Legislature(2003 - 2004)
05/06/2004 08:05 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
May 06, 2004
8:05 AM
TAPES
SFC-04 # 109, Side A
SFC 04 # 109, Side B
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 8:05 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Ben Stevens
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: REPRESENTATIVE NORM ROKEBERG; REPRESENTATIVE MIKE
CHENAULT; JANET SEITZ, Staff to Representative Norm Rokeberg; RUTH
BLACKWELL, Realtor and Representative, Alaska Association of
Realtors; PAT DAVIDSON, Director, Legislative Budget & Audit; BOB
BARTHOLOMEW, Chief Operating Officer, Alaska Permanent Fund
Corporation, Department of Revenue; STEVER PORTER, Deputy
Commissioner, Office of the Commissioner, Department of Revenue
Attending via Teleconference: From Anchorage: CHARLES SANDBERG,
Realtor, and Representative, Alaska Association of Realtors; HAROLD
HEINZE, CEO, Alaska Natural Gas Development Authority; From an
Offnet Site: DAVE OWENS, Owner, Owens Inspection Services; From
Kenai: BILL POPP, Oil and Gas Liaison for the Kenai Peninsula
Borough
SUMMARY INFORMATION
HB 418-REAL ESTATE COM'N/LICENSEE/HOME INSPECT
The committee heard from the sponsor and the real estate and home
inspector industry. Four amendments were adopted and the bill
reported from Committee.
HB 417-AK NATURAL GAS DEV. AUTHORITY INITIATIVE
The Committee heard from the sponsor, the Department of Natural
Resources, and the industry. The bill was reported from Committee.
HJR 26-CONST. AM: PF APPROPS/INFLATION-PROOFING
The Committee heard from the Department of Revenue and reported the
bill from Committee.
HB 15-SOLICITATIONS/CONSUMER PROTECTION
This bill was scheduled but not heard.
HB 422-BUDGET RESERVE FUND INVESTMENT
This bill was scheduled but not heard.
HB 494-ELECTRONIC PAYMENT FOR STATE BUSINESS
This bill was scheduled but not heard.
HB 514-CHILD SUPPORT ENFORCEMENT/ CRIMES
This bill was scheduled but not heard.
HB 545-STATE REAL PROPERTY LEASE EXTENSIONS
This bill was scheduled but not heard.
HB 559-STEP PROGRAM CONTINUANCE
This bill was scheduled but not heard.
SENATE CS FOR CS FOR HOUSE BILL NO. 418(L&C)
"An Act extending the termination date of the Real Estate
Commission; relating to real estate; relating to home
inspectors; relating to real estate licensees; and providing
for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this bill, SCS CS HB 418 (L&C), Version
23-LS1548\Q, is sponsored by the House Labor & Commerce Committee
and Representative Norm Rokeberg and would extend the Real Estate
Commission until June 30, 2008. In addition, he noted that the bill
would further clarify the State's Home Inspector law. He specified
that a Department of Community and Economic Development fiscal note
accompanies the bill.
JANET SEITZ, Staff to Representative Norm Rokeberg, the bill's
sponsor, informed the Committee that in addition to extending the
life of the Real Estate Commission until 2008, this legislation
would clarify existing procedures regarding real estate licenses
and notice procedures as recommended in the Alaska Division of
Legislative Audit, Audit Digest #08-20023-03 [copy on file]. She
explained that this bill would also change language to address
issues arising from the enactment of the 2003 Home Inspector
legislation, HB 9, as recommended by the Regulation Writing
Procedure and the Home Inspector industry.
RUTH BLACKWELL, Realtor and Representative, Alaska Association of
Realtors, informed the Committee that the Alaska Association of
Realtors (AAR) supports extending the life of the Real Estate
Commission. On another matter, she pointed out that AAR is in favor
of a forthcoming amendment that would reduce the real estate surety
fund award to a claimant from the $20,000 level specified in the
Senate Labor & Commerce (L&C) version of the bill to its current
level of $10,000.
Co-Chair Wilken asked which amendment would address the surety bond
issue.
Ms. Seitz responded that it would be addressed in forthcoming
Amendment #3.
Ms. Blackwell explained that with the exception of the year 2003
when the number of surety claims amounted to fourteen, the average
number of claims has been three or five claims a year. She stated
that during her most recent tenure as a Board member of the Real
Estate Commission, it was noted that few surety claim hearings were
heard due to the fact that the Commission has limited access to the
lone surety fund hearing officer, who is shared with another
entity. She stated that AAR recommends that the Committee continue
the $10,000 surety bond level and allow time for a process to be
developed to "fix the system so that the public is served." She
argued that increasing the surety bond to $20,000 would result in
an increase in the number of claims filed which would escalate the
problem regarding the scheduling of hearings.
Ms. Blackwell informed the Committee that AAR has, in place for its
members, a mediation, arbitration, and professional standards
hearing system that has conducted 60 hearings within the last year.
She voiced optimism that some manner of processing hearings to
better serve the public could be developed through a cooperative
effort between the Commission, the Department of Community and
Economic Development, and the AAR.
Co-Chair Wilken stated that when Amendment #3 is discussed, AAR's
support of it would be noted.
Senator Dyson asked whether AAR supports the licensing of home
inspectors.
Ms. Blackwell affirmed that it does.
Senator Dyson asked the methodology used by AAR to reach this
conclusion.
Ms. Blackwell explained that AAR conducted a poll of its various
boards and that information was provided to the AAR Legislative
Committee, which consists of a minimum of one member from each of
the other AAR boards. She noted that AAR has monitored, discussed,
and provided input regarding the Home Inspector bill for
approximately four years.
Senator Dyson asked whether 99 percent or 60 percent of realtors
support the licensing of Home Inspectors.
Ms. Blackwell responded that the answer would depend on the area
being polled as, she disclosed, the City and Borough of Juneau and
several other communities in the State do not have either licensed
or unlicensed home inspectors. She commented that, Juneau, for
instance, instead utilizes licensed engineers as, she noted, it is
felt that "their license was better than ours." However, she
disclosed that access to licensed inspectors would be acceptable as
their service would be less expensive than that of a licensed
engineer. In summary, she surmised that a minimum of 75 to 80
percent of the Association's members support licensing Home
Inspectors.
CHARLES SANDBERG, Realtor and Representative, Alaska Association of
Realtors, testified via teleconference from Anchorage, and informed
the Committee that he, a realtor for 17 years, was formerly the
National Director of the National Association of Realtors and is
currently a member of the Professional Standards Committee on the
national, State, and local Anchorage Board and Association level.
He also disclosed that he is an arbitrator on the AAR Hearing
Panel. This panel, he shared, is a very effective system that
resolves disputes between both consumers and consumers and between
consumers and realtor members. He stated that the AAR Hearing Panel
is less expensive to operate and is more efficient system than the
system utilized by the Commission and, in addition, has a 95-
percent resolution history. In contrast, he avowed that the Surety
Fund claim process is slow and resolves less than 10 percent of the
claims that are filed. He stated that none of the fourteen Surety
Fund claims that were filed in 2003 were heard, as compared to the
AAR process in which 60 claims were filed and processed.
Furthermore, he noted that the AAR system usually addresses and
resolves disputes in two to four months; whereas, the Commission's
hearing system process might require several years. Echoing Ms.
Blackwell's comments, he urged that the Surety Fund claim limit be
rolled back, via Amendment #3, from $20,000 to $10,000, and allow
the appropriate parties to review and determine a more effective
manner through which to deal with the issues.
Amendment #1: This amendment inserts new bill sections into the
bill on page two, following line 20. The new language reads as
follows.
Sec. 3. AS 08.18.071(a) is amended to read:
(a) Except as provided in (d) and (e) of this section,
each [EACH] applicant shall, at the time of applying for a
certificate of registration, file with the commissioner a
surety bond running to a state conditioned upon the
applicant's promise to pay all
(1) taxes and contributions due the state and
political subdivisions;
(2) persons furnishing labor or material or renting
or supplying equipment to the applicant; and
(3) amounts that may be adjudged against the
applicant by reason of negligent or improper work or breach of
contract in the conduct of the contracting business or home
inspection activity, as applicable, or by reason of damage to
public facilities occurring in the course of a construction
project.
Sec. 4. AS 08.18.071 is amended by adding a new subsection to
read:
(d) A general contractor or specialty contractor who is
in compliance with the surety bond or deposit requirements of
(a) and (b) of this section is not required to file another
surety bond or increase a deposit with the commissioner when
the general contractor or specialty contractor applies to be a
registered home inspector. However, if the general contractor
or specialty contractor subsequently is neither a general
contractor nor a specialty contractor and becomes only a
registered home inspector, the home inspector shall provide a
surety bond or deposit in lieu of the bond in the manner and
amount required for registered home inspectors under this
section.
(e) An applicant for, or holder of, a certificate of
registration as a home inspector may, in lieu of filing with
the commissioner a surety bond or deposit that meets the
requirements of this section, file evidence satisfactory to
the commissioner that the applicant is employed by a
registered home inspector who is in compliance with the surety
bond or deposit requirements of this section.
Co-Chair Green moved to adopt Amendment #1.
Co-Chair Wilken objected for explanation.
Co-Chair Green noted that one issue not resolved by the passage of
HB 9, was how to deal with home inspectors who are not employees of
a city or borough and who conduct the majority of the home
inspections.
Co-Chair Green informed the Committee that by restoring some of the
original language pertaining to home inspections, the amendments
she would be offering today would assist in alleviating the
unintended consequences resulting from the passage of HB 9.
Co-Chair Green stated that Amendment #1 "would correct" provisions
established by HB9 that require each home inspector to be
individually licensed, to provide a surety bond, and to have a
general liability insurance policy. These requirements, she
continued, require an individual to acquire "multiple bonding and
insurance requirements" in such situations as when a home inspector
business owner employs one or more persons who are also registered
home inspectors, or when a general or specialty contractor also
wishes to be a registered home inspector. She voiced the
understanding that the current requirements result in multiple
layers of requirements that are unnecessary in that they would not
provide any additional protection. She stated that Amendment #1
would change the provisions so that an owner/home inspector's
coverage would not be duplicated.
Ms. Seitz informed the Committee that Representative Rokeberg
supports Amendment #1, as it would address the "dual bonding"
concern. She exampled that currently a specialty contractor who
also desires to be licensed home inspector is required to acquire
two bonds, and she continued, this dual bonding requirement also
applies to a owner/employee situation in which both the employee
and the owner are currently be required to have a bond.
Senator Dyson asked whether there is a national home inspector
association.
Co-Chair Green understood that there is; however, she would defer
to the industry to provide further information.
Senator Dyson specified that he "did not agree" with the State
being involved in the licensing of home inspectors and, voicing
support for "eliminating that entirely." He asked whether this
amendment would eliminate the licensing requirement and replace it
with a registration requirement.
Ms. Seitz responded that the amendment retains the requirements
established by HB 9 that specify that a home inspector be required
to register in a manner "similar to a license, but it's not called
a license, it's called a registration."
Senator Dyson asked whether meeting the standards of the national
organization would serve to quality someone as a licensed
inspector.
Ms. Seitz stated that once the transitional licensing period, that
allows someone to be qualified in the profession based upon a
certain number of years' experience, has expired a person would be
required to pass certain examinations.
Senator Dyson asked whether the examinations would be administered
by the State or by a professional organization.
Ms. Seitz responded that the tests would be administered by
professional testing agencies.
Co-Chair Green referred to language in Section 2, subsection (a)
(1) (A) on page one, line 13 through page two, line two, of the
bill that reads as follows.
(A) existing home is the examination offered by the American
Society of Home Inspectors, [AMERICAN HOME INSPECTORS TRAINING
INSTITUTE,] or National Association of Home Inspectors;
Co-Chair Green noted that this legislation would require an
applicant to provide additional information as denoted in Section
2, subsection (a)(3)(B), located on page two, line nine, that reads
as follows.
(B) accompanied by documentation that the applicant has
completed continuing education requirements established by the
department;
Co-Chair Green clarified that this amendment does not address the
registration requirements as they are addressed elsewhere in the
legislation.
Co-Chair Green stated that forthcoming Amendment #2 would address
other issues that have resulted from the enactment of HB 9.
DAVE OWENS, Owner, Owens Inspection Services, testified via
teleconference from an offnet site and explained that his business
conducts both residential and commercial inspections. He discussed
the "stumbling blocks" that he and his business have experienced as
a result of HB 9's licensing requirements, in that, in addition to
the "problematic" dual bonding requirement, he, who has been
accredited in the home inspection business for numerous years, was
denied his license because he had not been tested in all applicable
categories within a year prior to his licensing application.
Mr. Owens also requested that the AS 18.56.300(c) provision, as
would be addressed in a forthcoming amendment, remain in Alaska
Housing Finance Corporation (AHFC) statutes.
Mr. Owens asked the Committee to address the dual bonding issue as
well as to determine a method through which the Department of
Community and Economic Development could recognize qualifying
certifications in lieu of when a test was undertaken.
Senator Dyson asked for clarification that while Mr. Owens remarks
referenced licensing requirements in his remarks, he was, in fact,
speaking to the registering requirements.
Mr. Owens concurred that he was speaking in regards to the
registration requirements.
Senator Dyson commented that although he would not require further
discussion at this time, he would be interested, at some time, in
further clarification between the difference in registration,
certification, and licensing.
Co-Chair Wilken removed his objection.
There being no further objection, Amendment #1 was ADOPTED.
Amendment #2: This amendment deletes "Section 44(e), ch. 134, SLA
2003, is" and replaces it with "Sections 41, 42, 44(e), and 47, ch.
134, SLA 2003, are" in Section 11, page five, line two.
Co-Chair Green moved to adopt Amendment #2.
Co-Chair Wilken objected for explanation.
Co-Chair Green explained that this amendment would reestablish the
AS 18.56.300 (c) provision, as earlier mentioned by Mr. Owens, that
was repealed by HB 9. She noted that a home inspection is required
for either the purchase of home through AHFC or for the
implementation of a housing loan for residential housing
constructed after June 30, 1992 with AHFC. She noted that AHFC
ascertains that this would apply to approximately "thirty to forty
percent of the market share of mortgage lending for single family
residential dwellings." Furthermore, she noted that subsection (c)
limited the liability of a home inspector performing the
requirements of subsection (b) to gross negligence and intentional
misconduct. Therefore, she stated, removal of subsection (c) served
to "expose home inspectors to greater risk of legal actions against
them for which a prudent business owner would require professional
liability or errors and omissions insurance." Furthermore, she
informed that this insurance is unavailable in Alaska, as confirmed
by the Division of Insurance. Therefore, she stated, HB 9 required
home inspectors to seek an unobtainable product. She stated that
the bill's sponsor concurs with this amendment.
Co-Chair Wilken removed his objection.
There being no further objection, Amendment #2 was ADOPTED.
Amendment #3: This amendment deletes "one year" and replaces it
with "three years" in Section 2, subsection (3)(A), on page two,
line seven of the bill. The amended language would read as follows.
(A) within three years after passing the examination required
under (1) of this subsection; or
In addition, the amendment would delete Section 6, on page three,
lines 12 through 22, which proposes changes to the claim level
associated with the Surety Fund.
Co-Chair Green moved to adopt Amendment #3. She stated that the
first portion of the amendment would address Mr. Owens' concern
regarding testing and registration time limitation requirements by
increasing the one-year time window to a three-year window.
Co-Chair Green noted that the second portion of the amendment has
been suggested by various individuals and would serve to delete the
Senate Labor & Commerce bill's language pertaining to the Surety
Fund.
Co-Chair Wilken objected for clarification.
Co-Chair Wilken requested that Amendment #3 be divided into
Amendment 3A and 3B.
There being no objection, Amendment #3 was divided.
Amendment #3A: This amendment deletes "one year" and replaces it
with "three years" in Section 2, subsection (3)(A), on page two,
line seven of the bill. The amended language would read as follows.
(A) within three years after passing the examination required
under (1) of this subsection; or
Co-Chair Green moved to adopt Amendment #3A.
REPRESENTATIVE NORM ROKEBERG, the bill's sponsor, concurred with
the proposed language.
Co-Chair Wilken removed his objection.
There being no further objection, Amendment 3A was ADOPTED.
Amendment #3B: This amendment deletes Section 6 which is located on
page three, lines 12 through 22 of the bill. The language being
deleted reads as follows.
Sec. 6. AS 08.88.470 is amended to read:
Sec. 08.88.470. Findings and payment. At the conclusion
of the commission's consideration of a claim made under AS
08.88.460, it shall make written findings and conclusions on
the evidence. If the commission finds that the claimant has
suffered a loss in a real estate transaction as a result of
fraud, misrepresentation, deceit, or the conversion of trust
funds or the conversion of community association accounts
under the control of a community association manager on the
part of a real estate licensee, the commission may award a
claimant reimbursement from the real estate surety fund for
the claimant's loss up to $20,000 [$10,000]. Not more than
$20,000 [$10,000] may be paid for each transaction regardless
of the number of persons injured or the number of parcels of
real estate involved in the transaction.
Co-Chair Green moved to adopt Amendment #3B.
Co-Chair Wilken objected.
Co-Chair Green stated that the Senate Labor & Commerce committee
adopted this language, and that there has been support for
continuing the $10,000 surety fund level.
Senator Bunde, Chair of the Senate & Labor Committee, asked whether
the removal of the entire section would serve to eliminate the
Surety Fund in its entirety.
Ms. Seitz responded that removal of this section would serve to
retain the current language of the section; specifically, she
stated, its removal would assure the continuance of the $10,000
Surety Fund claim level.
Representative Rokeberg commented that he supports this amendment,
as it would address the concerns raised by AAR. He echoed the
comments regarding the limited availability of the hearing officer,
and characterized the situation as not being "very workable." He
stated that currently the Surety Fund could be utilized to
reimburse injured parties for cases involving misrepresentation,
fraud, or deceit. He stated that were the limit to increase to
$20,000, the cases would be "more appropriately addressed by the
judiciary system" due to the high cost involved. He also noted that
claims at that level should be adjudicated in the Court System
rather than via the hearing office system. Furthermore, he opined,
increasing the level to $20,000 might result in an increase in the
number of claims. He noted that separate legislation is being
considered that would increase the current damages amount allowable
in Small Claims Courts.
Representative Rokeberg stated that the Surety Fund was originally
developed to "simplify the process to the consumer, but he opined,
the system is currently "more complicated and more expensive," and
that, in the case of a "frivolous claims," the licensee is
"required to expend a large amount of money for legal fees in order
to defend himself and achieve a dismissal." He concluded that
increasing the amount of the Surety Fund would be wrong in that, in
reality, the entire "system needs to be reformed" rather than
"making it more attractive to go the wrong way." He acknowledged
the AAR hearing process that allowed 60 cases to be addressed and
rectified in a short amount of time.
Senator Bunde stated that he respectfully disagreed and objected to
the amendment. He provided Members with a handout on Surety Bonds
titled "A Selection of Other States with State Administered Real
Estate Recovery Funds" [copy on file], that compares Alaska to
other states. He noted that Alaska with a $10,000 Surety Bond
requirement is one of approximately four states with the lowest
level. Furthermore, he declared that the majority of other states
have an established level of $20,000 or more, which, he attested,
has not "destroyed" their real estate industry.
Senator Bunde declared that the Committee should pay more attention
to the recommendations of the Legislative Budget & Audit division.
He pointed out that as specified in the aforementioned Legislative
Audit report in Recommendation #1, on page 11, the $10,000 claim
limit was established in 1974 statute. Furthermore, he noted that
the Surety Fund statute language was amended in 1998 to specify
that licensees would not be required to pay a Surety Fund fee
greater than $125 to support the Fund. He also noted that Statute
requires a minimum Surety Fund balance of $250,000 and a maximum
fund balance of $500,000, and that the Commission determines a fee
level to support these amounts. In addition, he noted that during
the auditing period, the Fund balance maintained a level close to
$500,000. He stated that the current $30 fee is sufficient to
support the statute requirements. He declared that increasing the
claim level to $20,000 would have minimal impact on the licensee,
and that consideration should be equally given to the impact on the
consumer, as he continued, while the last five successful Surety
Fund claim payments were at the $10,000 level, all of those alleged
losses exceeded that amount. Therefore, he supported the Audit's
recommendation to increase the level from $10,000 to $20,000. He
reiterated his objection to the amendment.
Representative Rokeberg informed the Committee that while the
primary purpose of the Surety Fund is to support awards to
consumers, it's secondary use is to provide funds for educational
purposes such as those associated with a restructuring of a
licensing law. He stated that the Fund balance is healthy due to
the manner in which the fund's fees are managed.
Senator Olson asked whether the amendment would result in costing
the consumer more or might serve to make the claim process more
complicated.
Representative Rokeberg replied that the amendment would result in
neither of these concerns, as it specially pertains to the ceiling
on the level of a Surety Fund award that might be determined.
Representative Rokeberg declared that the Surety Fund would also be
available to support any claim awarded by the Superior Court that
fits the Fund's established criteria. He stated that the fund is
there to protect the consumer against such things as "a fly-by-
night builder." He reminded the Committee that testimony has been
provided attesting to the fact that a higher award level might
attract people as it might be viewed as "a pot of money."
Senator Bunde respectfully disagreed. He contended that passage of
this amendment would cost the consumer, as he noted that the legal
cost associated with pursuing a claim via the Superior System would
be expensive, and that increasing the limit to $20,000 would allow
the claims to be addressed via the hearing process. Furthermore, he
noted that $10,000 is a small percentage of the cost of a home in
today's market.
Senator Olson asked whether the sponsor agrees with Senator Bunde's
comments.
Representative Rokeberg stated that while he does not agree with
Senator Bunde's comments, he would agree that the level has not
been adjusted for some time.
PAT DAVIDSON, Director, Legislative Budget & Audit, spoke to
Recommendation #1 which recommends increasing the claim limit from
$10,000 to $20,000. She stated that this recommendation was based
on a review of claims submitted through the hearing process during
the four-year audit period. All of those claims, she stated,
exceeded $10,000 and all but one was less than $20,000. She stated
that the recommendation is also based on the fact that the limit
had not been raised since its inception in 1974. These facts,
combined with the health of the Surety Fund and the fee limit of
$125, which assure that no excessive costs would be borne by a
licensee, support increasing the claim limit increased to $20,000.
Ms. Davidson shared that, in addition to the $10,000 individual
transaction limit, the Audit's recommends that the overall maximum
limit be increased from $50,000 to $100,000 due to the fact that a
licensee could be involved in multiple transactions. However, she
noted that, unlike the supporting history regarding the individual
claim levels, there was no history regarding the overall maximum
limit.
Representative Rokeberg suggested that in order to address the
inflation factor concern and the Audit's concerns, the individual
claim limit could be adjusted to $15,000.
Amendment to Amendment #3B: This amendment retains Section 6 and
reduces the maximum amount of a Surety Fund claim from $20,000 to
$15,000, as specified on page three, lines 20 and 21 of that
section.
Co-Chair Green moved to adopt Amendment #3B, as amended.
There being no objection, Amendment #3B, as amended, was ADOPTED.
Representative Rokeberg noted that this legislation and its
amendments were necessitated in order to address regulatory making
process requirements. He stated that while he did not agree with
many of those interpretations, they required addressing.
Co-Chair Green thanked the sponsor for his assistance in developing
this legislation as it has addressed numerous constituent concerns
Co-Chair Green moved to report the bill, as amended, from Committee
with individual recommendations and accompanying fiscal notes.
There being no objection, SCS CS HB 418(FIN) was REPORTED from
Committee with zero fiscal note #2, dated March 25, 2004, from the
Department of Community and Economic Development.
CS FOR HOUSE JOINT RESOLUTION NO. 26(FIN)
Proposing amendments to the Constitution of the State of
Alaska relating to and limiting appropriations from the Alaska
permanent fund based on an averaged percent of the fund market
value.
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this Percent of Market Value (POMV)
legislation would propose an amendment to the Alaska "Constitution
that would limit appropriations from the Permanent Fund to five
percent of the average of the market value of the Fund." He stated
that CS HJR 26 (FIN), Version 23-LS1006\Z, is accompanied by a
Division of Elections' fiscal note.
BOB BARTHOLOMEW, Chief Operating Officer, Alaska Permanent Fund
Corporation, Department of Revenue, noted that this resolution is
the result of approximately six years of effort on the part of the
Permanent Fund Board of Trustees to provide a simpler method "to
determine how much is available for appropriation from the
Permanent Fund."
SFC 04 # 109, Side B 08:52 AM
Mr. Bartholomew informed the Committee that The Alaska Permanent
Fund Board of Trustees supports the Version "Z" committee
substitute.
AT EASE 8:53 AM / 8:54 AM
The bill was HELD in Committee.
[Note: HJR 26 was re-addressed later in the meeting.}
HOUSE BILL NO. 417
"An Act amending the definition of 'project' in the Act
establishing the Alaska Natural Gas Development Authority; and
providing for an effective date."
AT EASE 8:54 AM / 9:14 AM
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this legislation, HB 417, Version 23-
LS1494\A, would change the responsibilities of the Alaska Natural
Gas Development Authority (ANGDA) "to include a review of the
economic viability of a gas line to tidewater at a point at or near
Cook Inlet."
REPRESENTATIVE MIKE CHENAULT, the bill's sponsor, stated that this
bill would allow ANGDA to investigate the possibility of a gas line
route to tidewater at a point at or near Cook Inlet. He noted that
the citizens of the State voted in support of providing ANGDA with
the authority to investigate the viability of developing a gas
pipeline from Prudhoe Bay south to tidewater on Prince William
Sound. He stated that enlarging that authority to encompass a route
to the Cook Inlet area is important, and he noted that increasing
the scope of the project would not negatively affect the original
routing evaluation, and would in fact, "enhance it."
HAROLD HEINZE, CEO, Alaska Natural Gas Development Authority,
testified via teleconference from Anchorage in support of the bill.
He attested that this legislation would expand the Authority's
authority to analyze a direct route to Cook Inlet in addition to
its original charge of getting gas to Cook Inlet via some method.
Furthermore, he stated that the Authority's analytical
"feasibility" study method would allow this study to be added to
the Authority's mission in an economically sound manner. He
informed the Committee that, "regardless of what happened here,"
the Authority would be considering this alternative, as it would
fall within the scope of its work to consider direct and indirect
routings.
BILL POPP, Kenai Peninsula Borough Oil and Gas Liaison, testified
via teleconference from Kenai, and stated that the Borough supports
passage of this legislation as it is believed that it would enhance
the responsibilities of ANGDA as an entity of the State by allowing
ANGDA "to perform with due diligence" by investigating a direct
route to Cook Inlet in addition of the line to a point on Prince
William Sound and the Spur Line from Glennallen to a Southcentral
Distribution Grid. He declared that a clear and detailed
explanation of routing economics is important to the success of the
project. He stated that the project is faced with numerous economic
obstacles and that expanding the project would be beneficial in
finding the most viable route to make this project "a realty if the
economics support it.
Senator Bunde understood that the project "would fall within the
parameters" of ANGDA's mission as currently established, and as
such, no additional funding would not be required.
STEVER PORTER, Deputy Commissioner, Department of Revenue, agreed
with Senator Bunde's comment.
Co-Chair Green moved to report the bill from Committee with
individual recommendations and accompanying fiscal note.
There being no objection, HB 417 was REPORTED from Committee with
zero fiscal note # 1, dated February 15, 2004 from the Department
of Revenue.
AT EASE 9:21 AM / 9:56 AM
CS FOR HOUSE JOINT RESOLUTION NO. 26(FIN)
Proposing amendments to the Constitution of the State of
Alaska relating to and limiting appropriations from the Alaska
permanent fund based on an averaged percent of the fund market
value.
[Note: This bill was heard earlier in the meeting.]
Co-Chair Wilken noted that this bill, which is referred to as the
Percent of Market Value (POMV) bill, is again before the Committee.
He stated that the bill proposes to place an amendment to the
Constitution on a Statewide ballot that would, were it approved,
limit the appropriation from the Permanent Fund to five percent of
the average of the market value of the Fund. He reminded that CS
HJR 26(FIN), Version 23-LS1006\Z is before the Committee.
BOB BARTHOLOMEW, Chief Operating Officer, Alaska Permanent Fund
Corporation, Department of Revenue, shared that the Permanent
Fund's Board of Trustees worked for approximately six years to
develop this proposal in order to prepare the Fund for the future,
both from an investment management perspective as well as "from the
perspective of how to make a stable and predictable amount of money
available to the Legislature if they desire to appropriate it." He
stated that this House of Representatives' legislation is
representative of the language proposed by the Board of Trustees.
He stated that the bill would establish "a spending limit of five
percent of the value of the Permanent Fund on an annual basis." He
exampled that were this methodology in effect for the next fiscal
year approximately $1.3 billion would be available for
appropriation from the Fund.
Mr. Bartholomew shared that were the current calculation
methodology in affect, and were the Legislature to require
additional resources, in excess of $4 billion could be available
for appropriation.
Mr. Bartholomew stated that this legislation would assure that "the
Permanent Fund is invested in long-term assets" with a goal of
trying to provide a stable and predictable payout. He pointed out
that one of the Board's concerns was to assure, were fiscal
concerns to be experienced in the future, that one of the State's
largest assets could be as productive as possible to assist in that
effort. He stated that inflation proofing has been conducted for 22
years. He stated that this would be inherent to the system, were
the spending limit in place. He stated that the goals of limiting
spending; protecting the fund against inflation; and granting the
Legislature and the public have a predictable payout in the future,
would be achieved by this legislation.
Senator Bunde stated for the record, that passing this legislation,
"while it might be a pre-cursor to some future activity that would
use some of the earnings for supporting State services, just
passing this does nothing to determine how the funds are spent."
Mr. Bartholomew confirmed Senator Bunde's comment to be correct. He
stated that, "there's two major public policy issues regarding the
Permanent Fund that … are being discussed in the Legislature this
year." The first, he noted, is the legislation regarding the
Constitutional amendment regarding the Board of Trust's POMV
proposal. This proposal, he opined, would serve to identify the
method through which to determine what is available and to protect
the Fund for the future. He clarified that the POMV proposal would
not change how the funds would be used, but would rather specify
the amount that could be used. He advised that a separate bill, HB
298, would address how the Permanent Fund's money would be spent.
He stressed that these are two separate issues.
Senator Bunde responded that the POMV proposal, were it approved,
would allow future Legislators to either designate all the earnings
calculated by the five-percent methodology, "as dividends or to
take all the earnings and put them into funding State services or
some combination thereof."
Mr. Bartholomew agreed that, "this Constitutional amendment would
limit the annual amount available, subject to the Legislature."
Senator Hoffman asked regarding the intent of a Board of Trustee's
POMV advertisement that had recently appeared in the Anchorage
Daily News newspaper. He also asked how the advertisement was
financed.
Mr. Bartholomew responded that the advertisement was paid for via
the Permanent Fund Corporation's operating budget. He stated that
the intent of the advertisement was to assist in educating the
public regarding the POMV proposal as, he noted, such things as
surveys indicate that, "there's still a high level of confusion in
the public as to what is the proposal." He stated that due to the
fact that "there's a lot of awareness and interest right now" in
regards to the Permanent Fund, the Board viewed this "as an
opportunity to provide education in as neutral a fashion" as could
be done. Therefore, he concluded that the intent was, "in a simple
way," to explain the difference between the current process and
"the Percent of Market Value (POMV) or endowment approach."
Senator Hoffman recalled a previous Finance Committee discussion
regarding the Board of Trustees' request for in excess of one
million dollars to inform the public about POMV. He stated that the
response from the Committee was unfavorable and that the request
had been denied. Therefore, he asked why the Board was furthering
this endeavor.
Mr. Bartholomew responded that "the request for both the authority
to do advocacy and for the funding to do the education and outreach
on POMV was because of the rule changes that take place" were the
legislation passed by the Legislature. He stated that it was
understood that, were the POMV proposal approved by the
Legislature, the Board's ability to advocate for a Constitutional
amendment would be restricted. He stated that, in his discussions
with the Board, it was not "linked" that advertisements prior to
the Legislative approval of the proposal would be prohibited.
Senator Hoffman asked for confirmation that it was not the intent
of the Board to get the public to apply pressure on the Legislature
to support POMV, by running the advertisement.
Mr. Bartholomew assured that the advertisement was not intended to
be a tool through which to lobby or influence passage of this
legislation. He assured that the Board understands that the issue
must be presented in a balanced fashion. He stated that aside from
working directly with the Legislature on issues, it would be
"inappropriate" for the Board to indirectly lobby the Legislature.
Therefore, he continued, the Board viewed the advertisement as an
educational tool.
Co-Chair Wilken complimented Mr. Bartholomew as being "good soldier
and he was glad he worked for the people of Alaska."
Senator Olson characterized the response to the advertisement
questions as "somewhat confusing, at best, if not "questionable."
Senator Dyson referenced the Permanent Fund Corporation's April
2004, "Percent of Market Value talking points" handout [copy on
file] and stated that in the subsection titled "how does POMV
provide the solution?" it is stated that, "The Fund is invested for
a 5-percent real rate of return after inflation." He noted that he
had previously asked regarding whether the language in Section 2(b)
of the bill on page two, line two, meant that it was "indeed" going
to be after inflation.
(b) Appropriations from the permanent fund for a fiscal year
may not exceed five percent of the average of the market
values of the fund on June 30 for the first five of the six
fiscal years immediately preceding that fiscal year.
Senator Dyson stated that is subsequent conversations, he had been
"reminded that the whole thing is a smoothing operation" in that it
was a five-year average. He recalled that he had asked whether any
language had been considered "that would make it clear that the
five percent that we are making available for appropriation is
protected against the year that we might have high inflation, and
actually, in a given year might be appropriating part of the real
value of the corpus." He noted that the response was to the affect
"that anything that we did along that line must be carefully worded
so that it was over a board period because it would vary from year
to year." Therefore, he re-asked whether language could be included
to clarify that in any given year, the amount being proposed would
"not dip into the principal," as he stated that, in addition to
preserving "the value of the principal," the people of the State
must be assured that the principal would "be intact."
Mr. Bartholomew replied that the issue regarding whether the POMV
would allow for the expenditure of the principal or corpus of the
Fund, has had a lot of discussion. He stated that it has been
determined that there are two methods through which to protect
against eroding the Fund. First, he communicated, the concept of
the word principal is included in Constitution through the "number
that is the sum of all the oil contributions, all the inflation
proofing appropriations the Legislature has done, and special
appropriations." This number, he specified, currently amounts to
$23.5 billion, and "only goes up." He communicated that "the
Legislature would not be allowed to appropriate any money that
would reduce the Permanent Fund below that level."
Mr. Bartholomew shared that an issue raised by the Board, regards
those times when there might be short-term extreme downturns in the
stock market that might reduce the value of the Fund down towards
the principal level. He stated that the Board determined that in
those times, "it would not be prudent for the economy" not to
distribute a Permanent Fund Dividend to the citizens. Therefore, he
continued, the Board proposed an endowment method of not just the
principal of the fund, but of the entire fund. Therefore, he stated
that in order to respond to the question of how to assure the
public that the corpus of the Fund would not be attached, the House
of Representatives' legislation before the Committee has adopted a
statutory limitation through which the Constitution would allow a
five-percent of the total market value to be spent in any one year.
Senator Dyson understood that the language specifies market value
as opposed to principal.
Mr. Bartholomew confirmed, and stated that this would include the
entire fund including the principal and the excess earnings. He
stated that this currently amounts to $27.5 billion dollars. He
stated that it is expected that the total rate of return would be
eight-percent, including a three percent inflation factor.
Therefore, he stated the real earnings of five-percent, after
inflation, would be utilized over time.
Mr. Bartholomew stated that in question is how to assure that
public that the principal would not be spent. He stated that there
is a provision in HB 298-DISTRIBUTIONS OF APPROPS FROM PERM FUND,
that, states that every ten-year period would be reviewed by the
Corporation to assure that the fund has earned five-percent above
inflation. Were this not to occur, he continued, the spending limit
would be lowered to the real rate of return. Therefore, he
recommended that the expenditure not be viewed on a year to year
basis "as there have definitely be years that the Permanent Fund
has not make money;" however, he attested, there has never been a
ten year period in which the five-percent level was not exceeded.
Continuing, he stated that over the 25-year period that the Fund
has existed, it has earned six-percent over inflation. He referred
the Committee to a PFC graph titled "Rolling 10-year real return -
Fiscal year" [copy on file]. He stated that "the Legislature has
not spent anywhere near the available funds."
Mr. Bartholomew stated that the statutory limitation addresses
Senator Dyson's concern. He stated that were a higher rate of
protection desired, a Constitutional amendment would be required as
opposed to the statutory limitation.
Senator Dyson understood that while appropriate inflation proofing
could not occur in a year of double-digit inflation; an
appropriation of up to five percent of the market value could
continue to be made. Doing so, he contended, might result in a net
loss of three to five percent of the Funds' market value that year.
Mr. Bartholomew replied that while this is correct, what makes this
"allowable and prudent" is the fact that the rate of return for
fiscal year 2004, for instance, is going to exceed the rate of
inflation by ten percent. He stated that adoption of the POMV would
limit the expenditures to five percent of the market value, which
in this case would have grown in excess of ten percent. This, he
attested "would serve to carry that money forward and over time,"
he stated, it is "believed that the good years would outweigh the
bad" years. He stated that limiting the spending in the good years
to five percent by retaining those excess earnings via the
implementation of a spending limit, would serve to protect the
Permanent Fund.
Senator B. Stevens pointed out that on the effective date of the
amendment that sweeps the Earnings Reserve Account (ERA) into the
Principal, as specified in Section 3 of the bill, the ERA would
crease to exist. He stated that HB 298 would allow the Legislature
to change the distribution of the five percent by a simple majority
vote. Therefore, he declared that the concept of the distribution
of the earnings "would be at the full discretion of future
Legislatures, just as it is now," with the only difference being
that the ERA is swept into the principal.
Co-Chair Wilken asked whether this legislation would allow for an
FY 05 CBR draw.
Mr. Bartholomew replied that, as drafted, the POMV program would
not allow for an appropriation until July 1, 2005, which would be
the beginning of FY 06. Therefore, he concluded the October 2004
Permanent Fund Dividend, which would occur in FY 05, is accounted
for in the FY 04 operating budget. He noted, that unless there was
a need for other appropriations "as written," that would be no
other appropriations from the Permanent Fund until July 1, 2005. At
that time, he continued, the appropriation would be limited to five
percent, were POMV enacted.
Senator Bunde reiterated that there are Alaskans who are concerned
that with the adoption of POMR, the Permanent Fund "would go away."
He referred to the aforementioned Ten-year look back chart, and
stated that while the past few years' stock market performance was
dismal, the Fund still made five-percent including the recent
years' worst-case scenario. Therefore, he observed that were the
POMV in affect for the past ten years, the corpus would not have
been used and any appropriation would have been limited to five
percent.
Mr. Bartholomew responded that this is correct, and were the POMV
five-percent spending limitation in place for the entirety of the
Fund's history, the expenditures would not have exceeded what the
Fund had earned above the rate of inflation. He reiterated the
importance of viewing the Fund over a ten-year period verses a
year-to-year basis. He noted that HB 298 would provide "guidance to
the Legislature" to reduce the five-percent Constitutional spending
limit appropriation down to the real earnings level were the
average earnings of the Fund to fall below that five-percent level.
Senator Bunde stated that the Legislature currently appropriates
between three and five million dollars of earnings, on an annual
basis, from the Permanent Fund to inflation proof the account.
Mr. Bartholomew agreed that the Legislature, on an annual basis,
appropriates money from the Fund's earnings account into the
protected principal. He stated that under POMV, the earnings would
be protected by the five percent limit, but would not subject to a
future appropriation.
Senator Bunde stated therefore, that were the Constitutional
amendment approved, the State would crease to appropriate up to
five million dollars of Fund earnings each year.
Mr. Bartholomew stated that is correct. He stated that POMV would
eliminate the Board's current concerns regarding inflation proofing
the Fund when there are other fiscal pressures such as the need to
find additional funds to support such things as education and
transportation.
Senator Bunde pointed out that while "many people say, 'don't'
spend the Permanent Fund," they do not understand that the
Legislature already spends money to inflation proof the Fund and
provide "for the Permanent Fund Dividend itself." He stated that
using the POMV method to provide funding for State programs and
Dividend checks, "would not change significantly the amount"
currently being utilized from the Fund were inflation proofing
factored into that amount.
Senator Hoffman stated that the Legislature could assess the
earnings from the ERA and "spend those dollars with a simple
majority today, but we haven't." He attested that the Legislature
has not done this, but has rather chosen to take "the more
difficult road" of balancing the budget by accessing the CBR, which
requires a three-quarter vote of the Legislature, because they are
aware that spending the Fund would be perceived by the people as
"tapping into… and threatening the Fund."
Senator Hoffman continued that were the POMV program adopted, the
Legislature could interpret it to state that the people have
granted them the authority to spend the five-percent as needed. He
stated that the POMV would provide no protection to the Permanent
Fund Dividend. He stated the participants of the Conference of
Alaskans stated they went one-step above and beyond what they were
charged to do by stating that the Permanent Fun should be protected
in the Constitution. Therefore, he stressed that consideration of
protecting the Permanent Fund be provided were the POMV "management
tool" to be adopted.
Senator Bunde stated that people could protect their PFD by
supporting a person to represent them in the Legislature.
Co-Chair Wilken asked for clarification regarding whether the five-
percent value of the fund is the value of the fund at a certain
point of time over the last five-years, as specified in the bill in
Section 2(b).
Mr. Bartholomew responded that the applicable rules in this regard
as included in statute. He stated that the value of the Permanent
Fund would be determined on June 30th of each year as that is the
end of each fiscal year. He stated that in order to accommodate the
"ups and downs of the financial markets, it's prudent to take an
average of the previous five years." Therefore, he stated that this
proposal would mandate that, on June 30th, an average of the
previous five-years' market value of the Fund, would be determined
based upon Generally Accepted Accounting Principals. That value, he
continued, would then be multiplied by five-percent in order to
determine the amount that would be available.
Co-Chair Wilken understood therefore that this would equate to
"five June 30's divided by five."
Senator Bunde moved to report the bill from Committee with
individual recommendations and accompanying fiscal notes.
Senator Hoffman stated that his not objecting to the motion does
not mean that he supports the proposal.
There being no objection, CS HJR 26(FIN) was REPORTED from
Committee with $1,500 fiscal note #3, dated January 16, 2004 from
the Division of Elections and new zero fiscal note #4, dated April
13, 2004 from the Department of Revenue.
RECESS TO THE CALL OF THE CHAIR 10:33 AM / 5:06 PM
[NOTE: Due to an audio malfunction, the adjournment of this meeting
was not recorded]
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 05:07 PM.
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