Legislature(2003 - 2004)
06/23/2004 10:48 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
1st Special Session
June 23, 2004
10:48 AM
TAPES
SFC-04 1st SS #3, Side A
SFC 04 1st SS #3, Side B
SFC 04 1st SS #4, Side A
SFC 04 1st SS #4, Side B
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 10:48
AM.
PRESENT
Senator Gary Wilken, Co-Chair
Senator Lyda Green, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Ben Stevens
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: SENATOR GARY STEVENS; SENATOR BERT STEDMAN; SENATOR
RALPH SEEKINS; SENATOR TOM WAGONER; SENATOR GENE THERRIAULT; JOE
GILBERTSON, Commissioner, Department of Health and Social Services;
JOHANNA BALES, Manager, Cigarette and Tobacco Products Excise Tax
Program, Department of Revenue, CHERYL FRASCA, Director, Office of
Management and Budget, Office of the Governor; JIM BALDWIN, Senior
Assistant Attorney General, Opinions, Appeals, & Ethics Section,
Department of Law
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SB1001-TOBACCO TAX; LICENSING; PENALTIES
The Committee heard from the Department of Health and Social
Services and the Department of Revenue. The bill reported from
Committee.
SJR103-CONST AM: APPROPRIATION LIMIT
The Committee heard from the Office of Management and Budget and
the Department of Law. Five amendments were considered with three
being adopted. The bill reported from Committee.
SCR101-FISCAL GAP APPROP FROM EARNINGS RESERVE
The Committee heard a presentation from the sponsor. The bill was
held in Committee.
SENATE BILL NO. 1001
"An Act relating to taxes on cigarettes and tobacco products,
to tax stamps on cigarettes, to forfeiture of cigarettes and
of property used in the manufacture, transportation,
possession, or sale of unstamped cigarettes, to accounting for
and use of part of the proceeds of the additional cigarette
tax, and to licenses and licensees under the Cigarette Tax
Act; relating to unfair cigarette sales; 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 would increase the current
cigarette excise tax by one dollar per pack and increase the tax on
other tobacco products. It would also designate a portion of the
tax revenues to support smoking education, tobacco use prevention
and tobacco control programs.
Senator Bunde noted that the bill is similar to a Senate bill heard
during the Twenty-Third Legislative Session. The few minor changes
include: the re-inclusion of the tobacco product floor stock tax
that was eliminated from the Session bill due to concern that it
might encourage product stock piling and thereby reduce revenue;
and the re-inclusion of the taxes on other tobacco products. This
language was excluded from the Session bill due to concern that it
would encourage the use of "substitute" cigarettes in order to
avoid the tax. The Session bill was altered in the House of
Representatives in that they amended language to pro-rate the
amount of the tax. To that point, he declared that the Legislature
should do all it could do to "increase sticker shock" by increasing
the tax by one dollar rather than gradually imposing the tax, as he
agreed with studies that have shown that an increase in the price
of cigarettes reduces smoking.
JOEL GILBERTSON, Commissioner, Department of Health and Social
Services, stated that the Administration proposed the tobacco tax
increase and the other changes proposed in the bill "largely
because of the public health impact that tobacco is causing on this
State and the public health benefits" that would be generated from
the tax increase. "Tobacco is the leading cause of death,"
disability, and chronic illness in the State and is recognized by
the Department as the State's "number one public health threat,"
specifically to the State's children. The 1997 tobacco tax increase
resulted in a 30-percent reduction in cigarette consumption. There
is a "direct correlation between increasing price and decreasing
consumption of tobacco products," specifically usage by young
Alaskans and individuals with limited resources. The results of a
2003 Department youth risk behavior survey compared to its 1995
survey substantiate the fact that the 1997 tobacco tax increase had
an impact on tobacco usage as youth consumption of tobacco products
has declined by 50-percent in that time period. "A good portion of
that decrease" is attributed to the tax increase. In addition, the
Department's tobacco enforcement efforts have also been effective
as the illegal sale of tobacco products to minors have reduced from
30.2 percent to ten percent. This is one of the lowest rates in the
nation. Were the proposed tax increase enacted, the Department
predicts a 15-percent decline in the number of youth smokers. This
would equate to 1,800 young Alaskans "being saved from a premature
death" attributed to smoking. The Department predicts that 3,500
Alaskans would quit smoking were the tax increase implemented. Of
that number, 800 would be saved from a smoking related death. IN
addition, 850 babies would be spared from exposure to maternal
smoking during the next five years. The tax increase would result
in a decrease in the number of Alaska Natives who smoke. Currently,
44-percent of Alaska Natives smoke. This is double the percent of
non-Native smokers.
Commissioner Gilbertson shared that a 1998 Department study
indicated that tobacco products usage costs the State $270 million,
or $400 per person. $133 million of the $270 million is direct
medical expenses such as hospital care, nursing home care, and
pharmacy costs. This expense directly affects health care premiums.
It has been determined that 15-percent, or $20 million, of the
State's Medicaid program's medical expenses are tobacco related.
The Tobacco Master Settlement Agreement was initially instituted to
fund the costs to states resulting from tobacco consumption. He
encouraged the Committee to support this legislation.
Co-Chair Green asked regarding "the proposed distribution" of the
revenue that would be generated by this tax.
Commissioner Gilbertson estimated that approximately four million
dollars would be provided to the Department's Tobacco Use Education
and Cessation Fund program, which is currently primarily funded by
the Tobacco Master Settlement Agreement (MSA).
JOHANNA BALES, Manager, Cigarette and Tobacco Products Excise Tax
Program, Department of Revenue, explained that, currently, a
portion of the revenue raised by the State's tobacco tax is
provided to the School Fund and a portion is provided to the
General Fund. This bill proposes that the entire revenue generated
from the tax increase be deposited into the General Fund. Under
this proposal, 8.9 percent, or approximately four million dollars,
of the tobacco tax revenue that is deposited in the General Fund
would be designated, annually, to support the Tobacco Use Education
and Cessation Fund program. Currently, 20-percent of the MSA, which
has historically averaged between four and five million dollars
annually, is directed to support that program. Were this
legislation adopted, the Program could receive approximately eight
or nine million dollars in funding. Eight million dollars is the
minimum amount specified for the program by the national Centers
for Disease Control and Prevention (CDC).
Commissioner Gilbertson stated that this is the minimum amount
recommended for Alaska as specified in the CDC "Best Practices for
States" guidelines.
Co-Chair Green interjected that the monetary range specified by the
CDC was between eight and $17 million. Therefore, she asked whether
the CDC might apply pressure for further increases. Her preference
would be that, rather than increasing the funding for the Tobacco
Use Education and Cessation Fund program, the revenue be utilized
to support the Department of Health and Social Services' tobacco
associated Medicaid expenses. She asked whether the increased
funding for the Tobacco Use Education and Cessation Fund program
would increase or replace existing funding.
Commissioner Gilbertson clarified that this would be "a true
increase" in the funding of the State's tobacco control efforts. He
characterized Co-Chair Green's remarks as being "very fair and
correct" and expressed that initially the dialogue regarding the
MSA money included compensating States for their Medicaid program
expenses resulting from "tobacco consumption by beneficiaries."
This bill would dedicate funds for the State's Tobacco Control
program rather than to Medicaid expenses. "That said," while the
State has implemented a good Tobacco Control program, its funding
level is below the amount designated by the CDC. The increased
level of funding that would be provided to the Tobacco Control
program via the Tobacco Use Education and Cessation Fund program
must be conducted in an "orderly ramp-up" fashion using Best
Practice guidelines. He reviewed the current Program endeavors.
Co-Chair Green asked whether the Tobacco Control program is "a
Department run program" that is separate from the media campaign
that is conducted by a variety of non-profit organizations.
Commissioner Gilbertson clarified that some of the MSA money
supports a variety of Department programs including the Tobacco
Enforcement program, which conducts "stings" on the illegal sale of
tobacco products to minors by retailers. In addition, MSA funds are
utilized by the Department to support the Tobacco Control program
that provides grants and contracts. These funds support a variety
of endeavors including the media campaign referenced.
Co-Chair Green asked whether funding for the anti-smoking media
campaigns might be doubled as a result of this legislation.
Commissioner Gilbertson responded that the total amount available
to the Tobacco Control Program is estimated to be "slightly less
than double" the current level. How the approximate four million
dollar increase would be spent is, of yet, undetermined.
Co-Chair Green asked whether the expectation in the future might be
that, as the funds are disbursed in support of various programs,
that more funds should be provided to fund the anti-smoking media
campaign, as this media funding discussion is a re-occurring one.
Commissioner Gilbertson replied that neither the Governor nor the
Department intent to request any further increase in tobacco
control funding in the next Legislative Session beyond what is
being proposed in this bill. He clarified however, that were this
bill enacted, the increased funds generated would require
appropriation.
Co-Chair Green asked whether details regarding the disbursement of
the new tax revenue are specified in the bill in addition to being
detailed in the Department of Health and Social Services fiscal
note #3, dated June 22, 2004.
Co-Chair Wilken noted that the Department's fiscal note #3 does not
reflect any expenditure in FY 05.
Senator Olson commented that the Senate bill, upon which this
legislation was based, did not specify that the generated revenue
would support Tobacco Control programs. As a physician, he would
always favor some sort of tobacco control; and therefore, he
supports the funding being designated to support Tobacco Control
programs.
Ms. Bales pointed out that the revenue disbursement language is
located in Section 16 beginning on line 18, page four, of the bill.
While this money would be specified for the Tobacco Use Education
and Cessation Fund, it does not specify how those funds must be
expended.
Co-Chair Green asked for a definition of the Tobacco Use Education
and Cessation Fund as "generally defined" within the Department.
Commissioner Gilbertson stated that the Fund, which is established
by AS 37.05.580, is the fund in which the MSA funds are deposited
each April.
Co-Chair Green asked whether the determination that the MSA funds
would be decreasing is the reason this program has been designated
as the recipient of the revenue generated by this legislation.
Commissioner Gilbertson responded that the terms of the MSA dictate
the level of payout to the States. There has been some indication
that the level of funding "might be modestly declining" due to
market share conditions of the MSA signatories.
Ms. Bales stated that the expectation is that the Tobacco Use
Education and Cessation Fund would receive $3.6 million MSA funding
in the year 2006. During the initial years, the MSA payment was
approximately five million dollars. While there has been a decrease
in the level of MSA funding, the reason this funding is being
proposed is to address the CDC minimum recommendation for the
State.
Co-Chair Green declared that the State would never to able to
satisfy CDC, and furthermore, CDC recommendations "should never set
the standards" for State programs.
Ms. Bales commented that this legislation is a combination of the
bill that passed the Senate and the amendments proposed by the
House Ways & Means and House Labor & Commerce committees. The House
of Representatives exerted tremendous effort in the consideration
of the funding provision included in this bill. In addition to
specifying how the revenues would be allocated, the bill would also
allow individuals to physically transport into the State up to 400
cigarettes per month without incurring any tax. This number would
align with federal allowances. In addition, the bill contains
penalty language for the violation of cigarette shipping
restrictions and the violation of the unstamped cigarette
guidelines; specifies that the one dollar per pack tax increase
would not be phased in; would increase the tax level on Other
Tobacco products as well as requiring that the tax be paid on these
products were individuals to ship these Other Tobacco products into
the State for personal consumption. Retailers and Distributors in
the State support this shipping provision. In addition, in-State
licensees who have a good tax paying record would be allowed to
reduce the level of the required bond; minimum pricing and a
provision addressing unfair pricing and other components are also
addressed in the legislation. The effective date of the bill would
be September first, 2004.
Senator Bunde moved to report the bill from Committee with
individual recommendations and accompanying fiscal notes.
Co-Chair Green did not object, but commented for the record, that
she would be "again opposing" this legislation on the Senate floor.
Until such a time the State were to impose a broad based tax such
as a sales tax, she could not support taxing specific commodities
or products. Such taxation is "an inappropriate" manner through
which to attempt to change individual's lifestyles or behaviors.
There being no objection, SB 1001 was REPORTED from Committee with
$828,100 fiscal note #1, dated June 15, 2004 from the Department of
Revenue; $206,400 fiscal note #2, dated June 14, 2004 from the
Department of Public Safety; and zero fiscal note #3, dated June
22, 2004 from the Department of Health and Social Services.
SENATE JOINT RESOLUTION NO. 103
Proposing amendments to the Constitution of the State of
Alaska relating to an appropriation limit.
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that the Senate Rules Committee at the
request of Governor Frank Murkowski sponsors this legislation. The
bill would repeal and replace the State's Constitution
appropriation limit with a spending limit and would establish a
moving three-year average as the basis for the application of the
limit. The legislation would terminate on July first, 2009.
Senator Dyson asked whether, upon further review, the Office of
Management and Budget had identified areas of the bill, other than
those identified and discussed during its first hearing that would
require discussion.
CHERYL FRASCA, Director, Office of Management and Budget, Office of
the Governor, stated that the concerns raised in the June 22, 2004
hearing on the bill have been addressed. No additional drafting
errors were identified.
Senator Dyson reiterated his concern regarding the calculation
formula in Section 1, as the language does not appear to support
the "no ratchet down" provision that had been specified in SJR 3-
CONST AM: APPROPRIATION/SPENDING LIMIT. In this regard, he asked
whether eliminating the language "or decrease" in Section 1(a),
page one, line nine, would clarify this intent.
Ms. Frasca responded that the "no ratchet down" provision is
addressed by the fact that were the formula, which is based upon
the lesser of the population/inflation factor as detailed in
Section 1(a)(1)(A) and (B) or the change in personal income factor
as detailed in Section 1(a)(2), to determine a spending limit lower
"than the spending limit from the prior year, then the current
year's spending limit" would be implemented. This would continue
the "no ratchet down" intention of SJR 3. The affect of eliminating
the words "or decrease," as proposed by Senator Dyson, must be
determined by the Department of Law.
Senator Dyson further questioned whether the words "by the lesser
of" as specified in Section 1(a) on page nine, would be more
appropriately included in Section 1(a)(1)(A, line thirteen.
Co-Chair Green commented that the word "or" as specified in Section
1(a)(1)(B), line one, page two, might alleviate Senator Dyson's
concern regarding the calculation formula's "no ratchet down"
provision, as it would serve to identify whether the formula would
be based on the calculation of Section 1(a)(1) or Section 1(a)(2).
Senator Dyson continued to voice concern as to whether the
language, as presented, would "preserve" the no ratchet down
intent.
Ms. Frasca expressed that language in SJR 3 might be being confused
with HJR 9 language. She clarified that this bill is modeled after
HJR 9-CONST AM: APPROPRIATION LIMIT, as amended by this Committee.
The Committee could, if desired, amend this bill in order to align
it with SJR 3.
JIM BALDWIN, Senior Assistant Attorney General, Opinions, Appeals,
& Ethics Section, Department of Law, responded to Senator Dyson's
question regarding the elimination of the words "or decreased" in
Section 1(a), on line nine, page one by stating that removal of the
words would not harm the "no ratchet down" intent of the bill.
Amendment #3: This amendment eliminates the words "or decreased" in
Section 1(a), line nine, on page one.
Senator Dyson moved to adopt Amendment #3.
Co-Chair Green objected for explanation.
Senator Dyson explained that removal of these words would serve to
support the intent that the Constitutional spending limit would
apply only to the amount that the State's budget could increase.
The Constitutional spending limit could not mandate a decrease in
the budget. The words proposed for deletion contradict language in
Section 1(b) on page two, lines eight and nine.
In response to a comment from Co-Chair Green, Senator Dyson
explained that rather than clarifying which of the calculations
should be used in the formula, as presented in Section 1(a) and
(b), the intent of this amendment is to affirm that the end-product
of all the calculations would be that "it would not force a
decrease below the last year's appropriation level." A forthcoming
amendment would address concerns regarding the components of the
calculation.
Co-Chair Wilken expressed that the conflict being addressed by this
amendment begins with the words "if the appropriation limit?." on
line five, page two in Section 1(b) as it contradicts language in
Section 1(a) on line five, page one.
Co-Chair Green removed her objection.
Senator Olson asked for confirmation that the Administration is in
agreement that the intent of this legislation is to not allow the
budget to be reduced in the out years.
Ms. Frasca stated that the Administration is willing to support a
spending limit that would not ratchet down the budget in a
situation where the formula calculations might be negative.
There being no further objection, Amendment #3 was ADOPTED.
Senator Dyson asked regarding language in Section 1(a)(1),
beginning on line ten, page one as he understood that SJR 3
mandated that the formula for determining a spending limit would be
based on the sum of the Consumer Price Index (CPI). The sum of the
CPI would be limited to a growth factor that would not exceed the
income of the State's citizens. He asked Ms. Frasca her
interpretation of that bill.
Ms. Frasca responded that due to the fact that this legislation was
fashioned after HJR 9 as amended by the Senate Finance Committee,
she had not reviewed the provisions of SJR 3. She reiterated that
the Committee could amend SJR 103.
Senator Dyson stated that the confusion arises from the language
that specifies that the calculation would be based on the lesser of
CPI and population, as specified in Section 1(a)(1) or the change
in personal income of State residents as specified in Section
1(a)(2).
Ms. Frasca clarified that the language specifies that the spending
limit calculation would be based on the rate of change of inflation
plus the rate of change in population times .75 percent as
specified in Section 1(a)(1). This sum would then be compared to
the rate of change in personal income as specified in Section
1(a)(2). Whichever is "the least of those two answers would become
the adjustment factor for the limit."
Senator Dyson stated that therein lay the confusion, as he
understood that both HJR 9 and SJR 3 based their calculation on the
growth in population and the lesser of the CPI or the growth in
Alaskans' income.
Co-Chair Wilken recalled that the Committee had removed the
personal income component from those calculations.
Senator Dyson agreed, but clarified that the Committee had
incorporated language specifying that the CPI component could not
exceed the growth in personal income.
SFC 04 1st SS #3, Side B 11:35 AM
Senator Dyson continued that this provision was included to
alleviate fears that otherwise "a huge escalator" might result that
would undermine "that budget discipline."
Co-Chair Wilken asked, therefore, whether the language in SJR 103
mirrors that as adopted in SJR 3 by the Committee.
Ms. Frasca "assumed" that it does not. She reiterated that the
language presented in SJR 103 is mirrored after HJR 9, as amended
by the Senate Finance Committee. She stated that the Committee
could alter the bill's language.
Senator Dyson acknowledged. He clarified that the population
component and the sum of the lesser of the CPI or income growth
were the key elements in SJR 3. He asked regarding the
Administration's decision to mirror the components of HJR 9 as
opposed to SJR 3.
Ms. Frasca responded that an extensive review of which bill's
calculation factors would be the best was not conducted, as the
Administration determined that, since both HJR 9 and SJR 3
contained the same variables, either approach would arrive "almost
to the same place." It used the HJR 9 bill as it had processed
further than SJR 3. Therefore, she stated that the weight placed on
one variable over another would be the Committee's preference. The
Administration would support either approach.
Senator Dyson voiced the desire that the legislation would advance
from Committee after some forthcoming alternations.
Conceptual Amendment #4: This amendment replaces language in
Section 1(a)(1)(A) and (2) beginning on line 11, page one through
page two, line four, with Section 1(a)(1) and (2) language
beginning on line eleven, page one through Section 1(a)(2) ending
on line three, page two of CS SJR 3(FIN). This language reads as
follows.
(1) the percentage rate of change in the Consumer
Price Index for all urban consumers for the Anchorage
metropolitan area compiled by a federal agency during the
two calendar years preceding the calendar year during which
the immediately preceding fiscal year began, but not to
exceed the percentage change in personal income of State
residents during the two calendar years preceding the
calendar year during which the immediately preceding fiscal
year begins; plus
(2) the percentage rate of change in the State
population during the two calendar years preceding the
calendar year during which the immediately preceding fiscal
year began compiled by a State department.
In addition, this amendment inserts the words "per capita" into the
new language of Section (a)(1) preceding the words "personal income
of State residents?".
Senator Dyson moved to adopt Conceptual Amendment #4.
AT EASE 11:40 AM / 11:47 AM
Senator Dyson stated that the inclusion of this language would
clarify the intent of the Committee regarding the formula.
There being no objection, Amendment #4 was ADOPTED.
Amendment #1: This amendment inserts a new paragraph into the bill
in Section 1(c) on page three, line 21 as follows.
(15) an appropriation for elementary or secondary public
school operations.
Senator Hoffman moved to adopt Amendment #1.
Senator B. Stevens objected.
Senator Hoffman explained that this "simple amendment" would remove
K-12 education expenditures from the spending limit provision.
[NOTE: Co-Chair Green assumed chair of the meeting.]
Co-Chair Green stated that the result of this amendment would be
that education spending would not be controlled via the
Constitutional spending limit, were one imposed.
Senator Hoffman expressed that education spending limits would be
decided by the Legislature. The Governor could veto Legislative
decisions that were considered excessive in this regard.
Senator B. Stevens disagreed with Senator Hoffman's comment that
this is a simple amendment, as, were it adopted, it would result in
the dollar amounts specified in Section 2(a)(1) and (2) on lines
one and two, page four being re-calculated. Specifically, it would
remove $800 million from those numbers. Were education excluded, it
would serve to double the maximum spending limit established by the
formula. "It is not a simple amendment."
Senator Bunde commented that while education is one of the
important services provided by the State, it is not "the only one."
Because it is the largest annual State expenditure, it would be
inappropriate to exclude it from the spending limit. Doing so would
make the spending limit "meaningless".
Senator Hoffman stated, in response to Senator B. Stevens concern,
that were the amendment adopted, the numbers in Section 2(a)(1) and
(2) could be addressed with a technical amendment. He disagreed
that the omission of education from the spending limit would double
the amount.
Co-Chair Green asked the percentage of General Fund dollars in
support of education in the FY 04 budget. She understood that it
amounted to between 45 and 50-percent of that budget.
Senator Bunde responded that education spending equated to
approximately $800 million of the State's FY 04 $2.3 billion
budget.
Co-Chair Green understood, therefore, that this amendment would
exclude approximately 35-percent of the State's expenditures from
the provisions of the limit. This would mean that the remaining 65-
percent would be responsible for controlling State spending.
Senator Hoffman stated that consideration should be provided to how
the proposed spending limit would have affected education spending
this past year, especially in consideration of the projected Public
Employees Retirement System (PERS) and Teachers Retirement System
(TRS) obligations which are anticipated for a minimum of another
three or four years. Therefore, this legislation would establish a
spending "knowing full well that ? we have increases on the
horizon," directly related to education.
Senator Bunde responded that the spending limit would not prohibit
increasing the education budget by $130 million. What it would say
is that priorities must be established, and, were education deemed
a priority, the money to support its increased budget "would have
to come from another area of State spending." "A finite pot of
money" would be available.
Senator Olson declared that while funding for the University of
Alaska system is important, K-12 education should be a higher
priority as it affects more people in the State. Therefore K-12
funding "should have equal positioning" to that provided the
University.
Co-Chair Green expressed that comparing K-12 education to
University funding and other exempted components of the spending
limit is difficult to do as the K-12 education component does not
"generate money that we would even be allowed to exempt. There is
nothing to waive." Education is, in a fashion, receiving a waiver,
as grants that might be provided "directly to schools" are not
included in the proposed spending limit calculation. The University
raises its own money; this is different than the 100-percent
funding provided to K-12 education.
Senator Dyson recalled that the graphs and models relating to this
issue that were presented during Committee hearings on the
Constitutional spending limits during the Twenty-Third Legislative
Session, addressed the Committee's concern regarding whether there
sufficient flexibility provided by the spending limit proposal to
meet projected State government growth relating to the PERS/TRS
issue as well as the Department of Health and Social Services
projected growth of the State match that would be required in the
Medicaid and Medicare programs. These obligations would present
challenges but would be doable.
Senator Dyson countered that the argument that K-12 education
should be exempt from the spending limit due to the number of
people involved could also be applied to ranking investigating and
prohibiting crimes against children as a number one priority as the
State leads the nation in violations against children. Therefore,
what to exempt due to the premise of this numbers' argument, could
be a huge discussion. He encouraged a no vote on the amendment, as
the fact that the education foundation funding formula, the
Constitutional mandate that education be adequately provided for,
and the "sympathy" the Legislature has shown in this regard should
sufficiently address the issue.
A roll call was taken on the motion.
IN FAVOR: Senator Hoffman and Senator Olson
OPPOSED: Senator Dyson, Senator B. Stevens, Senator Bunde, Co-Chair
Wilken and Co-Chair Green
The motion FAILED (2-5)
Amendment #1 FAILED to be adopted.
{NOTE: Co-Chair Wilken assumed chair of the meeting.]
Amendment #2: This amendment inserts a new subsection into Section
2 of the bill, on page three, following line 26 as follows.
(a) The 2004 amendment relating to an appropriation limit
(art. IX, sec. 16) takes effect only if the
(1) legislature adopts a resolution proposing an
amendment to Section 15 of Article IX to limit appropriations
from the Alaska permanent fund based on an averaged percent of
the fund market value and to permit appropriations from the
fund only for costs of administering the fund, a program of
dividend payment for residents of the State established by
law, aid to public education, and aid to municipalities and
other communities; and
(2) proposed amendment described in (1) of this
subsection is placed before the voters of the state at the
2004 general election.
In addition, the words "Contingent Effect" would be inserted into
Section 2 on page three, line 26, following "30".
Senator Hoffman moved for the adoption of, and objected to,
Amendment #2.
Senator Dyson viewed the amendment "as an effort to come to some
accommodation." He would support the Amendment if the sponsor would
delete language that would serve to enshrine some of the
distribution of the earnings of the Permanent Fund in the
Constitution. This language is located in the (a)(1) section of the
amendment; specifically "and to permit appropriations from the fund
only for costs of administering the fund, a program of dividend
payment for residents of the State established by law, aid to
public education, and aid to municipalities and other communities".
While he is sympathetic to these programs, he does not support them
being enshrined in the Constitution.
Senator Hoffman thought that this language was included in SJR 102,
and in that regard, he thought that the amendment would serve "to
keep the language in compliance with" that resolution. Perhaps
further discussion on SJR102-CONST. AM: PERM FUND P.O.M.V.;
DIVIDENDS should occur before this amendment is considered.
Amendment-to-Amendment #2: The amendment to the amendment amends
language in (a)(1) of the amendment so that the language would read
as follows.
(a) The 2004 amendment relating to an appropriation limit
(art. IX, sec. 16) takes effect only if the
(1) legislature adopts a resolution proposing an
amendment to Section 15 of Article IX to limit appropriations
from the Alaska permanent fund based on an averaged percent of
the fund market value; and
(2) proposed amendment described in (1) of this
subsection is placed before the voters of the state at the
2004 general election.
Senator Bunde moved to Amend Amendment #2. He stated that this
would reflect one of the resolutions being presented to the
Committee.
Senator Hoffman stated that while he would not object to the
amendment to the amendment, he might consider including this
language in SJR 102.
Senator Dyson observed that many Legislators have stated that any
discussion of new revenues to the State government should have a
Constitutional spending limit as their "cornerstone." He commended
Senator Hoffman's efforts in support of adopting a POMV plan.
Therefore, he understood that Senator Hoffman's amendment is an
effort to establish agreement in order to make that happen.
Acceptance of Senator Hoffman's amendment by "those of us who want
a spending" limit would indicate a reciprocal willingness that "we
would work with you to get the POMV before the people." He
applauded the "spirit of that."
Senator Bunde noted that Senator Dyson has stated that there are
those who would not "go anywhere without a complete plan." However,
the situation has become one in which supporters of the POMV and
supporters of a spending limit are waiting for the other to take
the first step. This might "indeed be an opportunity for us to step
together." He also accepted that there are those who argue that a
spending limit would not be considered without addressing how the
State would acquire new revenue. That is as valid an argument as
that a spending limit would not be accepted without a spending
plan. Approval of the amendment to the amendment might provide hope
of moving forward.
Senator Hoffman reiterated that his support of the amendment to the
amendment and his support of the establishment of a spending limit
would be contingent on what occurs with SJR 102.
Senator Dyson understood Senator Hoffman's remarks to be that were
an acceptable version of SJR 102 not to advance, Senator Hoffman
would not support this legislation, "even as amended." Were that
the case, Senator Dyson would offer a motion on the Senate floor
"to delete the amendment that we just made." However, he hoped that
some common ground would be acquired that would march both sides
"forward together."
Senator Olson commended Senator Dyson on his perception that
working together might advance a plan. He voiced support of the
Governor's proposal as outlined in SJR 102. He reminded that the
final decision would be with the voters.
Senator Dyson encouraged the Committee to recognize that methods
could be considered that would allow the proposals to be
implemented via statutory rather than Constitutional measures. He
urged that compromising efforts be exerted.
Co-Chair Green objected to the Amendment-to-Amendment #2.
Co-Chair Green removed her objection to the Amendment-to-Amendment
#2.
There being no further objection, the Amendment to Amendment #2 was
ADOPTED.
Amendment #2, as Amended, was before the Committee.
A roll call was taken on the motion to adopt Amendment #2, as
amended.
IN FAVOR: Senator Olson, Senator Bunde, Senator Dyson, and Senator
Hoffman
OPPOSED: Senator B. Stevens, Co-Chair Green, and Co-Chair Wilken
The motion PASSED (4-3)
Amendment #2, as Amended was ADOPTED.
Amendment #5: This amendment inserts a new paragraph into Section
1, subsection (d) on page three, following line 21 as follows.
(15) an appropriation to fund State employee retirement
benefits.
Senator Hoffman moved to adopt Amendment #5 and objected for
discussion. He stated that in consideration of the concern raised
in opposition to Amendment #1 that eliminating K-12 education
funding from the spending limit would be too large a component,
this amendment would remove a smaller component of K-12 funding;
specifically that funding specific to the K-12 PERS/TRS
obligations.
Senator Hoffman removed his objection.
Co-Chair Wilken objected for further discussion.
Co-Chair Green remarked that the State would experience some
unanticipated expense every year. While PERS/TRS expenses are
currently an issue, in a few years it would be something else. For
that reason, the inclusion of "hot button issues of the time" would
not be a wise move.
Co-Chair Wilken recalled that a forecast was developed that
reflected the PERS/TRS expenses for FY 06 and FY 07. He asked
Senator Dyson to speak to that point.
Senator Dyson stated that the projection models depicted that
forward education expenses could be absorbed within the spending
limit, as proposed. This surprised many.
A roll call was taken on the motion.
IN FAVOR: Senator Hoffman and Senator Olson
OPPOSED: Senator Bunde, Senator B. Stevens, Senator Dyson, Co-Chair
Green, and Co-Chair Wilken
The motion FAILED (2-5)
Amendment #5 FAILED to be adopted.
Co-Chair Wilken asked for confirmation that the exemptions provided
to the University of Alaska in SJR 3 and HJR 9 remain intact in
this legislation.
Ms. Frasca assured Co-Chair Wilken that the exemptions provided to
the University are contained in the bill.
Senator Dyson moved to report the bill, as amended, from Committee,
with individual recommendations and accompanying fiscal note.
There being no objection, CS SJR 103(FIN) was REPORTED from
Committee with the Division of Elections $1,500 fiscal note #1,
dated June 18, 2004.
RECESS 12:26 PM / 2:10 PM
SENATE CONCURRENT RESOLUTION NO. 101
Relating to offsetting the projected annual general fund
revenue shortfall through equal appropriations from the
constitutional budget reserve fund and the earnings reserve
account.
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Green re-convened the meeting. She commented that the
State should be considering a variety of methods through which to
address its fiscal concerns. This legislation is such a proposal.
Co-Chair Wilken, the bill's sponsor, presented a power point
presentation titled "Building the Bridge, the Power of Earnings, An
alternate Solution" [copy on file]. An editorial titled "Stick with
Democracy" [copy on file] from the Anchorage Daily News, dated June
14, 2004 and an email [copy on file] from Governor Walter Hickel
were also provided.
Co-Chair Wilken mentioned that Governor Frank Murkowski's election
campaign focused on the message of "hope." Co-Chair Wilken stated
that he campaigned on a message of responsibly developing Alaska to
create jobs ? to fill our fiscal gap with money derived from
resource development. He is concerned that his message might have
been forgotten, as other things have taken priority.
Co-Chair Wilken voiced being skeptical that the public would
approve a fiscal plan were one presented in the upcoming November
general election. His plan would present an alternative plan to
bridge the fiscal gap that the State would experience between now
and the time when new natural resource revenues become available.
It is difficult to accept that there is a fiscal problem when the
State is experiencing such things as near-record high employment,
the price of North Slope crude oil is hovering around $30 to $40
per barrel, there are high bank deposit levels, and low bankruptcy
levels. The people of the State "are pretty content." Therefore it
is difficult to expect that people would support changing or
understanding the POMV proposal that would provide revenue to the
State and would alter the manner in which the Permanent Fund
Dividend check would be determined.
Co-Chair Wilken commented that the first chart in his presentation,
titled "So, where's the problem?" identifies that the FY 05
$7,600,000,000 Total Operating and Capital budget is comprised of
$3,010,000,00 in federal funding, $1,260,000,000 of Permanent Fund
money for inflation proofing and the Permanent Fund Dividend
checks, $937,000,000 in Statutorily restricted money, and
$150,000,000 in Trust/Dedicated money that the Legislature could
not alter. The chart also denotes a projected Constitutional Budget
Reserve (CBR) draw of $372,000,000 based upon an average crude oil
price of $28 per barrel. The fiscal gap lies within the
$1,960,000,000 general fund component of the budget. The general
fund is currently 70 to 80-percent funded by oil and gas revenue.
The goal over the next few years is to increase General Fund
revenues.
Co-Chair Wilken noted that the chart titled "?and what's the
problem?" reflects the difference in the General fund revenues and
the expenditures for FY 1990 through FY 2006 as well as the
projected State spending through FY 2020. The State expends more
than it receives in revenues.
Co-Chair Wilken stated that the chart titled, "?but things can
change quickly, for the good and for the bad" depicts various
budget scenarios were the price of North Slope crude oil to range
between $12 and $44 per barrel. The higher the price, the more
General Fund revenue is received. The FY 05 budget is based on a
$28.30 per barrel price forecast and a $372,000,000 budget fiscal
gap is projected. Were the price of oil to decrease to $22 per
barrel, a $750,000,000 fiscal gap would result. Currently a surplus
in revenue is being generated as the price is in the $39 per barrel
price range. However, he warned that this price would not continue,
as things could change quickly.
Co-Chair Wilken continued that things have changed, as the chart
titled "?And they have" depicts.
• The CBR has been used to fill the fiscal gap
• Approximately $5,5 billion has been withdrawn.
• The state has deposited $5.6 billion and earned $2 billion in
interest.
Co-Chair Wilken noted that the chart titled "for example" depicts
the CBR balance and CBR draws for FY 94 through FY 04. It states
the following.
• CBR draw 9 out of 11 years
• Average draw $350 million
• Current balance $2.1 billion
Co-Chair Wilken noted that were the current per barrel price to
continue, the projected FY 05 CBR draw would not be required. He
cautioned however that the CBR would erode in the future, as the
State "does not feed it like we used to."
Co-Chair Wilken noted that, as supported by the comments listed on
the chart titled "? but Alaska is a resource state", Alaska is a
resource State and there are new revenue possibilities.
SFC-04 1st SS #4, Side A 02:19 PM
Co-Chair Wilken stated that the chart titled "? and a bridge is
needed, From today to Development" depicts the FY 05 budget and the
projected budget shortfalls that would occur until new revenue
resources are generated, beginning in the year 2011, from such
things as the completion of the proposed gas pipeline and new oil
field developments. How the State would address its budget deficit
until that time is the question to which there are a multitude of
answers.
Co-Chair Wilken stated that some options through which to address
the fiscal deficit are depicted in the "Several pots of Money" fact
sheet. These would include: reducing State spending; instituting an
income tax, a corporate tax, and a sales tax; utilizing the CBR
increasing user fees and taxes on such things as tobacco to
generate other revenues. He stressed that while these revenue
sources would generate some money, it would not be significant
enough to support the State's budget. Another source must be
generated in the interim, as these sources and the CBR could not
adequately support the State's annual budget deficit.
Co-Chair Wilken stated that his proposal would involve utilizing
$1,500,000,000 in realized earnings of the four billion dollars in
unrealized and realized earnings that are available to the
Legislature in the Permanent Fund. The CBR is projected to
terminate in the year 2009 as depicted in the chart titled, "and
why not just the CBR?"
Co-Chair Wilken continued that, based on current projections, the
CBR would be unavailable to assist in building the bridge to the
time when new revenue resources come on line. Referring to the
chart titled, "but what if..." he noted that were the Legislature
to split "the future fiscal gaps with equal contributions from the
Constitutional Budget Reserve and the Earnings Reserve Account," a
fiscal bridge could be built that would extend the life of the CBR
through the year 2012. This revenue proposal is depicted in the
chart titled " ? and we build a bridge".
Co-Chair Wilken noted that the Permanent Fund, the Division of
Legislative Finance, and the Office of Management and Budget
provided the numbers depicted in the charts.
Co-Chair Wilken stated that the answer to the question of whether
the Earnings Reserve Account could be utilized in this manner is
yes, as substantiated on the fact sheet titled, "but can we?"
The Earnings Reserve Account, a result of wise investment of
our Permanent Fund, has been and is still available to the
legislature by a majority vote of 21-11.
Co-Chair Wilken noted that an enormous amount of information is
available on the Permanent Fund website as depicted in the sheet
titled " PF financial projections say?". This information includes
such things as that the Fund projects a 7.38 percent return and a
realized Earnings Account amount of $740 million in FY 04. The
chart depicts that the Legislature, if it so desired, could access
approximately four billion dollars from the Permanent Fund in
realized and unrealized funds.
Co-Chair Wilken voiced being surprised as the number of people who
confuse the Earnings of the Permanent Fund with the Principal of
the Fund. As denoted on the sheet titled "?our Fund and our
Earnings", the Permanent Fund is comprised of "two distinct pots of
money:" the Principal of the Fund, valued at $23.5 billion, is
protected by the Constitution; however, the Earnings Reserve
Account, valued at $1.5 billion, is available to the Legislature by
a majority vote. The Principal receives 25-percent of oil revenues,
and special deposits could be received from the Earnings Reserve
Account. The Earnings Reserve Account is the account from which
Permanent Fund Dividends, inflation proofing of the Principal
account, and other expenditures are made. While come decry that
using the ERA would be a raid on the Permanent Fund, this is not
the case. Those people "should know better." His proposal is to
utilize the ERA, matched with an equal portion of the CBR, to fund
the fiscal deficit until new resource revenues transpire.
Co-Chair Wilken read the information on the sheet titled " ? the
Earnings Reserve the crown jewel of Alaska's Fiscal Future."
• Only Legislature in America deciding how to manage $27 billion
for 640,000 people
• Every minute, every hour, every day, the world helps build
Alaska by
o Investing in corporate America
o Investing in America's society
o Investing in America's future
• The Earnings Reserve Account is an abutment to our Bridge to
Development.
Co-Chair Wilken referred to the chart titled " ? but what about my
check if you use the Earnings Reserve?", as it specifies how
citizens' PFDs might be affected by addressing the State's fiscal
deficit with a 50/50 split from the ERA and the CBR. Based on
Permanent Fund financial projections, a $550 million fiscal gap
that would be addressed by a $275 million draw from the CBR and a
$275 million from the ERA for the next five years: would not reduce
the level of the PFD the first year; would decrease it by three
dollars the second year; and would serve to decrease one's PFD by
$32 the fifth year. The cumulative affect of this would amount to a
total five-year decrease of $64. He pointed out that the average
CBR draw has been $350 million.
Co-Chair Wilken noted that the chart titled " ? how does this
compare to the status quo" reflects what the projected amount of
the PFD would be in the forthcoming years based on projections.
Were $275 million removed from the ERA to support the budget
deficit for the next ten years, the FY 2014 dividend would amount
to $2,057 as opposed to being $2,177 were the ERA not utilized.
Co-Chair Wilken stated that the chart titled " ? and to the
suggested POMV method" indicates that, were the proposed Percent of
Market Value plan (POMV) adopted, the FY 2009 PFD check would
amount to $1,151 rather than $1,889 as proposed in his plan and
$1,319 in FY 2014 under the POMV as opposed to $2,057 under his
plan. "This is a powerful slide" as were the POMV plan adopted,
citizens PFDs would be significantly affected as compared to his
50/50 ERA/CBR proposal.
Co-Chair Wilken noted that while a State Income Tax might raise
$275 million, the sheet titled "but is this the best way? Let's
compare other revenue sources" depicts that it would cost each
Alaskan $1,059. A State Sales Tax might raise $275 million at a
cost of $1,035 to that same person. Utilizing $275 million from the
Earnings Reserve Account would cost that Alaskan $12. These amounts
reflect information based on the second year of implementation and
Department of Revenue projections for a married person with two
children and a $57,000 adjusted gross income.
Co-Chair Wilken continued that the chart titled, " ? and what about
over time" depicts the cumulative cost to a family of four for
these three options through the year FY 2014. The cost in FY 2014
would be $9,531, $9,315, and $1,940 for implementation of an income
tax, sales tax, or use of the ERA proposals, respectfully.
Co-Chair Wilken stated that the chart titled, "but does this help
the CBR" reflects the fact that were only half of the amount of the
fiscal deficit funded by the CBR, the CBR's life could be extended
almost an additional three years. Total funding of the Fiscal
deficit and the 50/50 CBR/ERA split portion impact to the CRB is
reflected on this chart.
Co-Chair Wilken stated that the effect of removing money from the
ERA is depicted in the chart titled " ? and what about the ERA."
While it would affect the ERA balance that balance would reflect
growth when the projected new resource revenues begin.
Co-Chair Wilken read the following information.
" ? a brief comparison ?"
POMV Method verses Build the Bridge.
POMV Method Build the Bridge
1) Amount of PFD 1) Amount of PFD
more predictable follows the market
2) More negative 2) Less negative
impact on your PFD impact on your PFD
3) Perm Fund principal 3) Perm Fund Principal
may be impacted protected
4) Perm Fund draw for 4) Earnings used only
state services is if necessary for state
automatic services
"? let's use it only when we need it ?"
• Build the Bridge Plan demands spending accountability
because
• the Earnings Reserve Account is the people's money and
• each legislator must answer to the public on how much was
spent from the Earnings Reserve to fund state services.
"lets summarize .. The Build the Bridge Plan"
• Recognizes Alaska's natural resource potential and
opportunity for jobs
• Recognizes the power of the Earnings Reserve - the crown
jewel of a fiscal plan
• Bridges the State of Alaska revenue needs until
development can occur
• Establishes accountability by forming a spending
partnership with all voters
" ? and now the challenge to our governor and to the
Legislature"
• It's time to recognize the power of the Earnings Reserve.
• It's time to have the courage, when needed, to use the
Earnings Reserve
• We're elected to work hard, get smart, and make the right
decisions for the people of Alaska,
• That's why we're here
Co-Chair Wilken concluded his presentation.
Senator Dyson asked whether the management plan proposed by the
POMV could be incorporated with the revenue stream provided via the
50/50 CBR/ERA proposal.
Senator Bunde interjected that the POMV plan would not recognize
there being an ERA.
Senator Dyson acknowledged that point, but stated that the POMV
could provide a revenue stream that could, on some basis, provide a
revenue stream that could support the 50/50 CBR/ERA proposal.
Co-Chair Wilken asked for further clarification.
Senator Dyson stated that a portion of the five-percent income
provided by POMV for distribution could be utilized, perhaps to
fund the Dividend and/or to support the CBR. He asked that, at some
point, the Administration provide a response to this suggestion.
Senator Bunde characterized Co-Chair Wilken's proposal as being
"thoughtful, logical" and reasonable. He asked how the Legislature
might further this proposal.
Co-Chair Wilken responded that SCR 101 provides some of this
detail. He is willing to compromise and would support any method
chosen by the Legislature to further the concept. While he is
unsure as to whether the proposal could be placed in law, he wished
to provide citizens a method through which to approach the fiscal
deficit without having the proposal being subject to the risk of
failure as a ballet question. We should not take a chance, and as a
Legislature, we should represent our constituents and take the
responsibility for addressing the situation. The plan he has
proposed is "a viable plan" that would save citizens' money. He
declared that "POMV is flawed mechanically and it is flawed at the
ballot box as it is not going to pass."
Senator Bunde agreed that two messages must be sent: one relating
to the Legislature and one to the investment community. He noted
that were a plan adopted either in Resolution or in Statute, a
forthcoming Legislature could either "abide by that or ignore it."
A psychological issue exists regarding spending a large portion of
the earnings of the Permanent Fund. The only prevention to change
is public and political pressure. The financial market would also
desire that a fiscal plan be adopted in this State. "They seem to
want something on paper" that would reassure them that "the rules
would not change cavalierly." He stated that were the Legislature
to support this proposal, the methodology to support it would be
furthered.
Co-Chair Wilken stated that of the various options available
through which to address the budget deficit, use of the ERA would
be his first choice. Were that removed from the equation, the other
options would move closer to the forefront. However, those options
would have more impact on financial and business communities than
the plan proposed in SCR 101, as it would eliminate the threat of
an income tax, a sales tax, and changes in corporate tax structure.
These entities should be reminded that the use of the State's
assets would be a better option than "going to their pockets." The
Standard &Poors national credit rating analyst's message was that
the State is not "judged on what you are going to do," but "on what
you have done." Alaska has exceeded other states in terms of its
assets and liquid assets, with only the inclusion of the CBR rather
than the entire Permanent Fund assets. He stated that when the
State's fiscal crisis is addressed, "this place would hum" just as
it did in 1999.
Senator Bunde understood that regardless of whether a solution to
the fiscal situation is addressed via Statute or Resolution, action
on the part of the Legislature would speak louder than words. The
Legislature must act.
Co-Chair Wilken stressed that the State would be faced with a $500
million deficit for several years. Oil must continue at a price of
$33.80 per barrel in order for the State to have a balanced budget
in FY 05. It is difficult to predict the price of oil in future
years. He reiterated that his plan would cost residents less than a
one-dollar decrease in their Permanent Fund dividend in FY 06. The
Legislature must have the courage to address the issue.
Senator Hoffman found the presentation interesting, but noted that
some of the "soft points" would include the fact that due to oil
price volatility a one billion dollar CBR balance must be
maintained. A $2.3 billion budget is flat spending. It is a known
consideration that the PERS and TRS obligation would amount to one-
third of a billion dollars over the next eleven years. Other
expense levels are unknown. He stated that when $270 million was
withdrawn from the CBR in FY 02, its balance dipped to almost zero.
This could have jeopardized the PFD. The effect on the monies
available for PFD would also be an area of concern. Under the
current status quo system the Permanent Fund balance in FY 2015
would be $45 billion. He asked regarding the level of the FY 2015
Fund were this proposal adopted. The POMV plan would result in an
eight million dollar reduction in the Fund. Another concern would
be, as alluded to by Senator Bunde, how to assure the public that
the Permanent Fund Dividend would be protected, were this proposal
furthered. This is the primary reason that the Legislature has not
voted to utilize the ERA to date.
Co-Chair Green reminded that there is no guarantee that there would
be a PFD payment each year. The payment "is based on performance of
the investment fund." If it is a guaranteed payment, it should not
be called a Dividend.
Senator Hoffman agreed that, while this is true under the current
scenario, it would not be true were the POMV plan adopted.
Co-Chair Green declared that it would be difficult to declare that
there would always be a dividend payment, regardless of what occurs
with the Fund.
Co-Chair Wilken agreed that Senator Hoffman's CBR concern is valid.
Everything being presented today is based on projections. While a
lot of negative things could occur, a lot of good things could
occur as well. The Permanent Fund balance is expected to be $43
billion in 2014. It should be clarified that the $100 million FY 02
amount referred to by Senator Hoffman, related to realized earnings
resulting from three years of negative earnings. It should also be
noted that there was, at that time, in excess of $1.1 billion in
unrealized earnings. If need be, some of the unrealized earnings
could be sold to support the payment of a Dividend. While "there is
no guarantee in investments," the investments over time "have been
very successful."
Senator Hoffman stated that in order to access the ERA Fund,
assurance must be provided that the Dividend would be protected.
Otherwise, the question would be how many Legislators would provide
the required vote.
Co-Chair Wilken responded that that might be true, and thereby,
access of the ERA might not occur for a few years as the options
are reviewed. Senator Hoffman is talking about enshrining the
Permanent Fund Dividend in the Constitution. He opined that paying
a Dividend Check is not one of the top four priorities of State
Government. It would be number five in his view, behind public
safety, public health, public education, and transportation.
Therefore, he could not support enshrining the payment of a
Dividend check in the Constitution.
Senator Hoffman responded that State voters should make this
decision.
Senator B. Stevens agreed, "that the POMV concept as presented, is
flawed." Were it exclusively a money management tool it would not
be flawed. The Permanent Fund Board of Trustees have supported the
POMV proposal for numerous years; however, their position "is
solely based on one thing alone", and that is enshrining inflation
proofing of the Permanent Fund. Legislators have been convinced to
raise spending levels in order to allow inflation proofing to be
enshrined. However, "the premise is flawed because the Legislature
has never not fully funded inflation proofing of the Permanent Fund
under the current formula." The current dilemma is that in order to
fund the State's essential services, inflation proofing of the Fund
must occur first. "Then you can enshrine the Dividend, and" were
any funds left, they could be used to fund other things. This
argument is flawed as the AS 37 Statutes "have never been not been
fulfilled." He argued that it has been "over-inflation proofed."
Now that the State has reached a budgetary point to which some of
the Permanent Fund money should be accessed, the Legislature might
be required "to break our philosophical positions" by being
required to enshrine inflation proofing and the PFD in the
Constitution, "even though we have never not done it." He voiced
support for Co-Chair Wilken's comment that, were it deemed
necessary, the Legislature could access the money in the ERA. The
POMV concept approach being presented is flawed.
Senator B. Stevens stated that while Co-Chair Wilken has presented
another alternative to the problem, the true nature of the problem
must be determined. Some opine that the State is "not spending
enough money so we need to get to the Dividend; others say that,
"we don't have enough money to spend so we have to get to the
Dividend." Both of these approaches are incorrect, as the State has
more money, in excess reserve, than most governments on the planet.
Senator B. Stevens stated that he is one of several fiscal
conservatives who view the level of State services as being
adequate to the demands presented by the State's citizens. It is
common knowledge that aligns with Co-Chair Wilken in support of
utilizing the ERA when the time comes, after inflation proofing and
funding of the Dividend has occurred.
SFC 04, 1st SS #4, Side B 03:07 PM
Senator B. Stevens stated that there is money available and such
usage would have minimum effect on the Dividend payout.
Senator B. Stevens suggested some changes to the presentation. The
chart titled "? and a bridge is needed" which depicts the potential
Future Oil and Gas revenue based on the Spring 2004 Revenue
Forecast, could provide a few alternate scenarios to reflect how
significant the fiscal deficit would be, particularly "as
projections become more conservative as the years out expand." In
addition, the Chart titled " ? and what about the ERA?" should
include a projection of the Permanent Fund corpus balance in
addition to the ERA balance.
Senator Hoffman commented in regards to Senator B. Stevens's claim
that the Legislature "has never not inflation proofed and never
not" funded a Dividend. Since it would appear that these things
would continue to be done, why not allow the people to vote on
whether or not to enshrine the Dividend in the Constitution. This
would "remove the politics" regarding how to spend the rest of the
earnings, as it would eliminate citizens' fear that the Dividend
would be negatively affected.
Senator B. Stevens stated that Senator Hoffman omitted his comment
that in times of excess revenue, the Legislature super-funded the
corpus of the Fund. Now is the time to utilize a portion of the ERA
to provide public services.
Senator Bunde stressed that Alaska's physical resources, being
finite, would be gone someday. When that occurred and were the
Dividend enshrined in Constitution, the citizens of the State would
be required to pay such things as an income tax in order to support
it. Demographics project that in ten or fifteen years, the smallest
component of the State's population would be the 30 to 50 year
olds. This "most productive age group" would be the taxpayers who
would be required to support the large group of Dividend
recipients. He quoted that "the democracy is doomed when the public
realizes they could vote themselves money from the public
treasury." That is what enshrinement would do. He hoped that, on
the other hand, the State would not resemble "the miser who died
with his mattress stuffed full of money."
Senator Dyson voiced appreciation for the efforts exerted by Co-
Chair Wilken to develop an alternate method through which to
address the fiscal gap.
Co-Chair Wilken acknowledged his staff person, Sheila Peterson, for
her efforts in developing the presentation.
Co-Chair Green expressed that public questions regarding this
proposal could be directed to Co-Chair Wilken and his staff.
Co-Chair Green asked Senator Hoffman to further explain the
intention of enshrining the Dividend in the Constitution:
specifically whether the intent is to insure that a payment would
be made, regardless of the State's fiscal situation or whether the
calculation mechanism for the dividend would be enshrined.
Senator Hoffman responded that Co-Chair Wilken's presentation
reflects that, in 2014, new resource revenues would be deposited
into the Fund. Proper management of the Fund would insure continued
funding for Dividends.
Co-Chair Green understood therefore that the desire is to guarantee
the Dividend rather than to establish a formula.
CHERYL FRASCA, Director, Office of Management and Budget, stated
that while the Administration had a copy of Co-Chair Wilken'
presentation, until today, they had not received the benefit of his
accompanying narrative. While she could question some aspects of
the proposal's "practical application", she noted that she had not
been able to confer with the Governor in regards to his
perspective.
Co-Chair Green requested that Ms. Frasca present her remarks and,
at a later date, provide comments from the Governor.
Ms. Frasca spoke to her concerns, including: the Administration's
desire to retain a one billion dollar CBR balance to provide "some
cushion" to the budget were oil prices to drop dramatically whereas
Co-Chair Wilken has presented the alternate idea that the ERA be
used for this purpose; what would happen were the fiscal deficit to
exceed $550 million: would the direction be to impose an additional
income source or remove more funds from the CBR or the ERA. This is
a concern, as, in forward years, the fiscal deficit would exceed
those of the past. Another concern about implementing this proposal
as opposed to the POMV is that the POMV model is less volatile in
terms of the payout and would be easier to budget. The volatile
fund sources through which to address the fiscal deficit under Co-
Chair Wilken's proposal would include the stock market and the
current volatility of the price of oil.
Co-Chair Green asked how the volatility of the price of oil and the
stock market differs from the current situation.
Ms Frasca responded that while it does not differ from the current
situation, it would affect the ability to provide a long-term
solution of fiscal stability. Part of the Administration's goal is
to develop a mechanism that would "fund future services with
stability." Due to wide swings in the stock market and the
investments of the Permanent Fund, the current Fund's earnings
income payout calculation is not as stable, going forward, as the
methodology proposed in POMV.
Ms. Frasca noted that another concern evolves around whether flat
spending, going forward, is a realistic approach upon which to base
future budgetary projections.
Ms. Frasca also asked whether, as a manner in which to be
accountable to the voters regarding how programs are funded, the
intention would be to utilize the ERA as a fund source that could
be directly identified as the fund source for new programs that
might be developed such a new funding for schools, public safety
officers, or transportation.
Senator Bunde agreed with Senator B. Stevens that the Permanent
Fund Trustees support the POMV concept, as it would provide a
mechanism through which to guarantee inflation proofing of the
Fund. The only reason that the Legislature would support POMV is
that it would provide a predictable revenue source. "The only
reason that you would need a predictable revenue source would be
that you are going to use that to fund government." On a public
policy basis, "it is not critical to the State that Dividends be
predictable." While POMV would supply a predictable funding source,
it might be a tool that is unacceptable to the public. This brings
us back to determining what would be possible, and that would
include accessing the ERA.
At EASE 3:23 PM / 3:24 PM
SENATOR GENE THERRIAULT opined that the Permanent Fund Board of
Trustees' support of the POMV is appropriate because insuring that
inflation proofing of the Permanent Fund must continue in order to
protect its value over time, as it is the appropriate action of
their role as fiduciaries of the Fund.
Senator Therriault noted that the importance placed on SJR 9 and
HJR 3 during the Legislative Session is interesting, as those
pieces of legislation are not being discussed anymore. The sponsor
of HJR 3 commented that protection of the purchasing power of the
Permanent Fund was the paramount thing that the Legislature should
protect. When it was pointed out that HJR 3 did not provide
protection to such things as the inflation proofing of the Fund,
support of the bill diminished.
Senator Therriault stated that currently the argument evolves
around two things: one is that protection of the PFD is being
sought; and secondly, the "growing realization" that the POMV plan
is the sensible thing to do as inflation proofing the Fund is the
"appropriate" mechanism through which to protect the purchasing
power of the Fund. "Unfortunately," these two approaches have
become linked together. Nonetheless, he supported the development
of a mechanism that would protect the purchasing value of the
assets of the Fund as well as providing a predictability "or
smoothing affect" of the size of the Dividend in the future as it
infuses a substantial amount of money into the economy.
Senator Therriault applauded Co-Chair Wilken's efforts in
developing an alternative proposal. He has some suggestions to the
plan that he would discuss separately with Co-Chair Wilken. He
agreed that the Legislature has the ability to access millions of
dollars in funding.
Co-Chair Green commented that the Legislature "is cursed" because
it does not utilize the ERA, which is a viable funding source.
Because it does utilize the ERA, an alternate approach would be to
implement an income tax.
Senator Olson commented that while there are a number of mechanisms
being discussed through which to address the fiscal gap, "the
reality" is that until the time when the public is guaranteed that
the Permanent Fund Dividend is protected, the public would not
support a plan.
The bill was HELD in Committee.
ADJOURNMENT
Co-Chair Green adjourned the meeting at 03:30 PM
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