Legislature(2003 - 2004)

03/16/2004 09:07 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     SENATE FINANCE COMMITTEE                                                                                 
                          March 16, 2004                                                                                      
                              9:07 AM                                                                                         
SFC-04 # 40,  Side A                                                                                                            
SFC 04 # 40,  Side B                                                                                                            
SFC 04 # 41,  Side A                                                                                                            
CALL TO ORDER                                                                                                               
Co-Chair Gary Wilken convened  the meeting at approximately 9:07 AM.                                                            
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice Chair                                                                                                   
Senator Fred Dyson                                                                                                              
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
Also Attending:   SENATOR JOHN COWDERY;  SENATOR KIM ELTON;  SENATOR                                                          
HOLLIS FRENCH;  SENATOR SCOTT OGAN;  SENATOR RALPH SEEKINS;  SENATOR                                                            
BERT   STEDMAN;  SENATOR   GARY   STEVENS;  SENATOR   TOM   WAGONER;                                                            
REPRESENTATIVE   PEGGY  WILSON;  MARK   STOPHA,  Staff  to   Senator                                                            
Georgianna Lincoln; MARK  GNADT, Staff to Representative Eric Croft;                                                            
Attending  via  Teleconference:     There  were  no  teleconference                                                           
SUMMARY INFORMATION                                                                                                         
HB 233-INCREASE EDUCATION FUNDING                                                                                               
The  Committee heard  from  the sponsor  and  the bill  was held  in                                                            
SJR 19-CONST. AM: PERMANENT FUND INCOME                                                                                         
The Committee  heard  from the  sponsor and  fielded questions  from                                                            
visiting Senators. The bill was held in Committee.                                                                              
SJR 32- CONST AM: PERM FUND INCOME FOR DIVIDENDS                                                                                
The Committee heard from the sponsor and fielded questions from                                                                 
visiting Senators. The bill was held in Committee.                                                                              
SJR 24-CONST AM: GUARANTEE PERM FUND DIVIDEND                                                                                   
The Committee heard from the sponsor and the bill was held in                                                                   
     CS FOR HOUSE BILL NO. 233(EDU) am                                                                                          
     "An  Act increasing  the base  student allocation  used in  the                                                            
     formula  for state funding of  public education; and  providing                                                            
     for an effective date."                                                                                                    
This was the first hearing for this bill in the Senate Finance                                                                  
Co-Chair Wilken stated this bill, sponsored by Representative                                                                   
Wilson, "increases the student dollar by $419 to $4,588 per                                                                     
REPRESENTATIVE PEGGY WILSON, read the sponsor statement into the                                                                
record as follows.                                                                                                              
     School  districts  all over the  state are  budget trimming  to                                                            
     cope  with inflationary  factors including  but not limited  to                                                            
     greatly  increased insurance  costs.  The legislature  supports                                                            
     the  concept  of  "No  Child  Left  [Behind]  Act"  and  it  is                                                            
     imperative  that  increased  funds  be allocated  in  order  to                                                            
     implement this act  and assure that no child is left behind. In                                                            
     addition  greatly  increased costs  of PERS/TERS  were  largely                                                            
     unforeseen  and if additional  dollars  are not added  to cover                                                            
     these  increased  costs  that will  cause  direct  cuts to  the                                                            
     Public   education    is   charged   with   assuming    greater                                                            
     responsibility  at the same time  they face a reduction  in the                                                            
     purchasing power of  the student dollar. Alaska cannot continue                                                            
     to  ask its  school  districts  to meet  all  these  additional                                                            
     responsibilities    with   insufficient   dollars;    therefore                                                            
     additional funding is a necessity.                                                                                         
     Providing  additional funding  for K-12 education early  in the                                                            
     session would  be tremendously helpful to school  districts. It                                                            
     would keep  many school districts from having  to hand out pink                                                            
     slips,  which cause unnecessary  anxiety in schools  across the                                                            
     The  substantial   increase   of  $419  to  the  base   student                                                            
     allocation  in CS House Bill 233 as amended would  bring needed                                                            
     help to  our local schools districts  at this very challenging                                                             
     time.  This   would  assist  them  in  meeting  and   hopefully                                                            
     exceeding  the public's expectations  and demands. The  time to                                                            
     act  is now and  I ask  your support  of CS  HB 233 as  amended                                                            
      which will raise the base student allocation to $4,588.                                                                   
Co-Chair Wilken  noted a drafting error in the committee  substitute                                                            
passed by the  House of Representatives,  in which the current  base                                                            
student allocation should  read $4,169, rather than $4,010.  He also                                                            
informed  that fiscal  note #2 is  incorrect and  the Department  of                                                            
Education  and Early  Development  would  submit an  updated  fiscal                                                            
Representative  Wilson clarified  that $4,010  was the base  student                                                            
allocation  amount  the  previous  year  when this  bill  was  first                                                            
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
     CS FOR SENATE JOINT RESOLUTION NO. 19(JUD)                                                                                 
     Proposing  amendments  to  the  Constitution  of the  State  of                                                            
     Alaska relating to the Alaska permanent fund.                                                                              
This  was the  first  hearing  for  this resolution  in  the  Senate                                                            
Finance Committee.                                                                                                              
Co-Chair Wilken  stated this resolution, "places the  current method                                                            
to calculate the PFD dividend  in the Constitution. In addition, the                                                            
constitution amendment  requires a majority vote by  Alaskans before                                                            
the  Permanent Fund  earnings  reserve may  be appropriated  by  the                                                            
legislature. This is a  constitutional amendment that must be placed                                                            
in front of the voters in November of 2004."                                                                                    
MARK STOPHA,  Staff  to Senator  Georgianna Lincoln,  informed  that                                                            
Senator  Lincoln  is out  of town  and he  read testimony  into  the                                                            
record as follows.                                                                                                              
     SJR  19  before  you  contains  three  elements.  It  puts  the                                                            
     Permanent   Fund  Dividend  into  the  Constitution.   It  puts                                                            
     inflation   proofing   of   the   Permanent   Fund   into   the                                                            
     Constitution,   and  it  creates  a  special  account  for  the                                                            
     remaining  earnings reserve of the Permanent  Fund, rather than                                                            
     depositing  those earnings into the general fund  as we do now.                                                            
     Those  earnings will be available  for use by the legislature,                                                             
     but only by a vote of Alaskan voters.                                                                                      
     This  bill  does  not  change  the  current  structure  of  the                                                            
     dividend   program.  It  continues  to  payout   dividends  and                                                            
     inflation  proofs the  Permanent Fund in  that order, as  we do                                                            
     now, but  places these processes in the Constitution.  The bill                                                            
     would never use the  principal of the Permanent Fund to pay out                                                            
     dividends or pay for other government services.                                                                            
     Subsection  (a) of Section 3 was added in the  Senate Judiciary                                                            
     Committee. Senator  Lincoln did not concur with that amendment.                                                            
     The vast  majority of our constituents are in  favor of putting                                                            
     the Permanent  Fund Dividend  into the Constitution  period. We                                                            
     believe  the  Judiciary  Committee   amendment  of  an  unknown                                                            
     spending  limit as part  of this bill  is a separate issue  and                                                            
     should be addressed in separate legislation.                                                                               
     Finally,  subsection (b) and  (c) of Section 3 ensures  that if                                                            
     the bill were to make  the Permanent Fund taxable by the IRS if                                                            
     dividends  become part of the Constitution, then  the amendment                                                            
     would  be suspended and repealed.  Attorney General  Renkes has                                                            
     provided  an opinion  that he  does not believe  that the  bill                                                            
     would  make the Permanent  Fund taxable.  Section 3 provides  a                                                            
     provision to rescind the amendment if it does.                                                                             
     As you can  see from this stack of e-mails in  front of me that                                                            
     has been  sent to all legislators  for the most part,  the bill                                                            
     is supported by voters  from all corners of the State. The bill                                                            
     is easy for  the public to understand because  it maintains the                                                            
     status quo regarding  how the Permanent Fund Dividends are paid                                                            
     out.  Guarantees  payment  of  Permanent  Fund Dividends  as  a                                                            
     priority  and protects  the earnings  reserve from legislative                                                             
     spending by requiring a vote of the people.                                                                                
Co-Chair Wilken  questioned the claim made in the  sponsor statement                                                            
that  permanent  fund dividends  represent  one-eighth  of  Alaska's                                                            
economy.  He  therefore  calculated  the  economy  of Alaska  at  $8                                                            
billion,  but had  understood  the amount  to be  approximately  $40                                                            
MARK GNADT, staff to Representative Eric Croft, was unsure where                                                                
this figure was derived.                                                                                                        
Co-Chair Green acknowledged her comments were premature, recalling                                                              
the  conversation  from the  previous  meeting indicating  that  the                                                            
Permanent Fund  is currently being over inflation  proofed and asked                                                            
if  this  resolution  contains  a  provision  in the  event  that  a                                                            
determination is made that  investments are self-inflation proofing,                                                            
the inflation proofing provision could be "relaxed".                                                                            
Mr. Stopha  responded  that the  Permanent Fund  would be  inflation                                                            
proofed in  the same manner  as currently  provided for in  statute,                                                            
except   this  resolution   would  place   the  provisions   in  the                                                            
Co-Chair Green  asked if the language in Section 1  on page 1, lines                                                            
10 -  12, inserting  new language  into Article  IX, sec. 15  Alaska                                                            
Permanent Fund,  reflect this. This language, following  "All income                                                            
from  the  permanent   fund  shall  be  deposited   in  the…"  reads                                                            
"…earnings reserve account  and distributed as provided for under AS                                                            
37.13.140,  37.13.145, and AS 43.23.025,  as those statutes  read on                                                            
July 1, 2002."                                                                                                                  
Mr.  Gnadt  affirmed  and  explained  this  is  standard  method  of                                                            
determining inflation proofing from the prior year.                                                                             
Co-Chair  Green  asked if  changes  were  made in  current  statutes                                                            
whether changes would automatically be made to this amendment.                                                                  
Co-Chair Wilken answered yes.                                                                                                   
SENATOR RALPH SEEKINS asked  if the witnesses were aware of the Bess                                                          
versus Ulmer case.                                                                                                            
Mr. Gnadt was aware of this litigation.                                                                                         
Senator Seekins  asked if the sponsor had procured  a legal analysis                                                            
regarding  whether or  not this resolution  would  be defined  as an                                                            
amendment or a revision to the Constitution.                                                                                    
Mr. Gnadt  did not have  an official legal  opinion to address  this                                                            
resolution  specifically.  He indicated  that other  legal  opinions                                                            
pertain to a "potential  Bess v. Ulmer problem"; however,  he stated                                                          
these opinions recommend  language to comply the resolution with the                                                            
amendment criteria.                                                                                                             
Senator   Seekins  asked   if  witnesses   were  concerned   that  a                                                            
constitutional  amendment establishing  a percentage  of the  annual                                                            
budget that  would be allocated  to the Permanent  Fund and  thereby                                                            
removing  this authority  from the  legislature  would constitute  a                                                            
revision to the Constitution.                                                                                                   
Mr. Gnadt  replied that  no such  formal analysis  of this had  been                                                            
Senator Seekins expressed  concern that any constitutional amendment                                                            
that  removes  significant  discretion   from  the  legislature  may                                                            
constitute a revision rather than an amendment.                                                                                 
Senator  Bunde  spoke to  the  proposal presented  by  Governor  Jay                                                            
Hammond,  referred to  as "the Hammond  Plan", and  a related  legal                                                            
opinion that determines  the proposal to likely be  unconstitutional                                                            
because  it proposes  major revisions  to the  Alaska Constitution.                                                             
Senator Bunde  was unsure  whether this pertains  to the  resolution                                                            
before the  Committee, but recommended  a legal opinion be  procured                                                            
on this resolution before proceeding.                                                                                           
Senator Bunde  remarked that the framers of the Alaska  Constitution                                                            
"learned from  the mistakes" of other state constitutions  and chose                                                            
to not allow  dedicated funds in Alaska's  Constitution.  He pointed                                                            
out this resolution  would dedicate  funds and asked if the  sponsor                                                            
has  considered   the  potential  situation  of  required   dividend                                                            
payments  in the  event of  inadequate  funding for  public  safety,                                                            
education, or other government services.                                                                                        
Mr. Stopha  replied that funding for  those purposes would  continue                                                            
to be  available,  however would  require  a vote of  the people  to                                                            
authorize such expenditures from the Permanent Fund.                                                                            
Senator Bunde  clarified that  each year in  drafting the budget  an                                                            
election would  be required to authorize specific  expenditures from                                                            
the Permanent Fund.                                                                                                             
Mr.  Stopha  affirmed  and noted  the  voting  structure  for  these                                                            
appropriations could be  negotiated as to whether they were specific                                                            
appropriations,  "blanket"  appropriations,  or  "forward  funding,"                                                            
Senator  Hoffman  reported  he  has  heard  much  on  the  topic  of                                                            
dedicated  funds and  concluded  that the  State has  turned a  non-                                                            
renewable  resource,  oil,   into  a renewable   resource  i.e.  the                                                            
Permanent Fund, and that  the Constitution allows the Legislature to                                                            
allocate resources. He  therefore questioned whether this resolution                                                            
would be dedication of  funds or rather, an allocation of resources.                                                            
SENATOR  HOLLIS   FRENCH  asked  about   public  reaction   to  this                                                            
resolution since it was introduced.                                                                                             
Mr. Stopha qualified he  has only worked for Senator Lincoln for one                                                            
year, but  relayed Senator  Lincoln's claim  that no other  bill she                                                            
has sponsored has received  this much attention during her tenure in                                                            
the legislature. He told  of the importance of dividends to families                                                            
in the Yukon  Kuskokwim census area,  where these payments  comprise                                                            
18 percent of annual family income.                                                                                             
Mr. Gnadt added  that constituents of Representative  Croft are also                                                            
very supportive of this proposal.                                                                                               
Senator Bunde  asked if this resolution would not  change the method                                                            
in which dividends are calculated.                                                                                              
Mr. Stopha affirmed.                                                                                                            
Senator  Bunde noted  testimony  provided  at the  previous  hearing                                                            
warning  that  if  the  dividend  calculation  were  unchanged,  the                                                            
dividend amount  would be very low  or zero in some years.  He asked                                                            
if the sponsor has relayed this to constituents.                                                                                
Mr.  Stopha  responded  that  the "spirit"  of  this  resolution  is                                                            
constitutional protection of the Permanent Fund Dividend.                                                                       
Senator  Hoffman asked  if public  feedback on  this resolution  has                                                            
been primarily related  to constitutional protection of the dividend                                                            
program, inflation proofing, or other provisions.                                                                               
Mr.  Stopha replied  that  Permanent  Fund  Dividends  has been  the                                                            
primary concern.                                                                                                                
Senator Hoffman  asked if a large  margin of expressed interest  has                                                            
been related to the dividends.                                                                                                  
Mr. Stopha answered yes.                                                                                                        
Mr. Gnadt added that Representative  Croft's office has had the same                                                            
experience.  He noted that residents  are accustomed to the  current                                                            
system and how it affects their dividend payments.                                                                              
Senator Olson  addressed Senator Bunde's  comments regarding  public                                                            
understanding  of the  Percent of  Market Value  (POMV) approach  to                                                            
managing   the  Permanent   Fund.   Senator  Olson   reported   that                                                            
constituents  are largely in favor  of retaining the current  system                                                            
despite  understanding  that POMV  would  stabilize  the amounts  of                                                            
dividend  payments. He conveyed  these residents  are "wary"  of the                                                            
POMV management method.                                                                                                         
Co-Chair  Green recalled  that she  introduced  legislation in  1997                                                            
that would have  accomplished similar goals but in  a different way.                                                            
She  learned from  these efforts  that  to "get  to the  end of  the                                                            
race", actions  must be taken  to provide  assurance to the  public.                                                            
She opined that legislatures  have been "very honorable stewards" of                                                            
the  earnings reserve  fund  and have  "faithfully  put forward  the                                                            
dividend program to the  greatest extent every year" as well has had                                                            
"great expectations  of the  investment boards"  and Fund  managers.                                                            
She reiterated  that the public must be provided assurance  that the                                                            
dividend  program would  continue, although  she  was unsure of  the                                                            
proper procedure  to attain this.  She was unsure she supported  all                                                            
elements of this resolution, but recognized it as an option.                                                                    
Senator Hoffman concluded  the dilemma is that three-quarters of the                                                            
members of the legislature  must approve any changes to the dividend                                                            
program,  after  which,  Alaskan  voters  must  then  approve  those                                                            
changes.  He  heard  "overwhelming"  support  for  a constitutional                                                             
guarantee of  dividend payments. He  also noted that the  membership                                                            
of the  Conference of Alaskans  did not make  recommendations  as to                                                            
what  amounts  should be  allocated  for  dividends  and  government                                                            
spending.  He  reiterated  that  the  Committee  must  address,  and                                                            
subsequently  reach an  agreement  that could  receive support  from                                                            
both the full Senate and the House of Representatives.                                                                          
Senator Dyson  paraphrased Senator  B. Stevens comments made  at the                                                            
Conference  of  Alaskans  that  guaranteeing  the  dividend  in  the                                                            
Constitution would  "tie the hands of legislators"  in the future in                                                            
the  event  of a  fiscal  crisis  in  which  inadequate  funds  were                                                            
otherwise available  for education, public safety  or other critical                                                            
needs. Senator Dyson warned  this would be a difficult situation and                                                            
he asserted that future  legislature should not be subjected to this                                                            
possibility.  He quoted Carl Marx,  "The and once they've  tasted it                                                            
they will be insatiable  until they have drained it."  Senator Dyson                                                            
cautioned the Committee to be wary of this.                                                                                     
Senator Bunde  asserted the reason  legislators are not elected  at-                                                            
large  for the  entire State  is because  they  represent  different                                                            
constituencies. He reported  that his constituency is of the opinion                                                            
that  the dividend  program  has "morphed"  from  an opportunity  to                                                            
receive extra  money for themselves, into an entitlement.  He deemed                                                            
this a  serious matter and  did not support  an enshrinement  of the                                                            
dividend  in the  Constitution  and  stated  that residents  in  his                                                            
election district  do not support  this either. He told of  findings                                                            
of a poll  conducted by  Dittman Research,  in which a question  was                                                            
posed  as to  whether  the  dividend  should  be guaranteed  in  the                                                            
Constitution.  He informed  that the  results of  this poll show  an                                                            
equal  division  among  respondents.  He  commented  this  could  be                                                            
considered   contentious,   but  disputed   that  a  Constitutional                                                             
enshrinement is widely supported statewide.                                                                                     
SENATOR BERT STEDMAN commented  that some aspects of this resolution                                                            
might  seem  "attractive"  but  do  not fit  well  into  the  entire                                                            
"mosaic". He asked  what consideration the sponsor  has given to the                                                            
effect a  constitutional guarantee  of dividends  would have  in the                                                            
event  of  an  immediate  need  to respond  to  a  disaster,  or  in                                                            
addressing the current fiscal dilemma.                                                                                          
Mr. Stopha  pointed out the earnings  reserve account would  remain.                                                            
He  understood the  concerns  that a  vote of  the  people would  be                                                            
required  before  dividend  funds  could  be  expended  even  if  an                                                            
immediate need were present,  such as in the event of a disaster. He                                                            
emphasized this resolution  is intended to be a part of a long-range                                                            
fiscal plan and he relayed  Senator Lincoln's assertion that the all                                                            
options should be considered  and that the permanent fund should not                                                            
be singled out.                                                                                                                 
Senator Stedman gave a  historical perspective noting that since its                                                            
inception,  the legislature  has had  the authority  to appropriate                                                             
funds from the earnings  reserve account; rather than doing this, he                                                            
noted  the legislature  has  deposited $7.1  billion  more into  the                                                            
Permanent Fund than required.                                                                                                   
Mr. Gnadt  agreed the  legislature  has a "fairly  good history"  of                                                            
depositing  monies into the  Permanent Fund.  However, he  cautioned                                                            
against  relying  upon  past actions  to  reflect  future  decision-                                                            
making.  He furthered  that the  past actions  were primarily  taken                                                            
during years with  high oil prices and a strong economy.  He assured                                                            
this  resolution  would not  eliminate  the ability  to appropriate                                                             
funds from the earnings  reserve account, but rather stipulates that                                                            
the State  currently  garners  75 percent  of oil  revenues for  the                                                            
general fund  and the remaining revenues  are "the people's  money".                                                            
He furthered  this resolution  would require  voter approval  before                                                            
the  remaining  25  percent  of oil  revenues  could  be  spent  for                                                            
government services.                                                                                                            
Senator Bunde  challenged characterization that the  legislators are                                                            
"running  off to Vegas"  to spend oil revenues  unscrupulously,  and                                                            
countered that  much of the money  is spent in rural areas  in which                                                            
residents do not contribute to education or public safety.                                                                      
Senator Olson  commented that much of the oil revenues  are expended                                                            
in  rural Alaska  just  as much  of the  resources  came from  rural                                                            
Senator Hoffman  pointed out  that Alaska is  the only state  with a                                                            
permanent fund  situation and subsequent  perceived "problems"  with                                                            
deciding  how  to  utilize  those  funds.  He  disagreed  that  this                                                            
resolution  would  "tie  our  hands",   arguing  that  this  is  the                                                            
"peoples'  money" and if  "they want to tie  our hands," voters  had                                                            
that right.  He also surmised that  this resolution could  also fail                                                            
and therefore the voters  would not impose these restrictions on the                                                            
legislature.  He  remarked  this  would  not  be  known  unless  the                                                            
question is placed in the ballot.                                                                                               
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
AT EASE 9:45 AM / 9:46 AM                                                                                                       
     CS FOR SENATE JOINT RESOLUTION NO. 32(JUD)                                                                                 
     Proposing  amendments  to  the  Constitution  of the  State  of                                                            
     Alaska  relating to  appropriations from  the Alaska  permanent                                                            
     fund  to be  used  for a  program of  dividends  for all  state                                                            
     residents  and providing  a  conditional effect  and  effective                                                            
     date for the amendment.                                                                                                    
This  was the  first  hearing  for  this resolution  in  the  Senate                                                            
Finance Committee.                                                                                                              
Co-Chair   Wilken   stated   this   resolution,   "constitutionally                                                             
guarantees that 80 percent  of the revenue stream from the Permanent                                                            
Fund  under a  percent  of market  value approach  would  go to  the                                                            
Permanent  Fund Dividend.  This constitutional  amendment will  take                                                            
place  only if  the POMV  amendment passes  the  legislature and  is                                                            
approved  by  the voters.  This  constitutional  amendment  must  be                                                            
placed before the voters November of 2004."                                                                                     
SENATOR KIM  ELTON characterized  himself as  not a sponsor  of this                                                            
resolution  as much as he is a carrier.  He then characterized  this                                                            
resolution  as an "if 'a' then 'b'"  stipulation. He explained  that                                                            
if a constitutional  amendment were  adopted to implement  a Percent                                                            
of Market Value (POMV)  procedure, this resolution would provide for                                                            
a division of the revenue from the POMV approach.                                                                               
Senator Elton  relayed this resolution is a nexus  of the Conference                                                            
of Alaskans' recommendation  that if POMV were adopted in the Alaska                                                            
Constitution,  the Constitution should also be amended  to guarantee                                                            
Permanent Fund  dividends. He stated  this resolution is  one method                                                            
to accomplish  this. He detailed that POMV would provide  a "revenue                                                            
stream" of  approximately five-percent  the amount of the  corpus of                                                            
the  Fund.   Of  that  amount,  he   stated  80  percent   would  be                                                            
appropriated   to  the  dividend  and  20  percent  for   government                                                            
operations. He calculated  that the current market value of the Fund                                                            
would provide approximately  $280 million for government services of                                                            
the  approximate  $1.4  million POMV.  He  cited  observations  from                                                            
Permanent  Fund  Corporation  representatives  that  reviewing  past                                                            
performance provides insight  into predicting future performance. He                                                            
listed various other divisions  between 65 percent for dividends and                                                            
35 percent  for government  services, and  76 percent for  dividends                                                            
and  24  percent  for  government  services.   He acknowledged   the                                                            
difficulty in  accurately predicting the future in  that the certain                                                            
market performances and  asset allocation decisions must be assumed.                                                            
He predicated  this  resolution  based on  calculations  how a  POMV                                                            
would have  affected the Permanent  Fund if implemented since  1990.                                                            
Senator Elton  also pointed out this  approach would not  prioritize                                                            
dividend   payments  above   inflation  proofing,   explaining   the                                                            
assumption that POMV provides  inflation proofing because only five-                                                            
percent is withdrawn from the Fund.                                                                                             
Senator  Elton agreed  with  Senator  Hoffman's comments  that  also                                                            
reflect the  "notion" of the Conference  of Alaskans that  the State                                                            
has  transformed  a "pool  of natural  resources"  into  a "pool  of                                                            
money"  that  continues  to  grow. Senator  Elton  asserted  that  a                                                            
significant portion of  the corpus of the Permanent Fund is a direct                                                            
result of prudent actions of past legislatures in inflation-                                                                    
proofing the Fund.                                                                                                              
Senator  Elton  opposed  the committee  substitute  adopted  by  the                                                            
Senate   Judiciary  Committee   because  it   was  contingent   upon                                                            
legislative and  voter approval of a constitutional  spending limit,                                                            
which  he stated  has not  been finalized.  He  recommended  against                                                            
including  a  spending  limit  in  a proposal  to  constitutionally                                                             
guarantee the Permanent  Fund Dividend program, as such action could                                                            
be  considered   a  revision  rather   than  an  amendment   to  the                                                            
Senator Elton  then addressed the matter of whether  this resolution                                                            
would be  a revision of  the Constitution.  He surmised that  making                                                            
such a determination is inappropriate at the committee level.                                                                   
Senator Bunde  was pleased to note that the sponsor  pointed out the                                                            
income   from  the   Permanent  Fund,   which   he  calculated   has                                                            
"outdistanced  the income to the State"  generated from development                                                             
of oil resources. Senator  Bunde remarked that a POMV is intended to                                                            
stabilize  the earnings  of the  Permanent  Fund and  the method  in                                                            
which those  earnings are calculated.  He understood the  amounts of                                                            
the dividend would subsequently  become stable rather than fluctuate                                                            
as it has in the  past. By extension, he stated that  the 20 percent                                                            
used to fund State services  would also be stabilized. He listed the                                                            
budget  deficit  for the  current  year at  $500 million,  of  which                                                            
approximately one half could be offset with the aforementioned 20-                                                              
percent.   However  he warned  that the  deficit  would continue  to                                                            
increase and that this scenario would not adjust for inflation.                                                                 
SFC 04 # 40, Side B 09:55 AM                                                                                                    
Senator  Bunde asked  whether  the sponsor  had considered  how  the                                                            
remaining government  expenses in excess of those  covered by the 20                                                            
percent of POMV funds would be addressed.                                                                                       
Senator  Elton  qualified  that the  State  is fortunate  this  year                                                            
because the price  of oil is currently over $36 per  barrel, and the                                                            
$500  million deficit  amount  is a  conservative  estimate. In  the                                                            
future, he expected the  gap between revenues and expenditures would                                                            
be significantly  higher. He did not consider this  resolution to be                                                            
a complete fiscal  solution, but rather as a component  of a broader                                                            
fiscal  plan.  He  clarified  he did  not  intend  to  suggest  that                                                            
additional efforts to address  government funding should be ignored.                                                            
Senator  Bunde  agreed  that depending  on  the  price of  oil,  the                                                            
deficit  could be  approximately  $1  billion and  that "draconian"                                                             
taxes  and  budget  reductions  could be  necessary  to  offset  the                                                            
balance. He asked  whether, in the current year, the  entire deficit                                                            
would  be  equal to  fifty-percent  of  the  five  percent  earnings                                                            
available for appropriation under the POMV method.                                                                              
Senator  Elton replied  that  an equal  division of  the total  POMV                                                            
earnings of $1.4  billion would provide approximately  $700 million,                                                            
an amount  that would be  adequate to cover  the projected  deficit.                                                            
However, he cautioned  that if the deficit increased  to $1 billion,                                                            
the earnings would not be sufficient.                                                                                           
SENATOR GARY  STEVENS expressed  he is a "great  fan" of the  Alaska                                                            
Constitution and was "loathe"  to amend it too readily. He asked how                                                            
the sponsor  determined this issue  merits such an amendment,  given                                                            
that the  framers  at the Constitutional  Convention  determined  to                                                            
leave the details to the Legislature to resolve.                                                                                
Senator Elton  replied that the Constitution  has provided  Alaskans                                                            
with significant  latitude. He stated this resolution  would provide                                                            
further definition  as to how the  Permanent Fund would be  managed.                                                            
He reiterated  it would not be implemented  unless a constitutional                                                             
amendment relating to POMV was approved.                                                                                        
Senator Hoffman  commented that the  Constitution was very  general;                                                            
however specific changes  have been made to benefit few people, such                                                            
as  the limited  entry  provision  that benefited  few  fishers.  He                                                            
asserted this resolution would benefit every Alaskan.                                                                           
Senator Seekins  asked if the sponsor  had obtained a legal  opinion                                                            
advising  whether this  resolution conforms  to the  ruling in  Bess                                                          
versus Ulmer.                                                                                                                 
Senator Elton  informed he  had and described  the opinion  from Tam                                                            
Cook of the  Division of Legal and  Research Services advising  that                                                            
the matter is "indeterminate"  and could be determined by a court to                                                            
be a constitutional revision or amendment.                                                                                      
Senator Seekins  clarified that currently all income  generated from                                                            
the Permanent  Fund is deposited  into the  State general fund,  and                                                            
subject  to  discretionary  appropriation  by  the  legislature.  He                                                            
understood  this resolution would  provide that appropriation  would                                                            
no  longer  be  discretionary   and  instead  80  percent  would  be                                                            
distributed  as dividends  and  only the  remaining  funds would  be                                                            
Senator  Elton  affirmed,  noting  these  provisions  are  currently                                                            
statutory   and   this  resolution   would   codify   them  in   the                                                            
Constitution.  He  encouraged the  Committee,  as it  considers  all                                                            
approaches,  to  consider  that  all  Alaskans   must  endorse  this                                                            
constitutional amendment.                                                                                                       
Senator Seekins  asked if the sponsor would therefore  not "have any                                                            
problem that  the first dollar that  would have to be spent  for any                                                            
reason in any particular  year regardless of the financial condition                                                            
of the state of Alaska would be to pay the dividend."                                                                           
Senator   Elton  corrected   that  the  "first   dollar"  would   be                                                            
appropriated  to inflation proof the  Permanent Fund. The  reminder,                                                            
he affirmed  would be allocated 20  percent for government  services                                                            
and 80 percent for the dividend.                                                                                                
Senator  Seekins clarified,  "we would inflation  proof our  savings                                                            
account no matter what  our other requirements were for State income                                                            
to meet  the needs of the  State of Alaska.  The second dollar  then                                                            
would  be for a  dividend. Then  we could  worry about  the rest  of                                                            
State needs after that."                                                                                                        
Senator Elton  countered he  would not characterize  the process  in                                                            
this way. I  saw no "difference" between  the funding available  for                                                            
the dividend and  that for State services; both would  be guaranteed                                                            
in the Constitution.                                                                                                            
Senator Hoffman  stated the Fund would  first be inflation-proofed,                                                             
"then government gets a  crack at it and then the people get a crack                                                            
at it." He noted the ratio  of funds allocated for dividends and for                                                            
government services could be changed.                                                                                           
Senator Bunde  asserted that the "ultimate recipient"  of government                                                            
spending is  the people, that government  services are provided  for                                                            
the people, and therefore  100 percent of the earnings would benefit                                                            
the people.                                                                                                                     
Senator  Bunde  asked  Senator   Seekins  as  Chair  of  the  Senate                                                            
Judiciary  Committee, if the  issue of whether  these proposals  are                                                            
amendments  or  revisions  to the  Constitution  could  be  resolved                                                            
before the process of an election and court challenges.                                                                         
Senator Seekins  shared his research  into the matter of  dedicating                                                            
income in the  Constitution from the Permanent Fund  to the dividend                                                            
program.  He  learned  that  if  the  legislature  were  to  pass  a                                                            
resolution  to amend  the  Constitution in  this  manner, the  issue                                                            
would be  challenged in court  before the  election was held  on the                                                            
subsequent ballot  initiative. He knew of no other  method to obtain                                                            
a  court  ruling  on  whether  such a  change  would  be  deemed  an                                                            
amendment or a revision.                                                                                                        
Senator Seekins  warned that such  change to the Constitution  would                                                            
be the  first instance  in which  funds were  allocated directly  to                                                            
individuals.  He  explained  that historically,  revenues  from  the                                                            
Permanent Fund have been  deposited into the State general fund then                                                            
appropriated  for dividends. He remarked  this change would  subvert                                                            
the legislative  appropriation authority and would  therefore likely                                                            
be considered  a revision  to the Constitution.  He noted the  State                                                            
Supreme Court would make the ultimate decision on the matter.                                                                   
Senator Elton relayed his  understanding that a court decision would                                                            
not  be  rendered  until  after a  ballot  initiative  passed  in  a                                                            
statewide election.                                                                                                             
Co-Chair  Green studied the  calculations  of the dividend  payments                                                            
provided  in a POMV  process and the  impact on  the dividends  if a                                                            
percentage of the available  amount were appropriated for government                                                            
services. She  anticipated a "bidding war" could ensue  in effort to                                                            
establish support for certain percentage amounts.                                                                               
Senator  Elton  interpreted   the  graph  provided   by  the  Alaska                                                            
Permanent Fund  Corporation, titled  "Comparison of dividend  payout                                                            
methods;  Historical  and  forecasted   data"  [copy  on  file],  to                                                            
indicate that  if this resolution had been enacted  between 1990 and                                                            
the  current  year,  the division  would  be  "about  76 /  24".  He                                                            
qualified that  the method of managing  and investing the  assets of                                                            
the Fund  have  changed. He  stated that  under  this approach,  any                                                            
asset allocation  decision or market behavior changes  could distort                                                            
future earnings. He cited  testimony given by representatives of the                                                            
Corporation that  to replicate future "dividend behavior"  under the                                                            
current  method, an  allocation  of 60  or 65 percent  to  dividends                                                            
would be likely.                                                                                                                
Senator Hoffman suggested  that instead of entering a "bidding war",                                                            
the  legislature  should  present  options  to  voters  listing  the                                                            
impacts  that  allocating   different  percentages  for   government                                                            
services  would   have  on  the  dividend.   He  cautioned   against                                                            
practicing  "one-ups-man-ship."   He asserted  that  the  State  has                                                            
developed its oil reserves,  a nonrenewable resource, and allocating                                                            
the proceeds to all Alaskan  residents. He commented that whether or                                                            
not these residents  remain in Alaska in 25 years,  they would still                                                            
receive some  benefits of the resources.  He doubted any  recipients                                                            
of  the dividend  were  "buying a  golden  condo", but  opined  that                                                            
individuals  are   better  able  to  spend  these   funds  than  the                                                            
Senator  Bunde  relayed a  comment  made  during the  Conference  of                                                            
Alaskans that  the U.S. Congress has  been "generous" to  Alaska and                                                            
is are "not  unaware" of  "what we do up  here". He noted  that over                                                            
one-half of  the State's annual $10  billion budget is comprised  of                                                            
federal funding  and that  Alaska receives  $7 for every $1  paid to                                                            
the federal government.  He hoped this practice would  continue, but                                                            
warned  it  is  contingent  upon  the  perceptions   of  members  of                                                            
Congress. If Alaskans  vote to constitutionally "lock  up" money and                                                            
dedicate  its use  for personal  expenditures,  and  yet expect  the                                                            
federal  government to fund  basic services,  he predicted  Congress                                                            
could reconsider its appropriations to the State.                                                                               
Senator  Stedman calculated  that a  division of  60 percent  and 40                                                            
percent  of POMV  revenue  was  more realistic.  He  reiterated  his                                                            
mosaic  analogy and  the impact of  each component  on the  complete                                                            
State  fiscal  situation, specifically   the "doors"  this  proposal                                                            
could "close"  to other funding  sources, such  as from the  federal                                                            
Senator Elton  remarked that it is difficult to predict  the future.                                                            
He ascertained  Alaskans do not consider the Permanent  Fund to be a                                                            
"shock  absorber"   for  deficit   funding.  He  recalled   Governor                                                            
Murkowski's  statement  that  the "cushion"  is  the Constitutional                                                             
Budget  Reserve fund  and  that a  balance of  at  least $1  billion                                                            
should  be retained  in that  fund. Senator  Elton  agreed with  the                                                            
Governor on this point  and furthered that the Permanent Fund should                                                            
be managed in the same manner as other State resources.                                                                         
SENATOR  HOLLIS  FRENCH   emphasized  the  proposed  constitutional                                                             
amendment is the  focus and characterized it as "highly  principled"                                                            
and "highly pragmatic".  He expounded that the discussion represents                                                            
a  "classic  American struggle"  between  "power  and  liberty,"  of                                                            
whether money  should be appropriated to government  or individuals.                                                            
He furthered  that the issue  is pragmatic  in that if a portion  of                                                            
earnings  from the  Permanent  Fund are  to be used  for  government                                                            
services,  a proposal for  this must be crafted  that would  receive                                                            
public  approval.   He predicted  that a  proposal to  adopt a  POMV                                                            
method would  not receive public approval  without this resolution.                                                             
He remarked  upon  the Conference  of  Alaskans conclusion  that  to                                                            
receive  public  approval  for POMV,  an  "iron clad  guarantee"  of                                                            
continued dividend payments would be required.                                                                                  
Senator Elton  appreciated the comments.  He agreed the matter  is a                                                            
conflux of policy and philosophy  but stressed that politics is also                                                            
an  issue.  He  surmised  that  the  public  needs   assurance  that                                                            
dividends  would be guaranteed  if POMV were  enacted and he  stated                                                            
this resolution is the result of this need.                                                                                     
Senator Hoffman  asked about the division  of three to five  percent                                                            
POMV between  inflation proofing  and allocation  for dividends  and                                                            
government. He  asked whether the sponsor had considered  that five-                                                            
percent could be too high.                                                                                                      
Senator  Elton  stated  that in  constructing  this  resolution,  he                                                            
divorced himself from that  question and rather addressed allocation                                                            
of the income  "stream". He emphasized  that any discussion  of POMV                                                            
must  include  discussion  on  the  appropriate   annual  amount  to                                                            
withdraw  from  the Permanent  Fund.  He  qualified  that  different                                                            
entities reached  different conclusions  of the appropriate  amount.                                                            
Exampled that  the withdrawal amount  from the Harvard Endowment  is                                                            
decided annually  based on the performance of that  fund. He pointed                                                            
out that  other endowment  funds  are managed  differently than  the                                                            
Alaska Permanent  Fund. He stressed  that this Committee  as well as                                                            
the Senate  should scrutinize  the percentage  amount. He relayed  a                                                            
suggestion made  at the Conference of Alaskans that  five-percent is                                                            
appropriate and  would not impact the corpus of the  Fund over time.                                                            
Whatever decision  on the POMV amount, he stressed  would not affect                                                            
this "tag-along" Constitutional  amendment, because it is predicated                                                            
on the annual revenue.                                                                                                          
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
     CS FOR SENATE JOINT RESOLUTION NO. 24(JUD)                                                                                 
     Proposing  amendments  to  the  Constitution  of the  State  of                                                            
     Alaska to  guarantee the permanent fund dividend,  establishing                                                            
     the  earnings  reserve  account,  and relating  to  the  Alaska                                                            
     permanent fund; and providing for an effective date.                                                                       
This  was the  first  hearing  for  this resolution  in  the  Senate                                                            
Finance Committee.                                                                                                              
Co-Chair Wilken stated  this resolution "requires income earned from                                                            
the Permanent  Fund to be deposited into a constitutionally  created                                                            
earnings reserve account.  Fifty-percent of the income available for                                                            
distribution shall be transferred  from the earnings reserve account                                                            
and used as payments  to State residents as a dividend.  This Senate                                                            
joint  resolution takes  effect only  if voters  approve a  spending                                                            
limit amendment."                                                                                                               
SENATOR SCOTT OGAN, sponsor,  proposed this resolution to "enshrine"                                                            
the  existing  Permanent  Fund  dividend  program  into  the  Alaska                                                            
Constitution,  as it has been successful for many  years. He opined,                                                            
"Nothing [is]  broke[n]; we don't need to fix it."  and that usually                                                            
government  "fixes things until they  are broken." He stressed  that                                                            
the legislature  has exercised discipline in depositing  significant                                                            
portions of  the earnings of the Permanent  Fund into the  corpus of                                                            
the Fund.  He predicted that  Alaskans would  have no confidence  in                                                            
the  legislature until  the  dividend program  is  protected in  the                                                            
Senator  Ogan shared  the  impetus of  this proposal  resulted  from                                                            
discussions in  the Mat-Su Valley relating to subsurface  rights. He                                                            
remarked  that  the State  of  Alaska  has those  rights,  that  the                                                            
"people" own  those resources and  as trustees, the legislature  has                                                            
the obligation  to  manage those  resources  to the  benefit of  all                                                            
Alaskans.  He  stated the  Permanent  Fund  operates with  the  same                                                            
philosophy.   He  expounded   further  on   subsurface  rights   and                                                            
landowners before Statehood.                                                                                                    
Senator Ogan then spoke  to a spending limit, which he opined should                                                            
be carefully  considered.  He suggested  that making  adoption  of a                                                            
constitutional   amendment  contingent   upon  passage  of   another                                                            
amendment  could be considered  a revision  to the Constitution.  He                                                            
recommended obtaining a legal opinion on the matter.                                                                            
Senator Ogan referenced  an article published in the Anchorage Daily                                                            
News related to  operating the State government like  a business. He                                                            
asserted this  could be done. He noted that oil companies  decide to                                                            
reduce  operations when  prices  fluctuate, making  these  decisions                                                            
"behind  closed doors,"  and that  "unfortunately"  the legislature                                                             
does   not   have  this   "luxury".   Therefore,   he   stressed   a                                                            
constitutional spending  limit must be enacted, the dividend program                                                            
must be  enshrined  in the Constitution,  and  the State  government                                                            
should  be "run  like a  business". Only  then,  he surmised,  would                                                            
people  be  willing  to  consider  using   excess  earnings  of  the                                                            
Permanent Fund for government services.                                                                                         
Senator  Bunde  understood  the sponsor's  comment  that  subsurface                                                            
rights are held in trust  for all residents of Alaska, regardless of                                                            
the location of the resource.                                                                                                   
Senator  Ogan  affirmed  and cited  Alaska  Constitution  Article  8                                                            
Section 3, regarding common use.                                                                                                
Senator Bunde also understood  the sponsor supported a change of the                                                            
"purpose  of the  dividend"  to  provide  compensation  for loss  of                                                            
subsurface  rights. Senator  Bunde had understood  the dividend  was                                                            
originally  instituted  to provide ownership  of  the corpus of  the                                                            
Fund so  residents would  support  the continuation  of the Fund  in                                                            
exchange for receipt of a portion of the interest earned.                                                                       
Senator Ogan countered  that the purpose has not changed.  He stated                                                            
that 25 percent  of the royalties  generated from subsurface  rights                                                            
are deposited  into the Permanent  Fund, which is a reflection  that                                                            
the money "comes from a  commonly owned resource". He shared that he                                                            
has become aware  that as the reality for some property  owners that                                                            
they do not  own subsurface rights  is understood, the necessity  to                                                            
ensure that  all residents receive  a portion of subsurface  royalty                                                            
is heightened.                                                                                                                  
Senator Bunde  concluded that the sponsor attests  that the dividend                                                            
would  constitute compensation  for  lack of  personal ownership  of                                                            
subsurface rights.                                                                                                              
Senator  Bunde next  referred to  the sponsor's  testimony that  the                                                            
legislature  has been "good stewards"  of the Permanent Fund  by not                                                            
appropriating  significant  amounts  of  the  earnings  and  instead                                                            
depositing  it into the corpus of  the Fund. However, Senator  Bunde                                                            
pointed  out that  currently $35  million is  expended annually  for                                                            
hold harmless provisions and other purposes.                                                                                    
Senator  Bunde remarked  that the  dividend amount  could have  been                                                            
"zero"  in  2003  and  "lower  this  year."  He recalled   testimony                                                            
attesting that the dividend  comprises up to 30 percent of household                                                            
income for  some residents and that  loss of dividends could  result                                                            
in  30 percent  lower  income  in  some  regions  of the  State.  He                                                            
predicted  this  would have  a  significant  impact on  the  State's                                                            
welfare   system.  He   remarked   that  some   residents   indicate                                                            
understanding  of  this possibility,  but  continue  to support  the                                                            
current  system   of  managing  the  Fund.  He  warned   of  serious                                                            
consequences that could occur in years of low or no dividends.                                                                  
Senator  Ogan  responded  that  the  public  accepts  that  dividend                                                            
amounts increase and decrease  depending upon the performance of the                                                            
Fund. He  noted that the  Permanent Fund  Corporation has  advocated                                                            
for a  POMV management  method  for several  years and  that such  a                                                            
system could  be implemented at a  later date. However, he  stressed                                                            
that the existing system is sufficient at this time.                                                                            
Senator Ogan continued  commenting about government  spending and of                                                            
the difficulties  in reducing the budget. He concluded  the only way                                                            
to "get rid of  cancer is to cut off the blood supply"  and asserted                                                            
this must be done with government as well.                                                                                      
Senator  Bunde commented  recalled  that funding  was  added to  the                                                            
dividend  program due  to public demand.  He predicted  that  if the                                                            
existing  system  continues,   areas  of  the  State  that  rely  on                                                            
dividends would  suffer and subsequently the burden  would be placed                                                            
on  the State.  He warned  that  this could  result  in substantial                                                             
increase in State spending.                                                                                                     
Senator  Olson addressed  Senator  Ogan's assertion  that the  State                                                            
government should be operated like a business.                                                                                  
SFC 04 # 41, Side A 10:42 AM                                                                                                    
Senator  Olson cautioned  against operating  the  State in the  same                                                            
manner as the now bankrupt  Enron Corporation was operated, in which                                                            
management  is  suspected  of  illegal  activities   that  defrauded                                                            
shareholders and employees.                                                                                                     
Senator  Bunde restated  his concern  about the  impact sanctifying                                                             
dividends in the  Constitution would have on other  states and their                                                            
congressional  delegations  in  appropriating  federal  funding  for                                                            
Alaska if the  State reserves its  earnings for individuals  and not                                                            
for government services.                                                                                                        
Senator  Ogan pointed  out that the  resolution  was amended  by the                                                            
Senate  Judiciary  Committee  to  add  a  provision  to  repeal  the                                                            
Constitutional  amendment if  a final determination  is made  by the                                                            
U.S. Internal  Revenue Service that utilizing the  Permanent Fund in                                                            
this manner would cause the Fund to be taxable.                                                                                 
Co-Chair Wilken ordered the resolution HELD in Committee.                                                                       
Co-Chair Gary Wilken adjourned the meeting at 10:45 AM                                                                          

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