Legislature(1995 - 1996)

03/29/1996 08:08 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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                             MINUTES                                           
                    SENATE FINANCE COMMITTEE                                   
                         March 29, 1996                                        
                            8:08 a.m.                                          
                                                                               
  TAPES                                                                        
                                                                               
  SFC-96, #59, Sides 1 and 2                                                   
  SFC-96, #60, Side 1                                                          
  SFC-96, #60, Side 2 (575-220)                                                
                                                                               
  CALL TO ORDER                                                                
                                                                               
  Senator Steve Frank,  Co-chairman, convened  the meeting  at                 
  approximately 8:08 a.m.                                                      
                                                                               
  PRESENT                                                                      
                                                                               
  In  addition  to  Co-chairmen Frank  and  Halford,  Senators                 
  Phillips, Rieger, Sharp, and Zharoff  were present.  Senator                 
  Donley arrived as the meeting was in progress.                               
                                                                               
  ALSO  ATTENDING:  Barbara  Ritchie, Deputy Attorney General,                 
  Civil Division, Dept.  of Law; Laurie Otto,  Deputy Attorney                 
  General,  Criminal  Division,  Dept.  of  Law;  Vince Usera,                 
  Assistant  Attorney General,  Commercial  Section, Dept.  of                 
  Law;   Alison   Elgee,   Deputy   Commissioner,   Dept.   of                 
  Administration;   Dick   Pegues,   Director,  Administrative                 
  Services  Division, Dept.  of Law;  Nancy  Slagle, Director,                 
  Budget Review, Office of Management  and Budget; Dan Fauske,                 
  CEO/Executive Director, Alaska Housing  Finance Corporation,                 
  Dept.  of  Revenue;  Kevin  Brooks,  Director,  Division  of                 
  Administrative Services, Dept.  of Fish and Game;  Nico Bus,                 
  Acting  Director,  Division of  Support  Services, Dept.  of                 
  Natural Resources and Dept. of  Military & Veterans Affairs;                 
  Paul  Larson,  Deputy  Director for  Fisheries,  Division of                 
  Commercial Fisheries  Management and  Development, Dept.  of                 
  Fish  and Game;  John  Bitney,  Legislative Liaison,  Alaska                 
  Housing Finance Corporation, Dept. of Revenue; Betty Martin,                 
  Comptroller,  Treasury  Division,  Dept.  of  Revenue;  Dean                 
  Paddock,  Executive  Director,  Bristol   Bay  Driftnetters'                 
  Association; Jim Kelly, Research and Liaison Officer, Alaska                 
  Permanent Fund Corporation,  Dept. of Revenue; and  aides to                 
  committee members and other members of the legislature.                      
                                                                               
  ALSO  PARTICIPATING  VIA   TELECONFERENCE  FROM   KETCHIKAN:                 
  Former Representative Oral Freeman.                                          
                                                                               
  SUMMARY INFORMATION                                                          
                                                                               
  HB 468 -  APPROP: SUPPLEMENTAL & OTHERS                                      
                                                                               
            Discussion regarding requests by the Dept. of Law,                 
            Dept. of Natural Resources,  Dept. of Military and                 
                                                                               
                                                                               
            Veterans Affairs, and AHFC as  well as stale dated                 
            warrants and ratification of  overexpenditures was                 
            had with department representatives.  The bill was                 
            held  in committee  for  continued review  at 9:30                 
            a.m., Monday, April 1, 1996.                                       
                                                                               
  SB  51 -  DISPOSITION OF PERMANENT FUND INCOME                               
                                                                               
            Discussion was  had  with Jim  Kelly,  and  former                 
            Representative   Oral   Freeman    testified   via                 
            teleconference from Ketchikan.  The bill was  held                 
            in committee for additional review.                                
                                                                               
  SB 152 -  GEOGRAPHIC PAY DIFFERENTIALS                                       
                                                                               
            Discussion and review  of a  draft CSSB 152  (Fin)                 
            (3/29/96) was  had with  Alison Elgee.   CSSB  152                 
            (Fin) was  adopted and REPORTED  OUT of  committee                 
            with  a  zero   fiscal  note  (indicating   future                 
            savings)  from the Office of the Governor, applied                 
            to all departments.                                                
                                                                               
  SB 265 -  RECEIPTS OF TEST FISHING OPERATIONS                                
                                                                               
            Testimony  was  provided  by  Kevin  Brooks,  Paul                 
            Larson,   and  Dean   Paddock.     The  bill   was                 
            subsequently held in committee for further review.                 
                                                                               
                                                                               
  CS FOR HOUSE BILL NO. 468(FIN) am                                            
                                                                               
       An Act making  supplemental appropriations for the                      
       expenses  of  state  government   and  making  and                      
       amending appropriations;  ratifying certain  state                      
       expenditures; and providing for an effective date.                      
                                                                               
  Co-chairman  Frank  directed  that the  FY  96  supplemental                 
  budget be brought on for continued committee review.                         
                                                                               
  Dept. of Military and Veterans Affairs                                       
                                                                               
  NICO  BUS,  Acting  Director,   Division  of  Administrative                 
  Services, Dept. of Natural Resources, came  before committee                 
  and advised  that  he would  be  representing the  Dept.  of                 
  Military and Veterans  Affairs on  supplemental items.   The                 
  $6.5  million  for  the  National  Guard and  Naval  Militia                 
  Retirement Program will  provide additional solvency  to the                 
  fund.  The program is now funded at 17 percent.  Co-chairman                 
  Frank inquired concerning the ratio of future savings to up-                 
  front moneys placed in the fund.  Mr. Bus explained that the                 
  Governor requested $2.5 million  for FY 97.   The department                 
  asked the  actuary  to  calculate  the impact  of  the  $5.5                 
  million.  The result was that for FY 97 the operating budget                 
                                                                               
                                                                               
  could be reduced by $850.0.  If  additional FY 96 funding is                 
  provided,  the  FY  97  operating  budget could  be  further                 
  reduced.    Co-chairman  Frank  asked  that  the  department                 
  provide  numbers  "all   the  way   up  to  full   actuarial                 
  soundness."  NANCY SLAGLE, Director of Budget Review, Office                 
  of  Management   and  Budget,  explained   that  projections                 
  indicate  that  a $10  million  lump-sum  contribution would                 
  reduce the FY 97 number to $1.2 million.                                     
                                                                               
  At the request of Senator Randy Phillips, Mr. Bus provided a                 
  history of the program.  He  explained that a 1988 provision                 
  in the National Guard Retirement System allowed for lump-sum                 
  payments.   Many of  the participants  request this  payment                 
  when they retire.  The fund was thus drawn down much  faster                 
  than anticipated.  That  is the main reason for  the present                 
  situation.    Lump-sum  payments  are  continuing,  but  the                 
  department is working  with the  division of retirement  and                 
  benefits  to  solve   the  problem  and  will   bring  forth                 
  recommendations next year.                                                   
                                                                               
  Discussion  followed  between  Senator  Rieger and  Mr.  Bus                 
  regarding the  target funding ratio for the  program.  Nancy                 
  Slagle advised  that adding  $5 million  to  the fund  would                 
  raise the ratio from  the present 17 percent to  53 percent.                 
  If $10 million  were appropriated,  funding would  be at  88                 
  percent.                                                                     
                                                                               
  In  response  to questions  from  Senator Phillips,  Mr. Bus                 
  voiced  his  understanding  that  with  the  requested  $6.5                 
  million  in  the supplemental  plus  FY 97  operating budget                 
  funding, the program should be stabilized.                                   
                                                                               
  Mr. Bus explained that the  $1.5 million for disaster relief                 
  has two elements.   The first  is $557.0  for floods in  the                 
  Kenai  area.    The total  cost  of  the  flood exceeded  $3                 
  million.   The department  found most of  the needed funding                 
  within  existing   appropriations.     The  $557.0   request                 
  represents  the  remainder.     The   second  part  of   the                 
  supplemental  seeks  $1  million  for  activity  between the                 
  present time and June 30, 1996.                                              
                                                                               
  In response to a question  from Co-chairman Frank concerning                 
  House Finance action,  Mrs. Slagle explained that  the House                 
  funded  the $1 million.  The  Governor included $1.5 million                 
  in his original  request, for  response to emergency  needs.                 
  Mrs. Slagle voiced  concern on behalf of  the administration                 
  that  "We  have no  other  moneys  available to  respond  to                 
  disasters  through  the  end  of  the  fiscal  year."    The                 
  department has functioned  thus far on outstanding  balances                 
  from previous disasters.                                                     
                                                                               
  Dept. of Natural Resources                                                   
                                                                               
  NICO BUS  again  came  before  committee  to  speak  to  the                 
                                                                               
                                                                               
  $5,258.6  for  fire  suppression which  he  said  would fund                 
  remaining activity through  FY 96.  Included  is the balance                 
  of  fixed costs  for  aviation  contracts, suppression,  and                 
  other  efforts.    It  also   includes  $750.0  for  routine                 
  suppression activity (initial attack) as  well as $2 million                 
  for project fires.  Mr. Bus referenced $1.5 million that was                 
  to carry over from FY 96 to '97.  Due to a fire in June, the                 
  funding was used  in 1995.    The  department presently  has                 
  $9,000.00 remaining.   Aviation contracts  are due April  1.                 
  The department should not  technically obligate these $200.0                 
  payments to vendors if there is  not sufficient funding.  If                 
  contracts are  cancelled, vendors may commit  their aircraft                 
  to  other  uses.    Total  need  for these  fixed  costs  is                 
  $2,256.4.    That  includes  aviation,  helicopters,  tanker                 
  craft, fixed wing  craft, etc.  These are basic  commitments                 
  the department makes to prepare for the fire season.                         
                                                                               
  Discussion  of  past   fire  seasons  followed.     Mr.  Bus                 
  acknowledged  that last year's season  was one of the lowest                 
  on record.                                                                   
                                                                               
  In  response   to  a   question  from  Co-chairman   Halford                 
  concerning   costs  for  the   $236.0  listed  as  "aviation                 
  section,"  Mr.  Bus explained  that  it relates  to in-house                 
  expenditures for staff that manages aviation contracts.  Mr.                 
  Bus advised  that he would  provide a  spread sheet  listing                 
  individual  items of  the supplemental request.   Discussion                 
  followed  among  the  co-chairmen  and  Mr.  Bus  concerning                 
  whether  this  effort  should   be  included  within   fixed                 
  operating costs or within the  supplemental.  Mr. Bus  noted                 
  that last year  the department used  a portion of its  fixed                 
  cost funding for actual fire suppression because funding for                 
  suppression was so small.                                                    
                                                                               
  Further discussion followed regarding the nature of aviation                 
  and BLM smoke-jumper contracts.                                              
                                                                               
  In response  to a  question from  Senator Phillips,  Mr. Bus                 
  said that predictions  indicate this  is a potentially  high                 
  fire year, mainly in the interior.                                           
                                                                               
  Co-chairman Frank asked  that Mr. Bus speak  to the $1,457.0                 
  in uncollectible federal receivables.   Mr. Bus advised that                 
  both the department  and the Dept.  of Law are working  with                 
  federal agencies to obtain a settlement.                                     
                                                                               
  Dept. of Law                                                                 
                                                                               
  Co-chairman Frank directed that review  revert to discussion                 
  of Dept.  of Law requests.  BARBARA RITCHIE, Deputy Attorney                 
  General, Civil Division, Dept. of Law, came before committee                 
  to  speak  to  Berger v.  State.    She  explained that  the                 
  situation commenced in 1989 when  Roger Berger, dba Frontier                 
  Financial  Services,   began  to  purchase   permanent  fund                 
                                                                               
                                                                               
  dividends for $325  to $400.   In return  for the cash,  Mr.                 
  Berger received an  assignment of  individual rights to  the                 
  $873  dividend.    The  Dept.  of  Revenue,  permanent  fund                 
  division, began to experience an escalation in the number of                 
  assignments.    As  a result,  it  took  action  to adopt  a                 
  regulation under which it would decline to honor assignments                 
  other than those  to governmental  agencies.  Frontier  then                 
  required  individuals  who  made assignments  to  complete a                 
  change of address  form and  power of attorney  so that  the                 
  dividend  went directly  to  Frontier  and was  subsequently                 
  signed over by  the borrower.   The Dept.  of Revenue  noted                 
  circumvention of  the new  regulation and  all parties  were                 
  notified.    In  December  of   1989,  Frontier  filed  suit                 
  challenging  the   regulation  and  department   refusal  to                 
  implement  the   address  changes.     The  superior   court                 
  determined  that   the  regulation   was  beyond   statutory                 
  authority  and thus  invalid.   The  statute has  since been                 
  changed  to allow assignment only to a court or governmental                 
  agency.  In  arguing the  case, the state  raised issues  of                 
  usury  and violation of the small loans act.  In December of                 
  1995 the supreme court ruled that the  transactions were not                 
  loans and  returned the  case to  the superior  court for  a                 
  determination of  "what was  owed to  Mr. Berger."   In  the                 
  meantime, the $873.00  permanent fund  dividend was paid  to                 
  the recipients.                                                              
                                                                               
  Discussion followed  regarding advice  in  the above  matter                 
  provided by the Dept. of Law to the Dept. of Revenue.  VINCE                 
  USERA, Assistant Attorney General, Dept.  of Law, voiced his                 
  understanding that former  Assistant Attorneys General, Jeff                 
  Bush and Peter Froehlich, advised the Dept. of Revenue  that                 
  it should  not adopt the  regulation.    Co-chairman Halford                 
  voiced  his understanding  that the  department was  advised                 
  against  adoption  but did  so anyway.    He then  asked for                 
  copies of memos  containing Dept. of Law  recommendations to                 
  the department.                                                              
                                                                               
  Discussion of the  failed petition for rehearing  before the                 
  supreme court followed between Mr. Usera and Senator Rieger.                 
                                                                               
                                                                               
  Further   discussion   followed  regarding   the  stipulated                 
  judgment settling the  amount versus a superior  court trial                 
  to determine the amount.                                                     
                                                                               
  Addition discussion occurred regarding the legal standing of                 
  those who received both the advance  from Mr. Berger and the                 
  dividend  as  well  as  Dept.  of  Revenue  notification  to                 
  recipients that the assignments would not be honored by  the                 
  department.                                                                  
                                                                               
  Senator  Sharp  noted that  the  $873.00 dividend  for 1989,                 
  times the number  of assignments (2,600), plus  interest and                 
  attorney  fees,  does  not approximate  the  requested  $3.5                 
                                                                               
                                                                               
  million.  It thus appears that the "individual was made more                 
  than whole."  Mrs. Ritchie  noted that statutory interest on                 
  the $2.2  million  at 10.5  percent  for 74  months  totaled                 
  "almost $1.3 million."                                                       
                                                                               
  Dept. of Public Safety                                                       
                                                                               
  NANCY SLAGLE  again came  before committee.   She  explained                 
  that the House decided the request for manuals and equipment                 
  should be considered within the capital budget.  It was thus                 
  removed from the supplemental.                                               
                                                                               
  Dept. of Revenue                                                             
                                                                               
  NANCY SLAGLE  advised that  the $198.2  request from  Alaska                 
  Housing  Finance  Corporation  relates  to consolidation  of                 
  leased facilities.   Inability to  construct a facility  for                 
  AHFC has necessitated additional lease  costs.  JOHN BITNEY,                 
  Alaska Housing Finance  Corporation, came before  committee.                 
  He explained  that the  FY 96  budget contained  funding for                 
  lease  payments  for six  months  in anticipation  that AHFC                 
  would  occupy  its  own  facility  when  leases  expired  in                 
  December.    Since  the  corporation  will be  remaining  in                 
  current facilities, the  above request is for  the remaining                 
  six months of this  fiscal year as  well as a rate  increase                 
  which incurred.  In response to a question  from Co-chairman                 
  Frank,  Mr. Bitney noted that the overall budget was reduced                 
  by $2.5 million.   He said  he had no  answer to a  question                 
  regarding  where  moneys  would be  derived  if supplemental                 
  funding is  not  provided.   Responding to  a question  from                 
  Senator Sharp, Mr.  Bitney advised  that the rate  increased                 
  from $1.27  to $1.30  per square  foot.   Co-chairman  Frank                 
  asked that Senator  Sharp, chairman  of the subcommittee  on                 
  the Dept. of Revenue budget, review the matter and forward a                 
  recommendation to committee.                                                 
                                                                               
  Co-chairman  Frank inquired concerning  the status  of space                 
  for the corporation.  Mr. Bitney acknowledged an RFP for new                 
  leases and  receipt of  six bids.   No  new leases  would be                 
  entered before July 1, 1996.  The RFP has no relation to the                 
  supplemental request.                                                        
                                                                               
  END:      SFC-59, Side 1                                                     
  BEGIN:    SFC-59, Side 2                                                     
                                                                               
  NANCY SLAGLE noted  that Sec. 12(b)  involves a fund  source                 
  change between PERS and benefit system  receipts.  The FY 96                 
  budget  inadvertently  cut  too  much  out of  receipts  and                 
  brought the total to $19,200.00.  The shift will cover costs                 
  and ensure  that charges are  made to proper  benefit system                 
  accounts.  BETTY MARTIN, Comptroller, Division  of Treasury,                 
  Dept. of Revenue, came before committee.  She explained that                 
  a portion of  the shortage results  from the fact that  "the                 
  SBS  accounts went participant directed over the last year .                 
                                                                               
                                                                               
  . . ."  Management fees for the change were not in the FY 96                 
  budget when  it was prepared.   The  remainder is  due to  a                 
  miscalculation in  performance measurement fees.   There are                 
  two structures for these fees.  One is for active management                 
  and the other is  for passive management.  Fees  included in                 
  the budget reflect passive management  when SBS accounts are                 
  actively managed.                                                            
                                                                               
  Dept. of Law                                                                 
                                                                               
  Discussion  next reverted  to  Sec. 9(c),  the  $66.6 for  a                 
  district attorney in  Bethel.  LAURIE OTTO,  Deputy Attorney                 
  General,  Criminal  Division,  Dept.  of  Law,  came  before                 
  committee.  She  attested to  three-person offices for  both                 
  the public  defender and  the district  attorney in  Bethel.                 
  Last August, two of  the public defenders quit.  One of them                 
  was  hospitalized for a stress-related disease.   One of the                 
  district attorneys  quit, and another  actively began asking                 
  for transfer to another job.  The third described himself as                 
  desperate.  Ms.  Otto said that,  when she visited the  area                 
  and reviewed statistics, she found  that staff in Bethel  is                 
  carrying double and  sometimes triple the caseload  of other                 
  offices.                                                                     
                                                                               
  In response to a question from Senator Phillips, seeking the                 
  root of the heavy caseload, Ms. Otto attested to a high rate                 
  of crime  between ages 15 and 30.   The Bethel region has "a                 
  very large number of people" in  that age range.  The Bethel                 
  office covers all 56 villages in the region.                                 
                                                                               
  Comments  followed   by  Ms.  Otto  and   committee  members                 
  regarding  the impact  of  alcohol and  prohibitions against                 
  alcohol in the area.  Ms.  Otto noted that Anchorage appears                 
  to be the source of much alcohol bootlegged into the region.                 
   Over  50 percent of the crime  in the DA's office in Bethel                 
  comes  for the  villages.   Serious  crime in  Bethel itself                 
  appears to involve local residents.                                          
                                                                               
  A  review  of  files,  indicates  that  the  office  is  not                 
  overcharging  criminal  actions.    It  appears  that  staff                 
  undercharges and  does not pursue cases it should because of                 
  the overload.  Staff  is routinely working 70 to  80 hours a                 
  week and is only paid for 37.5.   Ms. Otto said she returned                 
  from  her review much alarmed by  the situation and conveyed                 
  her concern to  both the Governor and the  Attorney General.                 
  Further review by staff from the Dept. of Corrections, Dept.                 
  of Health  and Social Services,  and Dept. of  Public Safety                 
  concluded that an emergency situation exists.  There is need                 
  for the fourth  position requested in  the supplemental.   A                 
  similar position has  been requested in the  public defender                 
  agency.  The  effect of  the fourth attorney  is that  staff                 
  will work six days a week instead of seven.                                  
                                                                               
  In  response to  an inquiry  from  Senator Rieger,  Ms. Otto                 
                                                                               
                                                                               
  cited  sexual  assault  and domestic  violence  as  the most                 
  frequently committed crimes  in the area.   In the state  of                 
  Alaska,  most crimes are  alcohol-related.  That  is true in                 
  the Bethel region among its 30,000 residents.                                
                                                                               
  Responding  to further  questions from Senator  Zharoff, Ms.                 
  Otto attested to  an 82  percent increase in  the amount  of                 
  crime  in  Bethel while  Nome  and Dillingham  have remained                 
  stable.   She speculated that much of the increase is due to                 
  the  fact that Bethel has  the highest rate of unemployment,                 
  and  there  is no  significant  economy.   It  also  has the                 
  highest rate  of  social problems  such as  child abuse  and                 
  suicide.  The  problem is  primarily economic.   Co-chairman                 
  Halford concurred in the foregoing assessment.                               
                                                                               
  University of Alaska                                                         
                                                                               
  NANCY SLAGLE spoke to the request for monetary terms for the                 
  classified employees  association and  the Alaska  community                 
  college federation of teachers for FY  96.  The House wished                 
  to consider all monetary contracts at one time.                              
                                                                               
  Stale Dated Warrants                                                         
                                                                               
  Senator  Randy  Phillips asked  if  the state  had developed                 
  general  policies regarding  stale  dated  warrants.   NANCY                 
  SLAGLE said she was  unaware of a time frame after which the                 
  state is no longer obligated to pay.   The money was owed at                 
  some point  in time.   Statutes require an  appropriation to                 
  cover warrants that are over two years old.                                  
                                                                               
  Ratification of Overexpenditures                                             
                                                                               
  NANCY  SLAGLE explained that the administration has reviewed                 
  this area of concern.   Legislative Audit identified several                 
  places where  accounting records do not balance expenditures                 
  with  appropriation levels, for a  variety of reasons.  Mrs.                 
  Slagle referenced audit and management review of the process                 
  and noted that  the result of  that review was furnished  to                 
  members.    The administration  will  continue to  work with                 
  agencies to  attempt to bring accounting records up to date.                 
  The next  legislative session  has been  established as  the                 
  deadline  for  cleaning up  everything through  FY 94.   The                 
  intent  is  to clean  up  accounts  on an  annual  basis and                 
  attempt to avoid need for ratifications in the future.                       
                                                                               
  Mrs. Slagle noted  that much of the  $6,877.5 total involves                 
  the  Dept.  of  Transportation and  Public  Facilities.   It                 
  relates to conversion from the old PBA accounting system  to                 
  the new system  in 1983.  Much of the  problem resulted from                 
  lack of understanding,  lack of  training, lack of  educated                 
  staff, etc.  Backtracking has been difficult because of lack                 
  of documentation  in early  years.   Mrs. Slagle  reiterated                 
  that  much  of  the problem  within  DOTPF  occurred because                 
                                                                               
                                                                               
  moneys were received  in a different year  than expenditures                 
  were  made.   Collection of  revenues was  not aligned  with                 
  expenditures.                                                                
                                                                               
  Co-chairman Frank  announced that the committee  would again                 
  meet at 9:30 a.m., Monday, April 1, 1996, to conclude review                 
  of supplemental requests.                                                    
                                                                               
                       RECESS - 9:15 A.M.                                      
                      RECONVENE - 9:30 A.M.                                    
                                                                               
                                                                               
  SENATE BILL NO. 152                                                          
                                                                               
       An Act  relating  to geographic  differentials for  the                 
       salaries of certain state employees who are not members                 
       of a  collective bargaining unit;  relating to periodic                 
       salary  surveys  and  preparation   of  an  annual  pay                 
       schedule regarding certain state employees; relating to                 
       certain  state  aid  calculations based  on  geographic                 
       differentials   for   state   employee  salaries;   and                 
       providing for an effective date.                                        
                                                                               
  Co-chairman Halford directed  that SB  152 again be  brought                 
  before committee and referenced a draft committee substitute                 
  (0-GS0049\F,  Cramer,   3/29/96).    ALISON   ELGEE,  Deputy                 
  Commissioner, Dept. of Administration, came before committee                 
  and provided the following review of the draft:                              
                                                                               
       Secs. 1, 2, and 3 are from the original bill.                           
                                                                               
       Sec. 4 was redrafted to include committee amendments to                 
       place the Fairbanks  area in  the 5 percent  geographic                 
       differential and employees in Washington  State at -20.                 
                                                                               
                                                                               
       Sec. 4 (b) reflects amendment of the base salary amount                 
       from $30.0 to $50.0.                                                    
                                                                               
       Sec. 4(c) allows  for premium pay situations  for those                 
       practicing  law  or  medicine  in  rural  districts  37                 
       through 40.                                                             
                                                                               
       Sec. 5 remains the same as in the earlier version.                      
                                                                               
       Secs. 6,  7, 8, and  9 contain technical  amendments to                 
       reflect the renumbering  of the geographic differential                 
       section.                                                                
                                                                               
       Sec. 10 contains  transition provisions.   It has  been                 
       amended to reflect a hold harmless  period in year one,                 
       a limited reduction of no more than 5 percent of salary                 
       in year two, and full implementation in year three.                     
                                                                               
                                                                               
  Ms. Elgee directed attention  to a handout (copy on  file in                 
  the  Senate Finance Committee  master file  for SB  152) and                 
  explained that it sets forth figures under both the  current                 
  and new differential for  a $60.0 employee in Fairbanks  and                 
  an employee at the same pay level in Nome.                                   
                                                                               
  Senator Randy Phillips questioned the repeal date of July 1,                 
  1998,  set  forth in  Sec.  12,  suggesting  that it  should                 
  reflect 1997.    Ms.  Elgee explained  that  1997  would  be                 
  correct in  the event  of a  one-year hold  harmless and  no                 
  transition.  July  1, 1998,  allows for the  second year  of                 
  transition per the proposed draft.                                           
                                                                               
  Discussion  followed between  Senator Rieger  and  Ms. Elgee                 
  regarding  operation  of  hold  harmless  provisions.     In                 
  response  to a scenario presented by  the Senator, Ms. Elgee                 
  said the department  would freeze the salary of  an employee                 
  who is overpaid based on the new differential.  Freezing the                 
  salary would not preclude award  of merit increases or cost-                 
  of-living adjustments.   Those amounts  would be  calculated                 
  against the revised salary.   The employee is frozen  at the                 
  current salary, or transitioned  down to the 5 percent,  and                 
  the bookkeeping  entries are  applied against  what the  new                 
  salary would  be.   At the  point that  the adjusted  salary                 
  meets or exceeds the frozen salary, the employee would begin                 
  to realize "some benefit from those increases."                              
                                                                               
  Senator Sharp referenced Sec. 10(a)(2) and suggested that it                 
  would appear to produce a savings, yet none is shown  on the                 
  fiscal note.  Ms. Elgee agreed  that there would be savings,                 
  in FY 98,  as employees turn over  or relocate out  of their                 
  current geographic differential areas.   It is impossible to                 
  project  what  those  savings might  be.    The fiscal  note                 
  represents  application   of  this  legislation   upon  full                 
  implementation in FY 99.                                                     
                                                                               
  Senator  Sharp MOVED  for  adoption of  the  draft CSSB  152                 
  (Finance)  as a mark-up  vehicle.  No  objection having been                 
  raised, CSSB 152 (Finance) was ADOPTED.                                      
                                                                               
  Senator  Zharoff  voiced concern  for  election  districts 5                 
  through 9 and  asked how  the index  and union  differential                 
  work.   Ms.  Elgee  explained that  the  index reflects  the                 
  statutory schedule applied to non-covered employees.  It has                 
  been in place  since 1972.   In 1985  an extensive  cost-of-                 
  living study was conducted.  As a result of that study,  new                 
  cost-of-living indices  were adopted through  the collective                 
  bargaining process with unions.  That union differential, in                 
  place  since  1986,   applies  to  the  bulk   of  unionized                 
  employees.                                                                   
                                                                               
  Co-chairman Halford asked how many  employees fall under the                 
  statutory index.    Ms. Elgee  responded,  "I think  in  the                 
                                                                               
                                                                               
  executive branch  we're talking  about 1,200  people."   Co-                 
  chairman Halford voiced his understanding that approximately                 
  15 percent of state employees would be  directly impacted by                 
  the proposed  bill.  The remainder would  be negotiated into                 
  the system.  Ms.  Elgee concurred.  She  added that not  all                 
  non-covered employees  would be  impacted  because those  in                 
  Anchorage and Juneau  will see no  change since they do  not                 
  now  receive  a   differential.    The  bill   would  affect                 
  approximately 93 people in the Fairbanks area.                               
                                                                               
  Senator Sharp MOVED  for passage of CSSB  152 (Finance) with                 
  individual  recommendations  and accompanying  fiscal notes.                 
  Senator Zharoff OBJECTED.  He  said that testimony indicates                 
  arbitrary  decisions were  made in  changing the index.   He                 
  reiterated  concern for  election  districts  5  through  9,                 
  saying that he was not comfortable with possible impact.  He                 
  expressed his belief that employees in those districts would                 
  experience reductions because  backup information  indicates                 
  the cost  of living in those areas  is much higher than what                 
  is reflected  in  the  proposed  legislation.    Co-chairman                 
  Halford  called  for  a show  of  hands  on  the motion  for                 
  passage.  The motion CARRIED on  a vote of 5 to 1, and  CSSB
  152 (Finance)  was REPORTED  OUT of  committee  with a  zero                 
  fiscal note  from the Office  of the Governor,  covering all                 
  departments.   Co-chairmen  Frank  and Halford  and Senators                 
  Rieger  and Sharp  signed  the committee  report with  a "do                 
  pass" recommendation.   Senators Donley and  Phillips signed                 
  "no recommendation."  Senator Zharoff signed "do not pass."                  
                                                                               
                                                                               
  SENATE BILL NO. 265                                                          
                                                                               
       An Act  relating to  receipts  of commercial  fisheries                 
       test fishing operations; and providing for an effective                 
       date.                                                                   
                                                                               
  Co-chairman Halford directed  that SB 265 be  brought on for                 
  discussion.   Senator Zharoff explained  that he  introduced                 
  the  bill  to enhance  Dept.  of  Fish and  Game  ability to                 
  successfully  manage the changing nature of Alaska's complex                 
  fisheries.  It  will form part  of the management scheme  to                 
  utilize  private sector  vessels,  gear,  and  expertise  to                 
  conduct  test  fisheries.   Funds  derived  from  these test                 
  fisheries will accrue  as designated program receipts.   The                 
  bill   does  not   impact   the  legislature's   ability  to                 
  appropriate, but  it streamlines  the process  in conducting                 
  test  fisheries.    A  number of  test  fisheries  have been                 
  proposed, but the department  has not, in the past,  had the                 
  flexibility nor the resources  to follow through.    Senator                 
  Zharoff asked that  department staff speak to  the specifics                 
  of the program.                                                              
                                                                               
  END:      SFC-96, #59, Side 2                                                
                                                                               
                                                                               
  BEGIN:    SFC-96, #60, Side 1                                                
                                                                               
  KEVIN BROOKS, Director, Division of Administrative Services,                 
  Dept. of Fish and Game, came before committee.  He explained                 
  that the bill would reclassify approximately $2.2 million in                 
  program receipt authority that would not hereafter roll into                 
  departmental caps.                                                           
                                                                               
  As  background  information,  Mr.  Brooks  noted  that  test                 
  fishery  receipts in  the current  year were  part  of OMB's                 
  classification as  designated program receipts  because they                 
  are based on a contractual relationship.   Proceeds from the                 
  sale of  fish caught during  a test fishery are  used to pay                 
  for  the boat  chartered  to  conduct  the  fishery.    Test                 
  fisheries have the  potential to extend seasons  or open new                 
  seasons.    Attempts to  develop the  sea urchin  fishery in                 
  Southeast was cited as an example.   These efforts have been                 
  hampered because  the department cannot  ask for  additional                 
  receipt  authority "because it runs  up against our caps and                 
  shows as  an increase to  the general fund."   OMB took  the                 
  first  step  in  designating these  program  receipts.   The                 
  proposed bill  would remove  those funds  from general  fund                 
  calculations.    It   does  not   cut  dollars,  it   merely                 
  reclassifies them.   The  test fishery  receipt program  has                 
  been  part  of  the  department's  management  program since                 
  before statehood.                                                            
                                                                               
  Co-chairman Frank requested a comparison of the current flow                 
  of funds versus that contemplated by the proposed bill.  Mr.                 
  Brooks  explained  that  the department  presently  receives                 
  authority, through  the legislative process, to  receive and                 
  expend approximately $2.2 million in program receipts.  That                 
  is in the  base budget.   Under the proposed bill,  receipts                 
  would  continue  to  flow through  the  general  fund to  be                 
  requested  by  the   department  and  appropriated  by   the                 
  legislature.  Moneys in excess of expenditures would flow as                 
  unrestricted  revenue to the general  fund.  The only change                 
  is that the receipts would  not roll into department general                 
  fund totals.  These moneys would show as other funds.                        
                                                                               
  Senator Rieger  referenced AS  37.05.146,  which contains  a                 
  list of exclusions from what flows through the general fund.                 
  It appears that these receipts are merely being added to the                 
  list.                                                                        
                                                                               
  PAUL  LARSON, Deputy  Director  for Fisheries,  Division  of                 
  Commercial Fisheries, explained that test fishery funds have                 
  been used  to  conduct research  throughout the  state.   He                 
  cited  use  in  Prince  William  Sound to  identify  pollack                 
  resources which  had not  previously been harvested  because                 
  the department had  no information  on abundance.   Contract                 
  with a local fisherman and sale of pollack caught during the                 
  test generated sufficient funds to assess pollack  resources                 
  and conduct a new fishery in Prince William Sound.                           
                                                                               
                                                                               
  Senator Sharp  asked if a  test fish fund  presently exists.                 
  Kevin  Brooks  explained that  the  proposed bill  would not                 
  establish  a  separate fund.    Test fishery  moneys  do not                 
  constitute designated  funds in the same respect as the fish                 
  and game fund.  There is currently a test fishery account.                   
                                                                               
  Discussion of potential for a sea urchin fishery followed.                   
                                                                               
  DEAN PADDOCK, Executive Director,  Bristol Bay Driftnetters'                 
  Association, came before  committee in support of  the bill.                 
  He  concurred   in  comments  that  the   legislation  would                 
  streamline department ability to manage.                                     
                                                                               
  Mr. Paddock advised that he  instituted the first state test                 
  fishery operation in 1960, based on a borrowed idea from the                 
  sockeye  commission   on  the  Fraser  River.     Management                 
  biologists  need  the   information  obtained  through  test                 
  fishing.  Commercial fishermen in Bristol Bay greatly depend                 
  on  test  catches  which precede  openings.    Management of                 
  resources in this area  would not be as precise  without the                 
  test fishery.                                                                
                                                                               
  In response  to comments  concerning the  impact of  reduced                 
  funding on fishery programs, Senator Sharp stressed that the                 
  budget for the division of commercial fisheries increased in                 
  FY  96 over  what it  was the  previous year.    Mr. Paddock                 
  attested   to   increasing   complexities  associated   with                 
  effective  management.   Initial  program  budgets  are  not                 
  keeping pace with overall demands.  Senator Sharp reiterated                 
  that while  the division did not receive  what it requested,                 
  it received more than the previous year.                                     
                                                                               
  Comments  followed  by  Mr.  Paddock  regarding  smolt  out-                 
  migration on the Egegik River.                                               
                                                                               
  Senator Zharoff noted a request  from Co-chairman Frank that                 
  he be  allowed  a day  in which  to review  the  bill.   Co-                 
  chairman  Halford voiced  support  for the  legislation  and                 
  advised  that it would  be again taken  up at  the next bill                 
  session.                                                                     
                                                                               
                                                                               
  SENATE BILL NO. 51                                                           
                                                                               
       An Act  relating to income  of the permanent  fund; and                 
       providing for an effective date.                                        
                                                                               
  Co-chairman Halford  directed that SB  51 be brought  on for                 
  discussion.  Senator  Rieger explained  that the bill  would                 
  introduce the concept  of real  earnings into management  of                 
  the state's largest endowment account--the Alaska  Permanent                 
  Fund.  Most endowments operate on a principle where earnings                 
                                                                               
                                                                               
  considered usable  are those  that exceeded  inflation in  a                 
  given year.  These moneys are referred to as "real earnings"                 
  in contrast to  "nominal earnings" which reflect  total cash                 
  return to  a fund  compared to  what is  actually earned  in                 
  excess of inflation.                                                         
                                                                               
  Given present dynamics  and increasing numbers of  proposals                 
  for potential use  of the  permanent fund, the  focus is  on                 
  total return,  and  inflation proofing  is an  afterthought.                 
  Under a "real earnings"  concept, inflation proofing becomes                 
  the first priority.   The  remainder of the  return is  then                 
  available for other use.  That is  how university endowments                 
  and most other endowment funds operate.  The first fiduciary                 
  priority is to protect  the principal.  That would  occur if                 
  inflation proofing were automatic.   The proposal  contained                 
  in the legislation is timely because  the permanent fund has                 
  enjoyed a  banner "run up"  over the  past eighteen  months.                 
  "Real earnings" based on the new size of  the fund are equal                 
  to total return under the prior size  of the fund.  The time                 
  is ideal  to make  the policy  change without  disruption in                 
  what "people see  when they look at  what the return  is and                 
  what the legislature sees."                                                  
                                                                               
  JIM KELLY, Director of Communications, Alaska Permanent Fund                 
  Corporation,   came   before  committee.      He  referenced                 
  correspondence from  the board  of trustees  indicating that                 
  the board had  discussed the legislation and did  not intend                 
  to take a position on the bill.   The board is supportive of                 
  any  changes  to  existing  law  which would  enhance  board                 
  ability  to  protect the  principal  of the  permanent fund.                 
  That  portion of  SB 51 which  makes inflation  proofing the                 
  highest priority represents such a change.                                   
                                                                               
  Another portion of the bill, making a change in the dividend                 
  formula by basing it on "real income" instead of net income,                 
  falls  outside   the  scope   of  the   trustees'  area   of                 
  responsibility.                                                              
                                                                               
  The  fiscal  note  for  the  bill  is   zero  since  changes                 
  incorporated  within  the  bill would  have  no  operational                 
  impact on the corporation.                                                   
                                                                               
  Mr. Kelly  explained that inflation proofing provisions were                 
  enacted  in  1982  at the  request  of  the  first board  of                 
  trustees.  For the past fourteen years, each legislature has                 
  taken  a portion  of annual  income and  appropriated  it to                 
  principal  to  protect the  fund  against inflation.   Those                 
  appropriations  produced a cumulative total of $4.6 billion.                 
  That  action  evidences   the  legislature's  strong,   long                 
  lasting, and unwavering support for protection of principal.                 
  The inflation rate for this year will be 2.82 percent, based                 
  on the calendar  year change and  the consumer price  index.                 
  Since  1978,  inflation  has  averaged  5.11 percent.    The                 
  expectation for the next five years  is that it will average                 
                                                                               
                                                                               
  "somewhere between 3.18 and 3.5 percent.  As a percentage of                 
  annual net income, inflation proofing has ranged from a high                 
  of 55 percent  (1991) to a low  of 25 percent (1989).   This                 
  year, with high  earnings of over  $1 billion, inflation  of                 
  $400 million amounts  to 24 percent.   It is projected  that                 
  inflation   proofing   in    future   years   will   require                 
  approximately  44  percent, on  average.   That is  based on                 
  assumptions that the  fund will be  able to earn a  realized                 
  return "on  the order  of 7.17 percent,  and inflation  will                 
  average something like 3.18 percent."                                        
  For  total  principal  of  $15  billion, every  one  percent                 
  increase in inflation requires approximately $150 million of                 
  net income to be transferred to principal.                                   
                                                                               
  Mr.  Kelly  noted that  the  proposed legislation  speaks to                 
  "real income"  and ensures  that nothing  but "real  income"                 
  would be distributed.  With the  exception of 1990 and 1991,                 
  since  conception of the  fund, nothing but  real income has                 
  been  distributed.  The earnings  goal of the corporation is                 
  to beat  inflation and produce  real income at  a rate of  3                 
  percent.  That 3 percent target is likely to be increased to                 
  4 percent at the May 2, 1996,  board meeting.  The 3 percent                 
  target was  set when  the permanent  fund  was largely  into                 
  fixed  income investments.   Over  the years,  the fund  has                 
  become more involved  in equity investments which  produce a                 
  higher rate of return.  Investment performance in  the 1980s                 
  and  1990s has been so good that  it has beaten inflation by                 
  5.5 percent in the nearly twenty  years the fund has been in                 
  existence.                                                                   
                                                                               
  Referencing a handout (copy on file in the committee  master                 
  file for SB  51), Mr. Kelly noted  that the trustees  are in                 
  the process of  setting asset allocations for  the next year                 
  and   three-years  hence.     When  this   is  accomplished,                 
  assumptions  regarding future  earnings  will likely  change                 
  based   on  capital   market  assumptions   and   new  asset                 
  allocations from the board.  Based on the most likely choice                 
  to be made by  trustees, the total median return  (cash plus                 
  appreciation) over the next five years  is 8.42 percent.  If                 
  the corporation is  unable to  gain appreciation because  of                 
  the market, the  least that could  be made would  be a  4.68                 
  percent median return.                                                       
                                                                               
                                                                               
  The $1.7 billion in income for  the current year reflects an                 
  11 percent return.  With inflation of 2.8 percent, there has                 
  been over 8  percent of real return.  Markets go up and down                 
  as  does  inflation.    In  terms  of income  available  for                 
  distribution, if the  tradition of  protecting principal  is                 
  maintained (through  the proposed bill or not) the state has                 
  available  the  "real  income"  of  the  fund.    Mr.  Kelly                 
  reiterated that the  goal is 4  percent.  On  a $15  billion                 
  fund that  amounts to  $600 million  a  year.   As the  fund                 
  builds  to  $20 billion,  there  would  be  $800 billion  of                 
                                                                               
                                                                               
  distributable income.                                                        
                                                                               
  Senator Rieger pointed to both  the $1.7 billion return  and                 
  unrealized  gains  of  $2.2  billion.     He  then  directed                 
  attention to  a tabulation  evidencing best  and worst  case                 
  projections   of  future  earnings  and  explained  that  it                 
  incorporates  the  $2.2 billion  in  unrealized gains.   One                 
  scenario  reflects total use of all  funding in the earnings                 
  reserve  and the other reflects no use of those moneys.  The                 
  Senator noted that  in one scenario, transfer to the general                 
  fund (even  after payment of  a $1,000 dividend  every year)                 
  "hits a billion  dollars by the end  of the run, per  year."                 
  In  the  other  case,  the  dividend  grows  to  "just under                 
  $2,000," but  no cash  is used in  the general  fund.   That                 
  results  in  $23 billion  in  the earnings  reserve account.                 
  Real earnings in the future are consistent with total return                 
  in the past.   The  question of inflation  proofing and  the                 
  potential threat to inflation proofing  from those who might                 
  propose  use of earnings beyond  what goes into dividends is                 
  guarded against by passage of SB 51.                                         
                                                                               
  Discussion  of  past  year  gains  and  application  of  the                 
  dividend formula  followed between  Co-chairman Halford  and                 
  Mr. Kelly.   Senator Rieger stressed that  the proposed bill                 
  does nothing to corporate capital gains.                                     
                                                                               
  Co-chairman Halford voiced  his understanding that  the bill                 
  would take inflation proofing out of corporate income before                 
  the dividend formula is applied.   Mr. Kelly concurred.  The                 
  Co-chairman next  noted projections that  inflation proofing                 
  in the future would require 44  percent of future income and                 
  asked what that  would do to the formula for dividends.  Mr.                 
  Kelly  responded  that   of  the   money  made  each   year,                 
  approximately  10.5  percent  goes to  dividends.    For the                 
  present year  it would amount  to a  $40 million  reduction.                 
  Since  the dividend is calculated on a five-year basis, that                 
  amount   would  be  compounded   over  time.    Transitional                 
  provisions in the bill would count  four years of net income                 
  and one year of real income for the first year.   The second                 
  year would count three years of net income  and two years of                 
  inflation  proofing  reduced net  income.   The  $40 million                 
  reduction would  thus be $80  million the second  year, $120                 
  million the third, $160 the fourth,  and $200 million by the                 
  end of five years.                                                           
                                                                               
  Co-chairman Halford raised  concern regarding dividends  and                 
  explained  that  he asked  permanent  fund staff  to provide                 
  projections  based  on the  status  quo versus  the proposed                 
  bill.  He then directed attention to tabulations (copies  on                 
  file  in  the master  file) and  noted  that the  bill would                 
  reduce the constant value of the dividend to $606.00 in 2001                 
  versus  a  real value  of  $1,002 in  that  same year.   The                 
  reduction would occur  under the  proposed bill because  the                 
  pool of funds for  the dividend would be reduced  by removal                 
                                                                               
                                                                               
  of  inflation  proofing  moneys   before  the  dividend   is                 
  calculated.    Mr.  Kelly  concurred.   Co-chairman  Halford                 
  reiterated that the real value of the dividend is reduced by                 
  $400 in "just five years."   He acknowledged concern in some                 
  sectors that  the dividend would grow to "some huge amount."                 
  He then pointed to  the graph he distributed and  noted that                 
  "the dividend never gets to $1,200,  in real dollars, before                 
  2006 . . . ."                                                                
                                                                               
  Senator Randy Phillips  concurred in need for  protection of                 
  the permanent fund.  He suggested that the fundamental issue                 
  is protection of the fund versus protection of the dividend.                 
  Co-chairman Halford noted  that the permanent  fund dividend                 
  protects the principal in the eyes of the public.                            
                                                                               
  Senator Sharp  voiced  his understanding  that the  proposed                 
  bill  would  not  require   greater  amounts  for  inflation                 
  proofing than  those presently provided.   Senator  Phillips                 
  reiterated  that the question should  be how best to protect                 
  the fund.   Senator Rieger's proposal would  inflation proof                 
  first and  pay dividends  later.   The question  is, "Do  we                 
  protect the  dividends, or do we protect  the permanent fund                 
  itself."   Co-chairman  Halford noted  that the  legislature                 
  could  change the  priority for  dividends versus  inflation                 
  proofing  without  changing  the  dividend  formula.     The                 
  proposed bill  applies the existing formula  after inflation                 
  proofing is removed.   That has the effect of  "reducing the                 
  dividends pretty drastically  over time."   The  Co-chairman                 
  noted  that  the original  debate  on priority  of dividends                 
  versus inflation proofing  was "almost  a draw in  advocates                 
  and supporters  of the  permanent  fund."   The question  of                 
  priority is different from the  taking of inflation proofing                 
  before  dividends  are   calculated.    Co-chairman  Halford                 
  advised  that  he did  not have  as  strong a  feeling about                 
  priorities are he does about the reallocation resulting from                 
  the proposed bill.                                                           
                                                                               
  Senator  Phillips   voiced  agreement  with   protection  of                 
  permanent  fund principal.   The question is  how that might                 
  best be done.                                                                
                                                                               
  END:      SFC-96, #60, Side 1                                                
  BEGIN:    SFC-96, #60, Side 2                                                
                                                                               
  Co-chairman Frank voiced  support for  use of "real  income"                 
  versus  nominal income.  He  further spoke to the mitigating                 
  effect  of five-year  averaging  of  dividends and  inquired                 
  regarding the impact of increasing the percentage from 21 to                 
  25 percent.   Senator Rieger noted  that the increase  would                 
  represent a policy call for the  legislature.  He noted that                 
  the corporation currently  pays out 55 percent  in dividends                 
  rather than 50 percent as perceived by the public.                           
                                                                               
  Senator Phillips asked  that Mr.  Kelly apply provisions  of                 
                                                                               
                                                                               
  the  proposed  bill  to both  past  dividends  and principal                 
  amounts.  Mr. Kelly advised that it would have had no effect                 
  on the principal.   He agreed to apply  it to dividends from                 
  inception in 1982 to the present time.  Co-chairman  Halford                 
  reiterated  that projections  indicate that,  over time,  44                 
  percent of income would be  required for inflation proofing.                 
  If  44  percent  is taken  out  of  the  formula before  the                 
  calculation is made, the dividend is reduced by that same 44                 
  percent.                                                                     
                                                                               
  Senator  Phillips again  asked  which of  the two--inflation                 
  proofing  or  dividends--would  be  the  most  effective  in                 
  protecting the principal  of the fund.   Co-chairman Halford                 
  voiced his belief that both protect the fund.  They are  not                 
  in conflict.   The  dividend and  inflation proofing  can be                 
  paid.  Over the  history of the fund, there  has continually                 
  been a surplus.  The legislature has deposited  that surplus                 
  into  principal.   That  surplus  could  be  used for  other                 
  activities.                                                                  
                                                                               
  FORMER   REPRESENTATIVE   ORAL   FREEMAN  next   spoke   via                 
  teleconference from Ketchikan.  He attested to the fact that                 
  the permanent fund is working exactly as it was intended to.                 
  There is no  reason nor rationale for  "tinkering or messing                 
  with it when  it's working  great."  The  general public  is                 
  highly suspicious of changes in the fund.                                    
                                                                               
  Mr.  Freeman  referenced  similar  discussion  of  inflation                 
  proofing  in the late  1980s.  At that  time, he advised, he                 
  posed questions regarding  what would happen in  a situation                 
  where inflation equals  earnings.  If inflation  proofing is                 
  the first  priority, all  earnings would  be  used for  that                 
  purpose.  The general public would  soon question need for a                 
  fund that produces no benefit for its people.                                
                                                                               
  Mr. Freeman stressed that the dividend is the life insurance                 
  policy for  the permanent  fund.   When the  fund loses  the                 
  confidence, backing, and support of  the general public, the                 
  permanent  fund  will  disappear.    He suggested  that  the                 
  proposed bill is not worth the effort put into it.                           
                                                                               
  In response  to a  hypothetical situation  posed by  Senator                 
  Rieger, Mr. Freeman  stressed that  the second  half of  the                 
  earnings  of the permanent fund has  taken care of inflation                 
  since 1982 and has  produced an excess of $2.2 billion.   He                 
  voiced his  belief  that  the fund  would  be  undamaged  if                 
  inflation proofing was short in  a particular year since the                 
  history  of the fund  indicates that  would not  happen year                 
  after year.   Co-chairman Halford  remarked that moneys  are                 
  traditionally maintained  in the earnings reserve account to                 
  cover  a shortfall  in  any particular  year.   Mr.  Freeman                 
  concurred.                                                                   
                                                                               
  Co-chairman Halford  noted that Senator Rieger  had prepared                 
                                                                               
                                                                               
  an  update  based on  nominal  dollars using  current income                 
  numbers and  requested  that projections  also  be  prepared                 
  based on real  dollars.  Senator  Zharoff asked if, at  some                 
  point,  inflation proofing  consumes  all of  the  earnings.                 
  Senator  Rieger responded,  "There's  always a  hypothetical                 
  like that."  He  then explained that people have  noted that                 
  half  is  going  to  dividends  and are  wondering  what  is                 
  happening  with the other half.   Proposals are offered with                 
  increasing frequency concerning  what to  do with the  other                 
  half.  Some of them will eventually garner enough support to                 
  pass.    When  that  happens, 100  percent  of  the  nominal                 
  earnings of  the permanent  fund will  be spoken  for.   The                 
  loser will be inflation proofing.                                            
                                                                               
  SB 51  reflects truth in  advertising of what  the permanent                 
  fund is really  achieving.   At the present  time, the  fund                 
  pays  out half  of  the inflation  component as  a dividend.                 
  That misleads the  public into thinking that "this  was only                 
  half of the  performance of  the fund that  is being  paid."                 
  The proposed change  is timely because of  fund performance.                 
  The proposed bill  could be effected without  impacting "the                 
  amount that is  put on  the table."   Senator Zharoff  noted                 
  that the other  half is not  being spent.   It "rolls  right                 
  into the corpus of the fund."                                                
                                                                               
  Co-chairman  Halford  voiced  his  belief  that  the  public                 
  understands that half the income is used for dividends while                 
  the other half provides inflation proofing.  He acknowledged                 
  an advocacy that believes that some  of the income should go                 
  through government and  "get spent through government."   He                 
  suggested that  the combined  effects of  the proposed  bill                 
  would  result  in  inflation proofing,  a  reduction  in the                 
  dividend formula, and a building  account that would be used                 
  to  fund  some  governmental  service.   The  public  should                 
  ultimately  decide what services it wishes  to buy.  Senator                 
  Sharp concurred.  He suggested that inflation proofing first                 
  and applying  the dividend  to half  of the remainder  would                 
  cause the public  to question the purpose  for the remaining                 
  half.                                                                        
                                                                               
  Co-chairman  Halford  suggested  that the  bill  be  held in                 
  committee  for  updated  projections.    He  said  it  could                 
  possibly be heard again in the coming week.                                  
                                                                               
  ADJOURNMENT                                                                  
                                                                               
  The meeting was adjourned at approximately 11:00 a.m.                        
                                                                               

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