Legislature(2003 - 2004)
03/16/2004 09:07 AM Senate FIN
| Audio | Topic |
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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 16, 2004
9:07 AM
TAPES
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.
PRESENT
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
participants.
SUMMARY INFORMATION
HB 233-INCREASE EDUCATION FUNDING
The Committee heard from the sponsor and the bill was held in
Committee.
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
Committee.
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
Committee.
Co-Chair Wilken stated this bill, sponsored by Representative
Wilson, "increases the student dollar by $419 to $4,588 per
student."
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
classroom.
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
state.
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
note.
Representative Wilson clarified that $4,010 was the base student
allocation amount the previous year when this bill was first
introduced.
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
billion.
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
Constitution.
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
conducted.
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,"
etc.
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
Alaska.
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
Constitution.
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
discretionary.
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
government.
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
government.
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
Constitution.
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.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 10:45 AM
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