Legislature(1999 - 2000)
03/22/2000 09:06 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
March 22, 2000
9:06 AM
TAPES
SFC-00 # 57, Side A and Side B
58, Side A
CALL TO ORDER
Co-Chair John Torgerson convened the meeting at
approximately 9:06 AM.
PRESENT Co-Chair John Torgerson, Co-Chair Sean Parnell,
Senator Al Adams, Senator Lyda Green, Senator Loren Leman,
Senator Randy Phillips, Senator Gary Wilken and Senator P.
Kelly were present when the meeting started. Senator Donley
arrived later.
Also Attending:
SENATOR JERRY MACKIE; SENATOR JERRY WARD; REPRESENTATIVE
GARY DAVIS; REPRESENTATIVE JERRY SANDERS; RON LAURENSON,
Attorney, Morrison and Foerster, L.L.P., Attorneys at Law,
Attending via Teleconference: From Delta Junction: ART
GRISWOLD; JOHN GLOTFELTY; From Homer: MARY GRISWOLD; From
Kenai: JAMES SHOWALTER; SUSAN GIBSON; BILL PHILLIPS; RALPH
RECTOR; ORVILLE MCETHY; From Kodiak: KATE BALLENGER; From
MatSu: JUNE BURKHART; LINDA ANDERSON; JESSE CHANDLER; KEITH
LIPSE; From Petersburg: BRYAN VAN ETTINGER; From Ketchikan:
ORAL FREEMAN; From Anchorage: CARL WASSILIE; From Big Delta:
WALTER ST JOHN
SUMMARY INFORMATION
SJR 33-CONST AM: PERMANENT FUND
The Committee heard from the sponsor and took public
testimony. The resolution was HELD.
SJR 35-CONST AM: PERM FUND INCOME DISTRIBUTION
The Committee heard from the sponsor, legal representation
of the Permanent Fund Corporation and took public testimony.
The resolution was HELD.
SENATE JOINT RESOLUTION NO. 33
Proposing amendments to the Constitution of the State
of Alaska relating to the permanent fund and to
payments to certain state residents from the permanent
fund.
SENATOR JERRY MACKIE told of how he wanted to generate
public discussion on his proposed plan prior to the
resolution being heard in any committee. He stated there was
a huge response that represented both pro and con
viewpoints. He continued that he was appreciative of those
who supported the plan. Of those who opposed the plan, he
said he wanted to find out why to determine how the concerns
might be addressed.
Senator Mackie then began to describe the elements of the
resolution, referring to a handout entitled, Mackie Plan
Assumptions. [Copy on file.]
Senator Mackie stated the resolution is a constitutional
amendment that would require voter approval. If approved, he
said the plan would provide a one-time final dividend
payment of $25,000 from the permanent fund for each Alaskan
who is eligible for the dividend as of January 2001. He
qualified that no new people would move to the state to take
advantage of the payout because the one-year residency
requirement has already begun.
Senator Mackie noted the plan requires no new statutes or
changes to statutes.
Senator Mackie shared that after the $25,000 dividends were
paid out, which he estimated to total approximately $14
billion, the dividend program would end and there would be a
balance of $12 - $13 billion in the permanent fund. He said
the Permanent Fund Corporation estimates that 592,000 people
would be eligible to collect a dividend in the year 2002. He
added that the fund would continue to be managed by the
Permanent Fund Corporation, the principal would be
constitutionally protected against spending without voter
approval and that only the earnings would be available for
government spending.
Senator Mackie pointed out that the plan also calls for
inflation proofing the fund and stated that most people
agree that inflation proofing the fund was the responsible
thing to do.
Senator Mackie relayed that the Corporation gave an estimate
of the annual earnings off of the $12 billion balance using
rates of return of eight, ten and twelve percent. He
qualified that the Corporation issued a disclaimer stating
their prediction was an eight-percent rate of return.
However, he said their projections were always conservative
and he noted that the fund has never earned below ten
percent. Therefore, he believed ten percent was the most
reasonable assessment of future earnings. He referred to the
chart in the handout that showed that once the fund was
inflation-proofed earnings of ten percent would be $884
million in the first year of the plan. In the year 2003, he
said the fund would earn $923 million. He continued with
predicted earnings of $962 million and $1.4 billion in the
next two years with the amount continuing to grow. He said
the reason the earnings continue to increase was because the
plan does not change the current constitutional requirement
that 25 percent of oil revenues go to the corpus of the
permanent fund.
Senator Mackie's prediction was that after the payout, this
plan balances the budget with no additional taxes required.
He indicated his opposition to taxes.
Senator Mackie admitted there would be a significant impact
on dividend recipients' individual income taxes. He relayed
that the Alaska Society of Public Accountants has
volunteered to do a complete analysis on the tax
consequences for all tax brackets. He thought the members'
would be surprised to learn that individuals would actually
have more money after they received the one-time large
dividend, paid the tax, invested the remaining funds and
received an annual dividend from their personal investment.
Senator Mackie noted that the average Alaskan was in the 28
percent tax bracket. He said an individual would have to
earn over $250,000 per year in order to reach the 39 percent
tax bracket. He added that he was continuing to work on
determining how Individual Retirement Accounts (IRAs),
educational trusts and other investments could avoid some of
the tax burden.
Senator Mackie voiced another question raised was the affect
the payout would have on the eligibility of recipients of
such public assistance programs as welfare, Medicare, and
low income housing programs. He talked to Margaret Pugh,
Commissioner, Department of Health and Social Services and
was told that this could be the best public assistance
program ever to get people off welfare and to become self-
supporting. Senator Mackie avowed that the reason people are
poor was because they didn't have any money. He predicted
that giving this money would help people. He also
anticipated that the state would save money with the
reduction of public assistance.
Senator Mackie explained how current statutes does not
calculate permanent fund dividends as income for eligibility
for the Alaska Temporary Assistance Program Denali KidCare,
Adult Public Assistance, or the Longevity Bonus Program. He
also learned that permanent fund dividend income was not
included in the eligibility requirements for most Medicaid
benefits. However, he noted that the dividend would be
considered as income for those recipients of two programs,
food stamps and supplemental social security insurance.
Senator Mackie spoke to low income housing programs saying
that while current participants would not be affected
because federal guidelines allow for a one-time receipt of
cash, any new applicants would be affected. He added that
daycare assistance, the USDA child and adult care food
program, school meals eligibility, and Headstart would not
be adversely affected by the large payouts to eligible
Alaskans.
Senator Mackie next addressed child support saying that
Commissioner Perdue said the reason many people were on
welfare was because of back child support owed to custodial
parents. He told about the large amount of money that a
single parent household would receive after the parent and
children's' dividends were collected and after the deadbeat
parent's dividend was garnished. He suggested that the money
could provide for the children's education, provide job
training or fund a small business to allow the family to get
off public assistance. He quoted the Department of Health
and Social Services "It's not fair to assume these folks
want to stay on welfare. Any opportunity they have to get
off - they're gone." He stressed that this plan would
provide a tremendous opportunity for people who are
dependent upon the government for basic support.
Senator Mackie shared there were currently 11,000 cases of
overdue child support payments in the state, where dividends
are garnished to help make those payments. He estimated that
garnishing a $25,000 dividend from deadbeat parents, who are
Alaskan residents would collect $103 million for those
children. He continued that 7,500 of those cases would be
closed because the amount due was equal to or less than the
amount of the large payout. The balances due on the cases
would be reduced greatly, he stressed.
Senator Mackie next addressed the 10,100 defaulted student
loans equaling $80.9 million owed to the State Of Alaska
noting that the garnishment of the large dividend would
close 9,000 accounts and repay $67 million to the student
loan program.
Senator Mackie stated that the $25,000 dividends from the
current number of 3,500 felons would yield $87.5 million. He
told of how the funds are allocated to the Sexual Violence
and Domestic Abuse programs, the Violent Crimes Compensation
program and the Department of Corrections Prisoner
Rehabilitation program.
Senator Mackie believed that the permanent fund was
established by the voters to provide a source of revenue
that would pay for essential services when oil revenues
declined. He stated that only 40 percent of the current
residents of Alaska were residents when the permanent fund
was established. He continued that it wasn't until six years
after the fund was established that the legislature decided
to distribute some of the earnings among individual
residents. He argued that many people have since developed
the attitude that the permanent fund is only in place to
provide the dividends.
Senator Mackie admitted that he and other legislators had
been unwilling to argue this point with the public. He
divulged that he was as guilty as many others were of
championing on the campaign trail, to protect the citizen's
dividends at any cost. As a result, he remarked that because
of this attitude, "our state's going down the drain." Since
he and others were retiring, he shared that they could now
"tell it like it is."
Senator Mackie expressed that the state was unable to
adequately fund the University of Alaska, K-12 education,
deferred maintenance needs and road systems. He expounded
that this has had a significant negative impact on the
public at a time when Alaska is the richest state in the
nation. He surmised that there was not one other state that
would not want to trade places with Alaska's financial
problems.
He restated his opposition to tax, saying that to implement
a large sales tax would only drain money from the community
He did not appreciate the use of the word "bribe" but noted
that the $25,000 dividend was an incentive or a negotiation
to try to break the hold that people have on the notion that
the fund is only for providing dividends.
He talked about the different reasons the September 14, 1999
advisory vote regarding the use of the permanent fund had
failed. He asserted that those who claim the budget should
be cut further don't understand that an additional $1
billion cannot be cut from a $2 billion general fund. His
assessment of the reason the long-range budget plan was not
approved was because the legislature did an inadequate job
of educating the public. He stated that the plan "looked
like a blank check that we are writing to ourselves." He
added that the plan was too complicated and did not give the
voters enough time to thoroughly understand it.
Senator Mackie warned against "sticking our heads in the
sand," suggesting that the legislature should devise another
option to present to the voters. "If you don't like my plan
let me see your plan" he remarked and said he appreciated
others' plans. He made further comments about other plans
and surmised that other legislators would prefer the matter
to "go away."
Co-Chair Torgerson warned the witness to keep his comments
to the bill rather than speculation of the other member's
intentions.
Senator Mackie shared one of the reasons he developed this
plan was because of his concern about the future. He
cautioned that if the state's reserved continued to be spent
down, in four to five years the reserves would be gone and
the legislature would be unwilling to tax at the high rate
that would be necessary to fund government. The only option,
he stressed would be to tap into the earnings of the
permanent fund, which is what pays for the dividend program.
Senator Mackie stated that because of the state's
constitutional mandate to balance the budget, the
legislature would have no other choice but to use funds from
the earnings reserve account.
REPRESENTATIVE GARY DAVIS added that when the legislation
was introduced he immediately supported it. He noted that
this plan balances the budget without imposing new taxes.
Representative Davis gave a history of the expectations of
dividend recipients that initially were "wow, this is nice"
to entitlement sentiments after several years of the
program. He spoke of testimony from Alaskans challenging the
legislature to not take away their individual dividends. He
expressed that those people who argue so ardently against
using the permanent fund to help pay for government services
are not the same people trying to make the decisions
necessary to keep government functioning.
Representative Davis stressed that while this legislature is
attempting to make a $30 million budget reduction, future
legislatures will face the need to make much larger
reductions. He admonished those who simply call for
reductions without understanding what was involved.
Representative Davis stated that in the previous year, the
voters rejected a long-term solution to the budget situation
and that this resolution offered a short-term solution,
which may be what the voters wanted.
Senator Green asked if the sponsor had looked at what
statutes would need to be revised to incorporate this plan.
Senator Mackie said he had not because other than clean-up
language in the reviser's bill, there would be no other
changes to statute. He was careful to not make any changes
to statute.
Senator Green repeated Senator Mackie's comments that those
recipients of welfare, Medicaid, low income housing,
Temporary Aide for Needy Families (TANF) or Denali KidCare
would not loose their eligibility for those programs after
collecting the large dividend. She asked what would be the
impact on the hold harmless and if it would be only a
portion of the payout amount or the entire $25,000.
Senator Mackie understood that the hold harmless did not
automatically rise with the amount of the dividend, but was
an amount set in statute.
Senator Green wanted to know if the witness thought it was a
good thing for people who's income and need were the
qualifying factors for these programs to receive $25,000 and
not have their eligibility impacted. Senator Mackie
responded that it was a good thing in that those individuals
and families would become able to move off of welfare, which
he predicted all would do.
Senator Green said that she understood that those recipients
would not be required to move off welfare.
Senator Mackie deferred to the department for a specific
response. He expressed his prediction that many people would
leave these public assistance programs and that the entire
hold harmless provision would go away since there would no
longer be a dividend.
Senator Leman continued on Senator Green's point that the
sponsor had said the large dividend would not prohibit
people from qualifying for certain programs and that the
sponsor thought that was positive. Senator Leman found it
interesting that the sponsor took that approach rather than
considering it a positive incentive for those people if they
would not qualify for the programs.
Senator Mackie responded that the hold harmless was already
placed in statutes and that the legislature could change
those provisions if desired. After listening to those who
manage the programs and deal with the participants daily, he
realized that the participants would be gone.
Senator Leman asked if "gone," meant gone from the state or
from the programs.
Senator Mackie clarified that he meant those program
recipients would no longer participate in the public
assistance programs, although some could leave the state as
well.
Senator Leman asked where is the credibility of the
permanent fund program when applicants sign an oath that
they intent to stay in the state indefinitely.
Senator Mackie countered that was the way the system
currently operated and that he was not changing anything.
While he was not promoting that people leave the state after
receiving a large dividend, for those people who lived in
Alaska only to receive the benefits of the permanent fund he
said, "don't let the door hit you in the butt on the way
out." He stressed that he was born in Alaska, his family has
been in the state forever and that he would die in Alaska.
He suggested that if those people left, there might be
smaller class sizes and fewer people to worry about.
Co-Chair Torgerson stressed that this resolution did not
repeal any statutes. He thought that for Committee members
to drill the witness on the impact the resolution would have
on any laws was unfair.
Senator Wilken requested another opportunity to continue
this conversation after the public testimony. He wanted to
discuss the fund's earnings and how they would be projected
in relation to inflation proofing.
Senator Adams stated that the presentation was excellent but
that the plan was ahead of its time because the state was
not yet "broke". However, he surmised that this was the best
long-range plan before either the Senate or the House of
Representatives. He supported no taxes, and expressed "let
the people vote."
Senator Adams then asked about future generations.
Senator Mackie agreed the intergenerational issue was a
problem and admitted this was not a perfect plan. However,
he was also concerned about future generations if there is
no money to fund certain services such as the university
system and senior citizen programs.
Senator P. Kelly questioned whether this plan would actually
lose on the intergenerational point, because of the argument
that if the state is going to be able to pay for future
services, a long-range fiscal plan needs to be implemented
now.
Co-Chair Torgerson asked the sponsor to provide a written
response from the Department of Health and Social Services
regarding Senator Green's concerns about whether recipients
of a large dividend would qualify for certain public
assistance programs.
ART GRISWOLD testified via teleconference from Delta
Junction as an older resident who would lose money from his
Social Security Insurance as well as his tax deductions for
his minor children and his spouse if the large payout was
made. He encouraged funding of the land grant university
work as intended.
MARY GRISWOLD testified via teleconference from Homer that
she was opposed to SJR 33 and supported HB 411 as a better
method of providing essential government services while
preserving the dividend program.
JAMES SHOWALTER testified via teleconference from Kenai
against SJR 33 saying that legislatures did not know the
meaning of the word "no".
KATE BALLENGER testified via teleconference from Kodiak in
strong support for SJR 33 because she believed it would
relieve the current funding situation. She was tired of
hearing the debate on what programs to cut when this money
was available. She could not understand how anyone could
oppose this plan when it would eliminate the deficient.
JUNE BURKHART testified via teleconference from MatSu asking
Senator Mackie what part of no didn't he understand. She
took issue with his suggestion that voters did not
understand what they were voting for on the advisory vote.
She avowed that she knew what she was voting for.
BRYAN VAN ETTINGER testified via teleconference from
Petersburg against SJR 33 because he believed it would place
a wedge between divorced parents. He addressed the deadbeat
dad comment and took offense to the term.
JOHN GLOTFELTY testified via teleconference from Delta
Junction that the resources were given to all Alaskans in
the constitution and told the Committee not to remove the
citizens from the oversight of the fund.
Tape: SFC - 00 #57, Side B 9:54 AM
Mr. Glotfelty continued.
SUSAN GIBSON testified via teleconference from Kenai taking
issue with Senator Mackie's comment about people's attitude
regarding budget reductions. She suggested the legislature
get some courage to stand up to special interest groups.
LINDA ANDERSON testified via teleconference from MatSu
accusing the legislators of lining their pockets.
BILL PHILLIPS testified via teleconference from Kenai about
his mistrust of the legislature.
JESSE CHANDLER testified via teleconference from MatSu that
he thought the $25,000 payoff was "stupid".
KEITH LIPSE testified via teleconference from MatSu telling
the Committee to not use his dividend to fund welfare. He
charged that the people on public assistance would return
even after receiving the large payout.
Senator Mackie concluded thanking the Committee for hearing
this resolution. He promised that at the next hearing he
would ask those who support the plan to come testify.
AT EASE 9:59 AM / 10:04 AM
SENATE JOINT RESOLUTION NO. 35
Proposing amendments to the Constitution of the State
of Alaska to guarantee the permanent fund dividend, to
provide for inflation proofing, and to require a vote
of the people before changing the statutory formula for
distribution that existed on January 1, 2000.
Senator Green testified that she introduced this resolution
for the opposite reason of SJR 33.
Senator Green explained that this plan takes the current
statutory formula for dividend distribution and places it
into the Alaska Constitution as an amendment to Article 9
Section 15.
Senator Green continued that the resolution would guarantee
that the eighteen-year history of earnings distribution was
preserved, the dividend was protected, the current method of
inflation-proofing the corpus of the fund was unchanged and
includes no new taxes.
Senator Green surmised that once Alaskans felt confident
that the dividend program was safe for future generations
and that the integrity of the permanent fund was protected,
the discussions could then begin on what to do with any
excess earnings.
Senator Green thought this resolution was the most important
step the legislature could take to show Alaskans that the
promise would be kept to protect the dividend program,
inflation-proof the corpus and ensure the future of the
permanent fund for generations to come.
Senator Green shared that one of the issues that would be
brought to the Committee's attention regarding this
resolution was the tax question. She avowed that there was
no proof that the U.S. Internal Revenue Service (IRS) would
tax the permanent fund any differently after this amendment
to the constitution was adopted. On the other hand, she
conceded, there was no proof that the taxation would not
change. She disclosed that the IRS had never taxed the
program in the past and that to her knowledge, the Permanent
Fund Corporation has never requested an opinion on the
matter from the IRS.
Senator Green spoke of warnings that the legislature would
lose control over the permanent fund by placing it into the
constitution. She assured that the question of who qualified
and who received the dividends would always remain in the
legislature's perusal. She stressed that this was probably
the sidebar that protects and keeps the dividend program
from being reclassified for the purposes of federal
taxation.
Senator Green declared that she did not believe the IRS
would risk losing the revenues it currently receives from
taxes on dividends. She cited that since the beginning of
the dividend program, $8.9 billion had been distributed as
dividends and at a conservative rate of 15 percent, she
calculated the IRS has received $1.34 billion.
Senator Green continued that the legislature could still
change the dividend program or the method of inflation
proofing through a constitutional amendment approved by a
vote of the people.
Senator Green mentioned SJR 18 offered the previous session
that also proposed to place some of the dividend provisions
into the constitution. She talked about the differences in
the language between this resolution and SJR 35, saying the
resolution before the Committee at this time places only the
current statutes relating to dividends and inflation-
proofing into the constitution. Excess earnings, she added,
are left in statute under the provisions of SJR 35.
Senator Green asserted that this resolution would guarantee
the legislature access to excess earnings in times of need.
She stressed that before any excess earnings could be spent
for government services, the public needs to be assured the
dividend and inflation proofing was protected.
She referred to the booklet, An Alaskan's Guide to the
Permanent Fund, saying she thought it clearly states the
intent of the program when it was established. [Copy on
file] She emphasized the words, "generations to come" as
repeatedly mentioned in the booklet. She cited the reason
for the permanent fund was to "have less state income" and
that it, "reduces the opportunity for excessive state
spending." She told the Committee the legislators needed to
remember this statement explains why the dividend program
exists and why it must continue.
Senator Green then addressed a collection of spreadsheets
that show models and projections of the impact of various
plans on the permanent fund and the dividend program. She
cautioned that many more such spreadsheets would be
presented and that they are all "suspects" because none has
ever proven to be 100 percent correct. She noted this
applied to any scenarios that either confirmed or refuted
the objections of this resolution. She did however reference
the spreadsheets contained in the handout that gave five
scenarios ranging from spending none of the permanent fund
excess earnings to spending all of the earnings for
government services. According to these figures, she
surmised that by the year 2010, the individual dividend
changes by $100. Therefore, she asserted there was stability
built into the permanent fund dividend program that was the
envy of other dividend funds. She concluded that simply
protecting the dividend and inflation proofing and allowing
investments to continue was in the best interest of
Alaskans.
Senator Leman appreciated and shared the sponsor's desire to
keep the fund a permanent fixture. However, he warned that
under the current structure of paying dividends based on
realized gains, there was a high likelihood the dividend
would end in eight or nine years. He asked why the existing
structure was retained in the resolution instead of allowing
a change to calculate dividends based on a percent of the
value of the entire fund.
Senator Green responded that she did not think the fund
would be eliminated under the current practice of
calculating dividends.
Senator Leman relayed his understanding of how the fund
would greatly diminish under the existing methodology. He
qualified that while it has worked for the first 20 years of
the program it had a high risk of failure. The concept of
enshrining this method in the constitution concerned him
because it could backfire.
Co-Chair Torgerson clarified Senator Leman's argument
derived from a model presented by Callan and Associates that
predicted if inflation rose considerably, the scenario of a
depleted dividend could occur.
Senator P. Kelly relayed that Senator Leman's concern was
that if the current structure was placed into the
constitution, then the dividend amount would not be drawn
down. Senator P. Kelly thought those assumptions were based
on the premise that the dividends would be paid first from
excess reserves, then the unrealized gains and finally the
principal of the fund. However he was unsure that would
happen with the program enshrined in the constitution.
Senator Donley thought Senator Leman was right. He spoke to
a memo he had sent to members at the start of the year
regarding this matter laying out that if certain events
occurred, Senator Leman's predictions would occur. Senator
Donley had proposed a solution to a particular caveat in the
dividend calculation formula. His explained his suggestion
would change the calculation in the event of certain
occurrences.
Senator Wilken requested a graphic representation, such as a
pie chart showing the program today and what would occur if
the measure were to pass.
Senator Green said she would comply but noted that the
resolution actually changed nothing from the current system.
Co-Chair Torgerson shared that he wrote a memo to the
executive director of the Permanent Fund Corporation
requesting an official position on this legislation,
specifically as it related to the tax exempt status of the
corporation. He received a response saying the matter would
be taken up at the March 8 Board of Directors Meeting.
RON LORENSEN, Attorney, Simpson, Tillinghast, Sorensen and
Lorensen, Attorneys at Law, serving as outside council to
the Permanent Fund Corporation for five years testified
about a legal opinion obtained by the corporation on the
taxation question.
Mr. Lorensen gave a history of the possible taxation of the
dividend and what could be done to minimize the tax. He
recounted how the corporation sought two outside legal
opinions in 1988, each of which took a different approach to
the question. He said the opinions both advised that the
permanent fund should not be taxable and suggested certain
changes to improve the argument that it should remain tax
exempt. He remarked that most of those suggested changes
were subsequently implemented including a number of changes
made by the legislature in 1994. As a result of the changes,
he stated that it was the general view that an argument
claiming the permanent fund was subject to taxation would be
very weak.
Mr. Lorensen continued sharing that in 1998, a similar
proposal for a constitutional amendment, SJR 18, was
introduced in the legislature. At that time, he said, the
board felt it was advisable to seek an update of the earlier
tax opinions to learn if the changes made had an impact of
minimizing tax concerns and also to assess how the proposed
changes might implicate arguments to make the fund taxable.
That opinion, Mr. Lorensen informed the Committee, updated
the earlier opinions to incorporate the adopted changes to
the fund and also address the impacts of SJR 18. He relayed
that the opinion advised that imbedding the dividend program
into the constitution would create a significant risk of
subjecting the permanent fund income to taxation. He cited
the opinion gave two inter-related reasons, one was called a
"private interest" in funds. He explained that when a
private interest was created in government funds, the funds
lose the governmental tax immunity protection. The other
reason cited in the opinion, he continued was whether or not
the income accrues to the state. He expounded that the
underlying question was whether the state legislature, the
body with the power of appropriation, also has the power of
appropriation with respect to that income. He pointed out
that by imbedding the appropriation of the dividends
permanently into the state constitution, the constitution
takes the appropriation power away from the legislature. As
a result, he asserted the argument strengthens that the
income no longer accrues to the state and becomes a private
interest and subsequently becomes taxable income.
Mr. Lorensen said that the board had been concerned about
the confidentiality of that opinion because of the
conclusions contained, which could come back to harm the
state if the information became public. He told the
Committee that he had communicated to the board, the co-
chair's conviction that this opinion was an important aspect
of the public policy debate.
Mr. Lorensen disclosed that the board has authorized him to
provide a copy of the opinion to the Committee "with no
strings attached." He expressed that it was the board's
preference that the information remains confidential but
that the board offered the opinion to the Committee to use
as it deemed appropriate.
AT EASE 10:26 AM / 10:27 AM
Co-Chair Torgerson relayed that he had a lengthy debate with
the corporation and Mr. Lorensen about whether or not this
opinion should be made public. Co-Chair Torgerson said that
during the break, another Committee member suggested to him
that the opinion should not be accepted if it could
jeopardize the permanent fund. However, he concluded that
the question of whether to enshrine the dividend in the
constitution is a larger public policy question. He said in
order for that question to be considered, Alaskans need to
know the potential consequences.
Co-Chair Torgerson stated that he was opposed to the
Committee having an executive session to review the contents
of the legal opinion only to emerge with a decision made
without any public input or public record.
Co-Chair Torgerson asked the witness whether he thought that
releasing the opinion to the public would jeopardize the
status of the permanent fund.
Mr. Lorensen answered that he did not believe that releasing
the opinion would jeopardize the permanent fund. He added
that the opinion concludes that the arguments are stronger
regarding the tax exemption of the current status of the
fund than if the dividend program were placed in the
constitution.
There was some discussion between Co-Chair Torgerson and Mr.
Lorensen about the need for information provided to the
Committee in a public hearing to be public information
versus information garnered in an executive session. Mr.
Lorensen concluded that while he was not convinced the
opinion needed to be made public, he was prepared to release
the opinion to the Committee to do with it as saw fit.
Senator Phillips asked for specific clarification from the
legal advisor to the corporation, Mr. Lorensen, if the tax
on the permanent fund would greatly increase if the
resolution were adopted. Mr. Lorensen affirmed it would be
substantially greater, "from something well below 50 percent
now to well in excess of 50 percent, I believe."
When asked by Senator Phillips if he was guessing at this
assessment, Mr. Lorensen qualified that "I'm just doing the
best I can. I'm not the court. I'm not the ultimate
decider."
Senator Green said she knew the defining issue on the
vulnerability of taxation was public interest versus private
interest. She asked for a clarification of public interest.
Mr. Lorensen responded that the matter was not a question of
public interest versus private interest, it was a question
of whether or not a private interest was created. He
explained private interest applied to an individual citizen
that was independently enforceable, or could enforce him or
herself. He stated that placing the dividend program into
the constitution would provide that private interest because
it would allow a citizen to make a constitutional claim for
the dividend if he or she did not get one.
Mr. Lorensen continued answering Senator Green's question
saying that the other issue was whether or not the
legislature had the ability to exercise the power of
appropriation over the money.
Senator Green asked about the issue of whether the
determination of who could receive the dividend was subject
to legislative change. She wanted to know if that was
considered when the board was discussing the taxability
question and considering obtaining legal advice. She
suggested the legislature could make eligibility
determinations based on need, senior citizen status, or any
permutation of demographic information. She thought that the
private interest would not be established if the legislature
had the option of redefining eligibility each year.
Mr. Lorensen did not think this specific variable was raised
with the attorneys. However, he stated Senator Green's
suggestion probably did not address the question of whether
or not a private interest existed at any one point in time.
He explained that while who was entitled to the private
interest could change, the fact that an underlying private
interested existed, would not change.
Senator Green commented that even if the constitution were
amended as proposed in this resolution, a future amendment
was possible through the same process. Therefore, she
concluded that the legislature would always have some
involvement in the dividend program through the budget
process unless the corporation decided to distribute the
dividends itself.
Mr. Lorensen said the comments about amending the
constitution were correct but that the legislature would not
have control over the vote of the people, which would be
required to pass an amendment.
Co-Chair Torgerson thought that the Committee would have to
read the opinion to understand the witness's private
interest argument.
Senator Adams worried that the federal tax rules were
"governed by the creator," meaning that the federal
government adopted laws when and how they benefited the
federal government. He asked what amount the dividend would
be using the model presented the previous year.
Mr. Lorensen understood the question but did not know the
answer. He did not know if the corporation had calculated
those figures or not.
Senator Adams restated his question to ask, if the fund lost
tax immunity, what percentage or amount of the interest
would the federal government take from the fund in the form
of taxes.
Mr. Lorensen answered it would be approximately 39 percent
Co-Chair Torgerson asked if the board took a position on
this resolution. Mr. Lorensen replied it had not.
Senator Phillips wanted to know if the board would take a
position if the legislature requested it do so.
Mr. Lorensen could not speak for the board.
ART GRISWOLD testified via teleconference from Delta
Junction that he believed more research should be done on
the tax structure, but once resolved, supported the
resolution.
LYNN BURKHARDT testified via teleconference from Homer that
if the public asked the legislature to not spend the
permanent fund, then it should not be spent. She talked
about the payoffs of the oil industry compared to the
environmental impacts.
RALPH RECTOR testified via teleconference from Kenai asking
why the tax would be so high because it should be calculated
on the number of shareholders. "Keep your hands off of our
money."
JUNE BURKHART testified via teleconference from MatSu in
strong support of the resolution and commended the sponsors.
She believed that the fund was created for the benefits of
all Alaskans forever.
ORAL FREEMAN testified via teleconference from Ketchikan in
agreement with the resolution. He repeated the previous
speaker's comment that the fund was for all Alaska.
CARL WASSILIE testified via teleconference from Anchorage in
favor of SJR 35 saying he thought the tax concerns could be
resolved with further discussion.
Tape: SFC - 00 #58, Side A 10:47 AM
JOHN GLOTFELTY testified via teleconference from Delta
Junction in support of the resolution and questioned why the
tax situation would change.
MARY GRISWOLD testified via teleconference from Homer in
opposition of the resolution although she did support the
concept of protecting the fund. She suggested HB 411 was a
better method. She gave detailed to explain her reasoning.
JAMES SHOWALTER testified via teleconference from Kenai
thanking the sponsors for introducing the bill, which he
favored. He stated that it protects the oil revenues.
SUSAN GIBSON testified via teleconference from Kenai in
support of the resolution. She suggested nonessential
services should be eliminated and that if done so, there
would be enough funds for the budget.
DALE BONDURANT testified via teleconference from Kenai about
his understanding of the purpose of the permanent fund and
his support of the resolution.
LINDA ANDERSON testified via teleconference from MatSu that
she thought the government had not been cut enough.
JESSEE CHANDLER testified via teleconference from MatSu in
favor of SJR 35.
CLIFTON CHANDLER testified via teleconference from MatSu
that he believed this resolution protected the permanent
fund for his and his children's future.
KEITH LIPSE testified via teleconference from MatSu thanking
Senator Green for looking out for the public's interest in
the permanent fund.
WALTER ST JOHN testified via teleconference from Big Delta
that the IRS would love SJR 33 to become adopted.
ORVILLE MCETHY testified via teleconference from Kenai in
support of SJR 35. He commented on the fast ferries in
British Columbia, Canada and noted that Governor Knowles was
planning to purchase two for Alaska.
Co-Chair Torgerson ordered the resolution HELD in Committee.
ADJOURNED
Senator Torgerson adjourned the meeting at 10:57 AM.
SFC-00 (18) 03/22/00
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