Legislature(1995 - 1996)
03/01/1995 09:15 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
MINUTES SENATE FINANCE COMMITTEE March 1, 1995 9:15 a.m. TAPES SFC-95, #6, Side 2 (600-end) SFC-95, #8, Side 1 (000-575) SFC-95, #8, Side 2 (575-800) CALL TO ORDER Senator Rick Halford, Co-chair, convened the meeting at approximately 9:15 a.m.. PRESENT In addition to Co-chairs Halford and Frank, Senators Donley, Phillips, Rieger, Sharp and Zharoff were in attendance. Also Attending: Senator Jim Duncan; Jim Kelly, Alaska Permanent Fund; Jim Baldwin, Assistant Attorney General; Stephen Slotnick, Assistant Attorney General; Elmer Lindstrom, Special Assistant to the Commissioner, Department of Health & Social Services; Mike Greany, Director, Legislative Finance Division; and Curt Lomas, Program Officer Division of Public Assistance, Department of Health & Social Services. SUMMARY INFORMATION SB 84 APPROP: TO PERMANENT FUND PRINCIPAL Discussion was had with Senator Jim Duncan, Jim Kelly, Jim Baldwin, Stephen Slotnick and Mike Greany regarding the two CS (FIN) versions of the bill. Further dis- cussion will be taken up at the next meeting. SB 37 END PERMANENT FUND DIVIDEND HOLD HARMLESS Discussion was had with Elmer Lindstrom and Curt Lomas. The Department of Health and Social Services is opposed to passage of the bill. The Work Draft for CSSB37(FIN) 9LS0449\G, dated 2/15/95 was Adopted. SENATE BILL NO. 84 "An Act making a special appropriation to the principal of the permanent fund; and providing for an effective date." Co-Chair Halford took up SB 84, an appropriation from the permanent fund reserve to the permanent fund principal. In the introduced form, it appropriates the entire reserve to the principal. There are two areas which have raised significant questions. What is the effect of the appropriation of the entire reserve to the principal on either dividends or inflation-proofing? What is the effect of appropriating the reserve to the principal on any other calculation on revenue available for appropriation as it applies to the constitutional reserve account. He noted for the record, "it is not his intention to make it easy to spend funds from other accounts. Co-chair Halford recognized the two different CS Work Drafts indicating the differences between the two. He noted that one provides, that at any time the amount in the reserve account exceeds $250 million, after dividends and inflation- proofing, it goes to the principal. The other CS appropriates all but $250 million to the principal. Senator Phillips stated his concern regarding this appropriation affecting the constitutional budget reserve account. Co-chair Halford asked, "If you reduce the amount available for appropriation by taking the permanent fund reserve off the table, do you then trigger the simple majority vote to the constitutional budget reserve?" Senator Rieger expressed his reservations concerning the bill. He supports making it more difficult to spend the money. He noted with the fiscal gap, people are cautiously looking at the spending. Some factions advocate no new taxes, some factions do not want the dividend to be touched. Today, it is possible to confirm that the budget will not be cut, the taxes will not be raised, and the dividends will be left alone. This would be possible for five years with the present reserves. This measure makes it less possible after that time. The reserves would be exhausted, in that context he supports it. Senator Rieger is convinced there needs to be measures taken to protect the permanent fund. He stated that he is also reserved with a bill he has co-sponsored. There is an effort to build up the fund which puts another billion dollars into it if it were to pass. He indicated an insecurity of the institutional protection of the fund in inflation-proofing and management. The two previous administrations have removed and selected new trustees. The elected governor controls a $3 million budget which is dwarfed in comparison to gaining control of a $16 billion fund. He expressed strengthening the protection institutionally, given the power vested in an individual to control these funds. He stressed that as the fund is built up, there is a need to protect it for future generations. Co-chair Halford asked Mike Greany to give an update on the "sweep" mechanism. Mr. Greany addressed the possible effect on SB 84 on the constitutional budget reserve. He spoke from a chart entitled, "Preliminary estimate of funds available for appropriation for FY96 for illustrative purposes". He provided information based on a rough calculation on funds available. He noted that what is needed is a process that identifies all the accounts that the court would consider available for appropriation and those accounts that are subject for sweep for repayment for the fund. Co-chair Frank spoke to the rough calculation. He asked, if a remainder of $452.2 million was left in the permanent fund reserve would that negate the provision? There are a number of subsidiary accounts that have not been included that could swing the number in either direction. He then asked, "is there a direct dollar-for-dollar relationship for the amount left in the permanent fund reserve, unprotected by being in the principal, to the amount that can be appropriated from the constitutional reserve by a simple majority? Mr. Greany responded that the earnings reserve of the permanent fund is the largest single fund available to appropriate. Co-chair Frank asked that if the calculations are correct and the funds were appropriated, except $452.2 million to the principal of the permanent fund, would there be any affect at all on the availability of the constitutional budget reserve? Mr. Greany answered that the legislature would not be able to use the simple majority to access the funds, it would return to Article IX, Section 17C, which requires a three-fourths vote. Co-chair Frank noted that if $500.0 million were left in the fund to give a margin of error, then it would be clear you would not be able to use the simple majority feature under Section 17B. If the funds were going to be utilized you would have to use Section 17C. Mr. Greany pointed out the other variable is the amount of money available from AHFC or AIDEA. The funds from those corporations is available to the extent that they have actually been appropriated as opposed to what may be theoretically available to appropriate. Discussion was had regarding Article IX, Section 17 B,C, and D. Jim Kelly of the Alaska Permanent Fund in Anchorage joined the committee via teleconference. Co-chair Halford reiterated the previous discussion. He noted that two CS's are before the committee. One provides that at any time the amount in the reserve account exceeds $250 million, after dividends and inflation-proofing, it goes to the principal. The other CS appropriates all but $250 million to the principal. There are questions to the effect of the appropriation of the reserve on dividends or inflation- proofing. Mr. Kelly responded that the problems that arise are due to the description of income available for distribution. Income available for distribution is 21% of the last five years income, but may not exceed that income of the current year plus the balance. Mr. Kelly indicated that this year, there is no problem with an appropriation of the total amount. The reading of the bill would allow for the dividend calculation to take place before the transfer. The problem would arise next year potentially, if the amount of money earned is less than the five year average. If the funds earned 6.49% next year, there would be an earnings of $993 million. The amount would be less than the five year average. That would be the amount that would be available for distribution. The appropriation for the dividend would then take half of that, which would have a negative impact on the dividend of approximately $60 million. The proposed CS's that would leave $250 million in the account would alleviate that problem. The permanent fund has added to the earnings reserve account 13 years out of 15. The two years it was taken out, amounted to a total of $30 million and $24 million, respectively. Co-chair Halford stated that in the past, the money out of the reserve, went to inflation-proofing not dividends. There is a dependance upon income, inflation rate, and average, which determines whether the short-fall occurs on the dividend-side or inflation-proofing-side. Mr. Kelly projects an 8.11% rate of return for next year. If inflation is 3.75%, there would be an additional $100 million added to the earnings reserve account next year. Co-chair Halford spoke to the committee substitute's. He prepared a CS which provides that anytime the balance in the reserve account exceeded $250 million, it would be automatically transferred to the principal. With regard to the impact of inflation-proofing, he said, and with $250 million in the earnings reserve account there would have been no problem in the last 15 years at all. Co-chair Halford then addressed the problem of the appropriation of funds exceeding $250 million which becomes a dedication and a substantive law opposed to an appropriations bill. He asked Mr. Kelly to give the history of the appropriation versus non-appropriation of inflation-proofing and dividends with regard to the permanent fund? Mr. Kelly responded that in the early years, dividends and inflation-proofing were not appropriated. It wasn't until the Cowper administration that sections of the bill provided for appropriated dividends and inflation-proofing. Co-chair Halford asked if it is based on the last phrase of the permanent fund language in the constitution, "or as provided by law"? Mr. Kelly responded that it was substantive law, and was interpreted to count as the appropriations for all those years. Co-chair Halford asked if it was ever successfully challenged? Mr. Kelly said there was never any legal action, just a change of policy. The legislature began including those sections in the front part of the bill. Senator Sharp asked if the 6.49% was a line of demarkation in ending up without enough funds for inflation-proofing? Mr. Kelly's projection using 6.49% would be a problem. He stated that if the earnings were less than $1,130 billion, there would be a problem. Senator Zharoff asked, what is the balance in the permanent fund to date? Mr. Kelly stated that the principle at the end of the year will be $13,500,000,000; in the earnings reserve account, $1,116,000,000, both at cost. There is an additional $750 million in unrealized gains. Total is $15 billion. Senator Zharoff referred to the CS that made mention of, "June 30th of each year after the transfers under B and C of the Section, the amount that exceeds $250 million shall be transferred." He questioned if the CS would bind the appropriation power of future legislators? End: SFC-95, #6, Side 2 Begin: SFC-95, #8, Side 1 Mr. Baldwin, Assistant Attorney General, and Mr. Slotnick, Assistant Attorney General were invited to join the committee to review past and present interpretation of the law. Mr. Baldwin stated that in a recent decision of the supreme court interpreting the amendment, there was discussion of the automatic transfer mechanism that is in statute. The opinion written during the Hammond administration expressed the opinion, that the inflation- proofing transfer could be automatic, based upon a fulfillment of a fiduciary obligation by the state to keep the fund above the inflation level. He stated that it is not set out in statute. Since it was established as a trust, the reasoning dictated a fiduciary obligation as trustees to treat it as a trust. He noted that a later administration decided that the constitution was not clear on how the provision was to be implemented. Whether the last sentence of the amendment does authorize the automatic transfer, or whether it implies that the legislature should appropriate it. From the Cowper administration to the present, the money has been appropriated along with the dividend. With regard to the law, the implementation is not clear. One could argue that the constitution does not take away the legislative power to appropriate funds, that it merely authorizes the legislature to act consistent with other powers granted in the constitution. Senator Rieger asked if there is a difference between the responsibility of a fiduciary and a trustee in the context of overseeing a fund? Mr. Baldwin stated a trustee has fiduciary obligations, to make prudent investment and management decisions. Senator Rieger stated that much of the debate concerning the constitutional provision on providing for the disposition of earnings requires a definition of earnings. In the past the handling of the return of capital, which represents the inflation rate, was treated as if it were earnings. Mr. Baldwin addressed the question of what is in the general fund versus what is not in the general fund. He stated that there is a difference of opinion between legislative lawyers and executive branch lawyers. Mr. Slotnick responded to the question of funds, other than the earnings reserve, which would be available for appropriation for purposes of Section 17B, but not for purposes of 17D. He cited Science and Technology Funds as an example. These particular funds are outside the general fund and would be available for appropriation for purposes of 17B, but not for 17D. There may also be other funds within some of the public corporations which would be available for appropriation. He said they cannot be spent without further legislative action, but would not be available for appropriation for purposes of payback because they are lodged in public corporations. Co-chair Frank asked how this was different from what Mr. Greany said? Mr. Slotnick stated that Mr. Greany identified only the earnings reserve as a certainty outside the general fund and not available for sweep. He is correct that it is the only fund the supreme court identified in the Cowper case. Co-chair Frank said that at issue are the equity balances of the large public corporations. Mr. Slotnick stated that at issue are certain funds within those public corporations which cannot be spent without further legislative action. Actual equity balances of AHFC are not on the table as available for appropriation unless in fact they are appropriated. There may be funds that cannot be used for revolving loans, or that the University cannot spend without an appropriation. These would be considered available for purposes of the calculation, but not necessarily for purposes of payback. Senator Rieger asked if this was made clear in the judge's ruling or is this an interpretation of what was said? Mr. Slotnick stated that the supreme court was very clear in footnote 32 which recognizes the distinction between 17B and 17D. The court stated that "the earnings reserve fund is outside the general fund." He went on to say that, "if no further legislative action is required, then it would not be considered available for appropriation unless it is actually appropriated". Senator Rieger questioned the feasibility of taking all assets in the general fund and moving it over for management by the permanent fund. Mr. Slotnick responded that it was debateable. Not everyone agrees with his legal interpretation of whether the assets in the permanent fund are in total outside the general fund. Mr. Slotnick said that the legislature does have that authority. Mr. Baldwin stated that it is the Legal Department's opinion that the legislature has the power to create certain funds that are outside the general fund. Senator Rieger asked, "without a constitutional amendment?" Mr. Baldwin noted that the legislature has done that by creating public corporations. Mr. Slotnick commented that the administration is opposed to SB 84. It makes access to the budget reserve easier which could lead to smaller dividends upsetting the inflation- proofing process. Another valid concern is the State's bond rate. It could cause it to undergo scrutiny, possibly leading to a down-grading. It also takes away the insurance policy, it takes away options, and it undercuts the work of the long-range fiscal commission. No one has identified to the administration's satisfaction the need for this bill. Transferring the earnings reserve will not increase the dividends, because the earnings from the earnings reserve are already accounted for in the formula that calculates the dividends. The bill is not necessary to protect the earnings reserve account from sweep. It is not eligible for sweep, back into the constitutional budget reserve, and it is not necessarily to protect the earnings reserve from spending as there is no spending proposal. Co-chair Halford stated that the committee has dealt with the question of permanent fund dividends and under existing projections it would have done nothing. He said that there is an interest to deal with any impact on the constitutional budget reserve availability. Mr. Slotnick stated he was speaking to SB 84, not the committee substitutes. His largest concern is, access to the budget reserve. It's not clear that the CS's have solved that problem because the formula compares the amount appropriated in one year with the amount available for appropriation. If there is a smaller balance in the earnings reserve, then access to the budget reserve under a simple majority is more likely. Senator Phillips stated that this fund of over $1 billion, is subject to legislative appropriation. He stressed there is a mistrust of this legislature to spend the money correctly, which is why it is wanted in the permanent fund. Mr. Slotnick's response to that statement is, "if they don't spend it, it stays in the earnings reserve where in fact it is serving a purpose. The purposes are to keep our financial picture healthy. Senator Phillips interjected that it is always subject to legislative appropriation, and the fear is the legislature can appropriate that money for any purpose. The legislature has that authority. He felt that it is good public policy to have that distrust of the legislature. He feels it should be in the permanent fund so that it cannot be spent. Senator Phillips wanted the public policy statement announced for his constituents. Co-chair Halford asked if there was anyone in the room who believed that if the other $1.2 billion had not been deposited to the principal of the permanent fund, that it would not have gone into the budget gap of the mid-eighties? There was no response. Mr. Baldwin stated that he wasn't sure which CS the committee was considering or how the committee was proposing solving the problem with the constitutional budget reserve for FY95. He felt that if the amount of $250 million was left in the account, it might help solve the problem this year. Assuming that you appropriate $700 million from the earnings reserve account into the permanent fund, we have a big problem next year. This would occur because the appropriation level for FY96 just jumped up $700 million. The amount available for appropriation is going to be lower next year. This means, in an election year, access in CBR is very easy by the majority vote. Co-chair Halford said that the solution is to combine the CBR and the permanent fund principal with earnings reserve account. Mr. Baldwin pointed out that Mr. Greany's illustration addresses the problem for one year only, it doesn't show what happens the next year based on a large appropriation this year, which means the appropriation level is much higher than the amount that is available for appropriation in the succeeding year. Senator Sharp stated that it was difficult to accept the transfer of funds being called an appropriation. Mr. Baldwin said that if you are sending it from the earnings reserve to the principal that would be an appropriation. Senator Sharp indicated that the debate during the election was the appropriations of funds available to meet the needs of the operation of the governor, not transferring funds instead of retaining. Mr. Baldwin stated the court did try to argue a portion of this issue in a supreme court case, but the supreme court has come down and spoken on this question. It is the decision that governs. Co-chair Halford stated, that if there were no more questions on this bill, it would be taken up at the next meeting. and the two SENATE BILL NO. 37 "An Act relating to treatment of permanent fund dividends for purposes of determining eligibility for certain benefits; and providing for an effective date." Senator Phillips stated for the record that he is representing District L. The committee substitute before the committee basically gives the option of the welfare recipient to decide to accept monies from welfare programs or the permanent fund dividend, but not both. Historically, in 1981, the legislature passed the permanent fund dividend with a hold harmless. Approximately $2 million was paid out of the general fund up to 1986. In 1986, the legislature decided to have the recipients of all the PFD's pay for the hold harmless. That amount is $22 million currently, which translates to $41.45 per person. There are 573,000 people receiving the dividend. The CS excludes only the Adult Public Assistance recipients and the Supplemental Security Income recipients. Basically, they will receive their benefit plus the permanent fund dividend. The other 39,500 people will have to make a decision whether to take the permanent fund dividend for that particular month or their financial assistance from other programs. Co-chair Halford asked about the fiscal note attached to the bill. Senator Phillips responded that it has been difficult obtaining a fiscal note. He had just received it an hour prior to the meeting, asked the department to explain it. He also wanted to make clear that the SSI and APA recipients will both receive their benefits plus their PFD. The hold harmless would cost those receiving the PFD, $4.2 million or, approximately $8 per person. This deduction would include 8,000 people. Senator Phillips stressed he chose to exclude from the CS the APA and SSI recipients since this category of people can least help themselves. Co-chair Halford asked Senator Phillips to move the proposed CS and explain it to the committee. Senator Phillips MOVED CS for SB 37 9-LS0449/G, Cook, dated 2/15/95. (See subsequent hearing of 3/9/95 for adoption of updated draft, 3/17/95). Co-chair Halford asked if there were any objections to adopting CS as the working vehicle. Without objection, the CS for SB 37 is ADOPTED. Senator Phillips explained that the bill would effect 39,500 people and would exclude only those on APA and SSI. The total is 8,000 on APA and SSI. Co-chair Halford asked for consideration in adopting a program allowing those on public assistance to check off a block on their permanent fund application indicating an equal number of monthly dividend payments. This would avoid exceeding the welfare guidelines, with administrative costs deducted from their individual dividends. Co-chair Halford's intent is to mitigate the effect of not taking from everyone else's dividend to fund the hold harmless. Senator Rieger supports this action. He has a POM which says that federal rules allow for this action. Co-chair Halford asked Elmer Lindstrom, Special Assistant to the Commissioner of Health & Social Services to address the committee. Mr. Lindstrom stated that the department is opposed to passage of SB 37. The entire text of his presentation is attached. End: SFC-95, #8, Side 1 Begin: SFC-95, #8, Side 2 Mr. Lindstrom also noted that the department did supply Senator Phillips with draft fiscal notes to reflect the draft CS that was made available to H&SS. Senator Sharp spoke of the "check-off" recommended by Co- chair Halford. He pointed out the "double-dipping" effect. He stressed the frustration of the state making payment of the permanent fund dividend which takes the obligation away from the federal in that month. He would like to find a resolution to the problem which allows people the ability to absorb the additional amount opposed to dropping off the role because of the income. He felt there must be a more sensible plan to the present inequity of payment distribution. Mr. Lindstrom answered that there has not been a detailed analysis of the problem, though it has been mentioned previously and the department is going to look at it. The first guess is that it would increase the cost of the hold harmless program. He explained that when individuals receive their dividend, they spend it immediately in one month, resulting in the loss of their benefit for one month. By spending it all in one month, they are over the cap for benefits for that one month. But, if that $1,000 were to be spread over 3 or 4 months, it would be a dollar for dollar reduction in each of those months, resulting in an increase cost of the hold harmless program in total. Added onto that would be additional administrative costs. Senator Sharp inquired if the 47,000 people involved in the program are up against the income cap? Mr. Lindstrom responded that in the one month expenditure of the dividend, the income puts them significantly over the income cap for that month. The results are a loss of income for the one month. That amount that is considerably over the cap, we are not having to hold harmless. But if you spread that amount over a greater period it would be subject to reimbursement. Mr. Curtis Lomas, Program Officer, Division of Public Assistance with the Department of Health & Social Services spoke to the issue of Senator Sharp's question. He stated that there has been considerable discussion regarding quarterly and monthly payments with the dividend. To state it clearly, public assistance payments are not an "on" and "off" situation. If the income is below the limit for the program there is eligibility for payment, but it is reduced by the amount of the total income. In a typical case with a family on AFDC, if everyone in the family gets the dividend payments in October, it will result in the family being ineligible for that month. The loss to that family is approximately $923, if they have no other income. In the department's analysis in the past, the calculations across all the programs that are both hold harmless and permanent fund dividend, a monthly payment scheme for the dividend roughly doubled the cost of the hold harmless program. Co-chair Halford noted that based on the payment, the gap in the state's welfare programs, between eligibility and poverty line is very small. Mr. Lomas confirmed 7%. Co- chair Halford confirmed that the gap is increasing as we reduce payment. He noted that it increased by the action of the last legislature. Mr. Lomas confirmed that it increases every year as the cost of living goes up. Co-chair Halford noted that it hinged on repealing the automatic cola. He said that there are not enough votes in the legislature to take this money out of the dividend this year, and he felt that this issue will not go away. Co-chair Frank asked for an analysis from the Department of Health and Social Services showing the calculations of the PFD that was done on a monthly basis? Senator Donley asked what the cost to the state is, versus the federal government, of transferred payments no longer received. Mr. Lomas responded that the formula for the federal and state funded program is 50%/50%. That applies to Medicaid and AFTC program. Co-chair Frank asked if the assumption included recipients choosing the dividend and foregoing their benefits? Mr. Lomas said that people apply for their dividend, because in almost every instance, they loose more if they choose public assistance over the dividend. Co-chair Frank stated that in an earlier analysis he had seen, it was unlikely that Medicaid would be lost. Mr. Lomas stated that with few exceptions that was true. The Medicaid Program is an anomaly of federal law that allows us to disregard dividend payments in most Medicaid cases as income. It only kicks in as an eligibility factor if somebody holds onto it beyond the month that they received it, then it is treated as an asset. Co-chair Frank stated that assumptions are made that people are going to forego their benefits if this law were to pass and continue to get the permanent fund dividend. He asked if minors can apply for their dividends, once they turn 18, as long as parents do not apply for them? Mr. Lomas said that was his understanding. He commented that Mr. Williams testified to that effect when he was with the PFD Division earlier this year. Co-chair Frank asked for analysis regarding support from other programs versus money from PFD, and how families might make decisions on one or the other program. Senator Zharoff asked if PFD's could be used for education? Mr. Lomas stated that under current operating policies, when the dividend for the advanced college tuition program is checked off, we do not treat it as a n asset for public assistance purposes. Mr. Lindstrom stressed to the committee the impact the reduction would have for the family. This would be the equivalent of a 7-1/2% rateable reduction. These are poor families that receive their dividends and spend their dividends very quickly. Co-chair Halford asked what income is not accountable for purposes of welfare? Is there any exempt income and what is it? Mr. Lomas responded that almost all income counts. Co- chair Frank asked if Native Corporation Dividends count under all categories? Mr. Lomas specifically said that there was a provision in the Native Claims Settlement Act (amendments were enacted in 1988 which applied to SSI, AFDC and APA programs) that holds harmless the first $2.0 per individual per annum. In the Food Stamp Program payments are not counted unless held over 6 months, then it is considered an asset. The Medicaid Program follows the rules of the AFDC and SSI programs. The first $2.0 per individual per annum is disregarded. There are other very minor income exclusions, such as the Foster Grandparent Program, which gives grants to seniors to act as surrogate grandparents. There are a few very specific provisions in federal law that exclude some rather unusual sources of income. He stated that there are also portions of earned income that are disregarded in the various programs as incentives to work and as recognition that there are costs related to working. The whole dollar amount of earnings is not generally counted. Those disregards vary depending upon the program. Co-chair Halford asked for a list of all disregards along with a one-page matrix that states the program, eligibility guidelines (in terms of dollars), and the normal payment amount that the permanent fund hold harmless contributes to that program. A single page that lays out the programs, eligibility, payment, and contribution of the hold harmless, by program. He also wanted clarity on why the state cannot change the law and provide for an income disregard for the permanent fund dividend instead of a hold harmless for the PFD. Senator Zharoff inquired about public assistance for the seasonally employed. He asked, if a person is on public assistance at the time the application for the PFD or receipt of the PFD comes out, does that exclude that person from participation for the entire year? Mr. Lomas responded that this legislation does not impact anyone's eligibility for PFD, it only impacts eligibility for the hold harmless and public assistance programs. The PFD is treated only as income if you happen to be on public assistance when you receive it. If employed and not in the caseload when the dividend is received, there is no eligibility to weigh against and no hold harmless consideration. Co-chair Frank asked for a seasonal study for the caseload by month. Senator Sharp asked if the permanent fund dividend effects the Energy Assistant Grants and low income housing? Mr. Lomas responded that they are not counted for the Energy Assistance Program which is a federally funded program that provides the department with latitude in terms of accountable income. ADJOURNMENT The meeting was adjourned at approximately 11:00 a.m.