax, in addition  to goods  and                                                            
services used for manufacturing.                                                                                                
                                                                                                                                
Senator Bunde  reiterated the conversation  at the previous  meeting                                                            
of the Senate  Finance Committee that an income tax  would allow for                                                            
no exemptions. He remarked  that the purpose of a tax is to generate                                                            
revenue and that the more  exemptions allowed, the less revenue that                                                            
could be collected.  He suggested  that if a debate between  a sales                                                            
tax and an  income tax were to ensue,  exemptions should  be allowed                                                            
for neither.                                                                                                                    
                                                                                                                                
Senator  Hoffman asked  Senator Bunde  if his intent  is that  large                                                            
purchases would have no tax limits.                                                                                             
                                                                                                                                
Senator Bunde  responded if the plan were to raise  money this would                                                            
be appropriate.                                                                                                                 
                                                                                                                                
Senator B. Stevens  noted that this could create a  conflict, as the                                                            
intent is to establish  a maximum tax per purchase. He stated he was                                                            
researching  how  this  would  impact  local  government  sales  tax                                                            
limits.                                                                                                                         
                                                                                                                                
Senator Hoffman  asked if this proposal would establish  two systems                                                            
of sales tax  exemptions for those  communities that impose  a local                                                            
sales tax.                                                                                                                      
                                                                                                                                
Senator B. Stevens replied  this proposal would impose a State sales                                                            
tax  in addition  to  a local  tax,  although  both taxes  would  be                                                            
governed  by the State  rules.  He explained  that local  exemptions                                                            
would  be  "absorbed"  into  the State  process  and  therefore  one                                                            
community  would  not  exempt  taxation  on  an  item  that  another                                                            
community would tax.                                                                                                            
                                                                                                                                
PHELAN  STRAUBE, Staff  to Senator  B. Stevens,  clarified that  the                                                            
proposed   legislation  would   establish   exemptions  that   would                                                            
supersede any  local exemptions. He gave the tax exemption  extended                                                            
to senior citizens by the  City and Borough of Juneau as an example,                                                            
noting that this  legislation would not allow exemptions  for senior                                                            
citizens. He qualified  that local governments could provide rebates                                                            
for certain purchases or to certain purchasers if desired.                                                                      
                                                                                                                                
Senator B. Stevens  assured this proposal would not  reduce revenues                                                            
to local governments,  as one percent of the State  portion would be                                                            
appropriated  to those  local governments  that  currently impose  a                                                            
sales tax.                                                                                                                      
                                                                                                                                
Co-Chair Wilken asked clarification  of the portion of the collected                                                            
tax returned to local governments.                                                                                              
                                                                                                                                
Senator  B. Stevens  detailed  that  the  State would  collect  four                                                            
percent of the amount of  purchases made in communities that did not                                                            
impose a local  sales tax. Purchases made in those  communities with                                                            
a  local  sales  tax  would  be  assessed  four  percent,  plus  the                                                            
percentage  of the  local sales  tax. He  continued  that the  State                                                            
would retain  three percent and return  to the local government  the                                                            
percentage  it levied  plus an additional  one percent.  He gave  an                                                            
example  a community  with  a three-percent  sales  tax. Under  this                                                            
proposal,  he stated the  consumer would  be levied a seven-percent                                                             
tax, the State  would retain three-percent  and the community  would                                                            
receive four-percent.                                                                                                           
                                                                                                                                
Co-Chair  Wilken asked  if  therefore the  highest  amount that  the                                                            
State would  collect would be three  percent of the purchase  price.                                                            
                                                                                                                                
Senator  B. Stevens  corrected the  State could  receive up to  four                                                            
percent.  He stated  this  would be  from  purchases  made in  those                                                            
communities that assess no local sales tax.                                                                                     
                                                                                                                                
Co-Chair Wilken requested further examples.                                                                                     
                                                                                                                                
Senator  B. Stevens  compared Fairbanks  and Juneau.  He noted  that                                                            
because  the Fairbanks  North Star  Borough collects  no sales  tax,                                                            
purchased made  in that area would  be assessed a four-percent  tax,                                                            
all of which would be retained  by the State. He then explained that                                                            
the tax revenues  received by the  City and Borough of Juneau  under                                                            
this proposal  would increase from  the current five percent  to six                                                            
percent. He noted the tax  assessed on purchases would increase from                                                            
five  percent  to nine  percent.  He  pointed  out that  the  Juneau                                                            
government  would  have  the options  of  retaining  the  additional                                                            
funding for government  services, reduce the amount of the local tax                                                            
to four percent, or offer rebates.                                                                                              
                                                                                                                                
Senator  B. Stevens  furthered  that  if  the Fairbanks  North  Star                                                            
Borough chose  to implement a three-percent tax, consumers  would be                                                            
assessed seven  percent on purchases;  the State would retain  three                                                            
percent  and the Fairbanks  government would  receive four  percent,                                                            
consisting of the three  percent it levied and a one percent "bonus"                                                            
from the State.  He suggested the Fairbanks government  could decide                                                            
to lower property  taxes as a result  of the revenues received  from                                                            
sales taxes, or  decide to increase funding for education,  roads or                                                            
other services.                                                                                                                 
                                                                                                                                
Senator  Hoffman asked  if  a community  that currently  imposes  no                                                            
sales  tax  could  implement  a  one-percent  sales  tax  to  become                                                            
eligible to receive one-percent of the State portion.                                                                           
                                                                                                                                
Senator  B.  Stevens  replied  that under  this  proposal,  a  local                                                            
government  must impose  a minimum  sales  tax of  three percent  to                                                            
qualify for the additional one-percent "revenue sharing".                                                                       
                                                                                                                                
Senator  B. Stevens  clarified the  minimum amount  the State  would                                                            
collect would  be three percent of purchases and the  maximum amount                                                            
would  be four  percent of  purchases,  depending  upon whether  the                                                            
local government  imposed a sales tax of at least  three-percent. He                                                            
informed that  the four-percent amount was chosen  for this proposal                                                            
because it  would be among  the lowest amounts  collected by  states                                                            
imposing a statewide sales tax.                                                                                                 
                                                                                                                                
Co-Chair Wilken  noted that if a local government  was restricted to                                                            
a revenue or taxation limit,  it could not accept the additional one                                                            
percent  and that money  would revert  to the  State. Otherwise,  he                                                            
surmised the  local government would  be forced to reduce  the local                                                            
tax percentage.                                                                                                                 
                                                                                                                                
SENATOR BERT  STEDMAN requested further  discussion on the  issue of                                                            
limiting the maximum amount  of sales tax that could be collected on                                                            
each purchase.  He. He asked if the  proposal would allow  the State                                                            
tax limitation and a local limitation to differ.                                                                                
                                                                                                                                
Senator  B. Stevens  replied that  $60 would be  the highest  amount                                                            
levied on single  purchases by the  State, although the limit  could                                                            
be higher for  the local sales tax  portion on purchases.  He agreed                                                            
this is an issue that must  be resolved. He emphasized the intent is                                                            
to not preclude any municipality  from collection of taxes currently                                                            
in place.                                                                                                                       
                                                                                                                                
Senator Stedman  knew of some municipalities  that limit  the tax to                                                            
the first  $1,000 of each  purchase, and  proposals to increase  the                                                            
amount  to  $5,000.  He asked  the  flexibility  provided  to  local                                                            
governments  if the State limited  the tax to the first $1,500  of a                                                            
purchase.                                                                                                                       
                                                                                                                                
Senator  B.  Stevens  indicated  the  issue  would  require  further                                                            
investigation to determine the impact on communities.                                                                           
                                                                                                                                
Senator Olson  asked how  the sales tax would  be enforced  in small                                                            
communities  and gave examples of  residents selling candy  bars out                                                            
of their homes. He reported  that some high school students practice                                                            
this type of retail sales.                                                                                                      
                                                                                                                                
Senator B.  Stevens was unsure how  the Department of Revenue  would                                                            
implement a statewide sales  tax. He noted that systems are in place                                                            
in some  boroughs and assumed  the process  would be related  to the                                                            
tax  collection  systems  merchants   have  in  place.  He  admitted                                                            
"leakage"  and abuse  would occur,  but noted  the federal  Internal                                                            
Revenue Service (IRS) also experiences such problems.                                                                           
                                                                                                                                
SENATOR  TOM  WAGONER  furthered  on  Senator  Stedman's   comments,                                                            
pointing  out  that  a  tax limit  on  sales  of  $1500  would  cost                                                            
consumers  an  additional  $75  on  purchases  made  in  Kenai  over                                                            
purchases of  the same amount made  in Anchorage. He predicted  that                                                            
shoppers would travel to Anchorage for larger purchases.                                                                        
                                                                                                                                
Senator B. Stevens remarked this occurs currently.                                                                              
                                                                                                                                
Senator Wagoner corrected  this does not occur because the sales tax                                                            
collected by the  Kenai Peninsula Borough is levied  on a maximum of                                                            
$500 of each invoice, with a total tax of $25.                                                                                  
                                                                                                                                
Co-Chair  Wilken  noted the  existence  of  obstacles  that must  be                                                            
addressed.                                                                                                                      
                                                                                                                                
Senator  Hoffman referenced  Sec.  43.44.040. Payment  of use  tax.,                                                            
established  by Section 13  on page 6, lines  5 - 8 of the  proposed                                                            
committee substitute.  He noted the  30-day deadline for  submitting                                                            
collected  taxes.  He  expressed  concern  that  this  would  create                                                            
hardship for businesses  that collect a minimal amount. He suggested                                                            
extended reporting  periods to allow businesses to  submit taxes and                                                            
reports after accumulating a reasonable amount.                                                                                 
                                                                                                                                
Senator  B.  Stevens  agreed  to  this  suggestion.  He  stated  the                                                            
submission process  should not be so onerous as to  create more work                                                            
than the initial transaction.                                                                                                   
                                                                                                                                
                                                                                                                                
ADJOURNMENT                                                                                                                 
                                                                                                                                
Co-Chair Gary Wilken adjourned the meeting at 03:21 PM                                                                          

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