Legislature(1993 - 1994)

03/09/1994 01:53 PM Senate JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                        SENATE JUDICIARY                                       
                          March 9, 1994                                        
                           1:53 p.m.                                           
  MEMBERS PRESENT                                                              
 Senator Robin Taylor, Chairman                                                
 Senator Rick Halford, Vice-Chairman                                           
 Senator Dave Donley                                                           
 Senator Suzanne Little                                                        
  MEMBERS ABSENT                                                               
 Senator George Jacko                                                          
  COMMITTEE CALENDAR                                                           
 SENATE BILL NO. 170                                                           
 "An Act relating to income of the permanent fund."                            
 SENATE CS FOR CS FOR HOUSE BILL NO. 254(JUD)                                  
 "An Act relating to open meetings of governmental bodies."                    
 HOUSE BILL NO. 71                                                             
 "An Act relating to the involuntary dissolution of Native                     
 corporations; and providing for an effective date."                           
 CS FOR SENATE BILL NO. 286(JUD)                                               
 "An Act relating to special conditions of mandatory parole;                   
 relating to conditions of mandatory and discretionary parole;                 
 extending the termination date of the Board of Parole; and                    
 providing for an effective date."                                             
 HOUSE BILL NO. 280                                                            
 "An Act adopting the Uniform Custodial Trust Act."                            
 CS FOR HOUSE BILL NO. 415(JUD)                                                
 "An Act making corrective amendments to the Alaska Statutes as                
 recommended by the revisor of statutes; and providing for an                  
 effective date."                                                              
  PREVIOUS SENATE COMMITTEE ACTION                                             
 SB 170 - See State Affairs minutes dated 1/26/94, 1/28/94, and                
 HB 254 - See Judiciary minutes dated 3/16/94, 3/21/94, and 3/30/94.           
 HB  71 - See Community & Regional Affairs minutes dated                       
 SB 286 - See Labor & Commerce minutes dated 2/15/94.  See                     
          Judiciary minutes dated 3/2/94.                                      
     HB 280 - See State Affairs minutes dated 3/2/94.                          
 HB 415 - No previous senate committee action.                                 
  WITNESS REGISTER                                                             
 Senator Steve Rieger                                                          
 State Capitol, Juneau, AK 99801-1182¶465-3879                                 
  POSITION STATEMENT:  Prime Sponsor of HB 170                                 
 Jim Kelly, Resource & Liason Officer                                          
 Alaska Permanent Fund Corporation                                             
 P.O. Box 25500, Juneau, AK 99802-5500 ¶465-2059                               
  POSITION STATEMENT:  in favor of HB 170                                      
 Micheal J. Stark, Assistant Attorney General                                  
 Criminal Division                                                             
 Department of Law                                                             
 P.O. Box 110300, Juneau, AK 99811-0300¶465-3428                               
  POSITION STATEMENT:  testified on HB 286                                     
 Larry LaBolle, Aide                                                           
 Represenative Foster                                                          
 State Capitol, Juneau, AK 99801-1182¶465-3789                                 
  POSITION STATEMENT:  Prime Sponsor of HB 71                                  
 Karen J. Brand, Aide                                                          
 House Rules Committee                                                         
 State Capitol, Juneau, AK 99801-1182¶465-4451                                 
  POSITION STATEMENT:  Offered information on HB 280                           
 Arthur A. Peterson, Commissioner                                              
 National Conference of Commissioners on Uniform State Laws                    
 350 N. Franklin St., Juneau, AK 99801¶586-4000                                
  POSITION STATEMENT:  in favor of HB 280                                      
 David R. Dierdorff, Revisor of Statutes                                       
 Legal Services                                                                
 Legislative Affairs Agency                                                    
 130 Seward St., Suite 409, Juneau, AK 99801-2105¶465-2450                     
  POSITION STATEMENT:  Offered information on HB 415                           
  ACTION NARATIVE                                                              
 TAPE 94-14, SIDE A                                                            
 Number 001                                                                    
 CHAIRMAN ROBIN TAYLOR calls the Senate Judiciary Committee meeting            
 to order at 1:53 p.m.                                                         
 INCOME) as the first order of business before the Senate Judiciary            
 Committee today.                                                              
 SENATOR RIEGER, Prime Sponsor, states discussions took place in the           
 legislature in the early 1980s regarding the order of priorities of           
 uses of the permanent fund earnings.  The result of those                     
 discussions was that dividends were given priority over inflation             
 proofing of the permanent fund.  Sentor Rieger feels that was an              
 incorrect prioritization.  He considers the permanent fund to be a            
 long range fund for Alaska which needs protection for future                  
 generations.  Senator Rieger believes not inflation proofing the              
 fund puts it in jeopardy.  SB 170 would place inflation proofing as           
 the top priority by referring to income as real income.  Senator              
 Rieger acknowledges that this could slow the rate of growth of                
 dividends.  He notes that in the previous committee, the Director             
 of OMB (The Office of Management & Budget) testified that the                 
 Administration was in support of SB 170.                                      
 SENATOR HALFORD comments he would never send the House a title                
 indicates that changing the priority between inflation proofing and           
 dividends should not necessarily have an effect on the dividend               
 payment schedule.  Senator Halford asks if the change would make              
 the reserve more critical for dividends than for inflation                    
 SENATOR RIEGER explains that the change would retain, in statute,             
 the various provisions describing the uses of earnings of the fund,           
 other than removing the statutory provision which would re-invest             
 a sum equal to inflation.  That would no longer be necessary.                 
 SENATOR HALFORD comments that would not be necessary due to the               
 change from net income to real income.                                        
 SENATOR RIEGER states that when there is positive inflation, real             
 income would be smaller than total return.  SB 170 attempts the               
 least amount of switching around of the statutes.  Senator Rieger             
 states that the earnings reserve is necessary under the current               
 regime to cover short falls in inflation proofing, or to cover                
 short falls in the pay out rule because of five year averaging.  If           
 inflation proofing is given a higher priority, then one of the                
 reasons to have the reserve is removed.  SB 170 does not speak to             
 what should be done with the reserve.                                         
 Number 119                                                                    
 SENATOR HALFORD states that there is more involved than changing              
 the priority between dividends and inflation proofing.  He                    
 expresses concern with other provisions and their effect on                   
 dividends due to the way the bill is drafted.  Senator Halford asks           
 the difference between what would be taken out in the net income              
 scenario, versus the real income scenario.                                    
 SENATOR RIEGER responds that the corporation appears to be backing            
 away from their conservative assumption, the long term greater                
 return being 9 percent total return, with a 6 percent inflationary            
 environment.  Senator Rieger thinks the corporation is discovering            
 the advantages of reviewing asset allocation as a fundamental                 
 portfolio strategy.  In many forcasts, an inflationary environment            
 is using up two-thirds of the total return.                                   
 SENATOR HALFORD asks if it would still use up more than half.                 
 SENATOR RIEGER responds it would not always do so.  Some forecasts            
 put inflation at the 4 to 5 percent range, with the total return              
 above 10 percent.  Senator Rieger states that it would depend upon            
 the amount allocated to equities, as opposed to the amount                    
 allocated to bonds.  Senator Rieger hopes that the permanent fund             
 will earn more than a prudent portfolio while managing the money in           
 a more diversified manner.                                                    
 SENATOR LITTLE asks if Senator Rieger intends to change the title             
 of SB 170.                                                                    
 SENATOR RIEGER replies he does not have a problem with tightening             
 up the title, but feels the Rules Committee would be the best place           
 to address that concern.                                                      
 CHAIRMAN TAYLOR expresses desire to deal with the title now in a              
 committee substitute.                                                         
 Number 204                                                                    
 JIM KELLY, Research & Liason Officer, Alaska Permanent Fund                   
 Corporation, states that SB 170 will protect the permanent fund               
 principal better than the status quo, in the case of a conflict               
 over the fund by the trustees.  Asset allocation is done annually             
 with five year projections of capital returns.  Mr. Kelly explains            
 that assumptions are used to determine earnings for asset classes.            
 The main job of the trustees is to determine how much money they              
 are going to put into those asset classes.  The corporation                   
 estimates a rate of return at 8.37%, on average, over the next five           
 years.  They project an inflation rate of 4 percent, therefore,               
 beating inflation by 4.37 percent.  Mr. Kelly notes that after five           
 years, the corporation would beat inflation by only 3 percent,                
 which is closer to the historical average.                                    
 CHAIRMAN TAYLOR asks Mr. Kelly if he is projecting  4%.                       
 MR. KELLY clarifies that this year the corporation is looking at a            
 5% rate of return.  Inflation is only 2.95%.  Mr. Kelly explains              
 that for the first seven months of the year, a rate of return of              
 7.95% is projected, which would beat inflation by 5 percent.  Mr.             
 Kelly projects that the corporation would beat inflation by 4.37%,            
 with inflation projected at 4%.                                               
 CHAIRMAN TAYLOR points out that since President Clinton expressed             
 concerns, the interest rates were increased by the Federal Reserve            
 in order to slow inflation.                                                   
 MR. KELLY informs the committee of a board meeting tomorrow, March            
 10,  discussing this issue.  Mr. Kelly reiterates that the                    
 corporation's best estimate is a rate of inflation of 4%.                     
 SENATOR DONLEY asks how income is treated when the decision is made           
 to sell stock.                                                                
 MR. KELLY responds that earnings are net income, when realized                
 gains are taken into account.  Mr. Kelly states that over the long            
 term, the corporation views net income and total return as the                
 same, because eventually the profits are taken.  A projected 9%               
 average earnings includes returns on investments, stocks,                     
 dividends, interest, and capital gains.                                       
 SENATOR DONLEY notes that when stock is sold, a great deal of                 
 income could come in at one time.                                             
 MR. KELLY informs the committee that in the spring of 1987, the               
 corporation sold $700 million from the index account, which                   
 resulted in $300 million in profits.  The index account is a                  
 bankers trust, with the corporation deciding when to sell.  Mr.               
 Kelly notes that the corporation has $5 billion in the stock market           
 now.  That investment has been averaging $7 million per month in              
 realized gains.                                                               
 Number 267                                                                    
 SENATOR HALFORD notes that sheet #1 is the status quo, while sheet            
 requests that the comparisons be made in real dollars instead of              
 nominal dollars in order to realize the purchasing power of the               
 dividends.  The dividend seems to climb although it does not.                 
 Senator Halford explains that the status quo shows a dividend of              
 $1166 in five years, while SB 170 cuts that dividend almost in                
 half.  Senator Halford asks what the reasoning is behind that and             
 how would work.                                                               
 MR. KELLY responds that the real income, the amount on sheet #9, is           
 net income minus inflation proofing.  That explains the difference            
 in dividend amounts.  In response to Senator Halford, Mr. Kelly               
 states that SB 170 takes the inflation component out of the net               
 SENATOR HALFORD asks how we  would re-prioritize inflation proofing           
 versus dividends without doing that.                                          
 MR. KELLY replies that putting a line in the law saying, "not                 
 withstanding any other provision of law, inflation proofing shall             
 be paid first."                                                               
 SENATOR HALFORD feels that dividends or inflation proofing first              
 work well.  However, he does not want to adopt a schedule that will           
 increase the ability to spend General Fund money at the expense of            
 the dividend revenue.                                                         
 CHAIRMAN TAYLOR asks if it would actually have that impact.                   
 SENATOR HALFORD says the chart illustrates that impact.                       
 MR. KELLY points out that on sheet #9, the add column under                   
 Reserves is a large portion of the dividend stream.                           
 SENATOR HALFORD asserts that a huge reserve is being built in order           
 to get the money to the General Fund.                                         
 MR. KELLY states that sheet #10 illustrates what happens when a               
 huge reserve is built.                                                        
 SENATOR HALFORD comments that then the dividend would be cut in               
 SENATOR RIEGER explains that the best case forecast shown as #1               
 seems very conservative because it reflects the same assumptions of           
 the dividend fund of ten years ago.  At that time, two-thirds to              
 three-quarters of the permanent fund was in bonds.  He notes that             
 the size of the dividend, when used for comparison, actually makes            
 a draw on the reserves in order to pay that amount.  The dividend             
 is inflated; the comparison is unfair.                                        
 SENATOR HALFORD points out the progression of falling dividends               
 under SB 170.                                                                 
 SENATOR RIEGER states more realistic returns need to be reviewed.             
 The rate of growth of dividends is slower.  He refers to sheet #11            
 and notes that the dividend is still $2000 at the end of the page.            
 SENATOR HALFORD comments that $2000 in real dollars is probably               
 less than the current dividend.                                               
 MR. KELLY asks the committee to compare sheet #3, with sheet #11.             
 SENATOR HALFORD suggests that the same assumptions should be taken            
 with or without SB 170.  He asks if there is a sheet with a 9.93%             
 rate of return and 4% inflation.                                              
 MR. KELLY replies that sheet #3 fits those specifications.                    
 SENATOR HALFORD comments the comparison would be sheets #2, #3, and           
 Number 362                                                                    
 SENATOR LITTLE asks for an explanation of the charts regarding                
 financial projections of the permanent fund.                                  
 MR. KELLY responds sheet #1 was the basic chart; the other charts             
 reflect different assumptions.  Mr. Kelly discusses the various               
 components of the charts.  The specific differences in the charts             
 are expressed in the bold type at the bottom right corner of the              
 SENATOR HALFORD asks how much time the corporation would need to do           
 the same set of charts in real numbers.                                       
 MR. KELLY replies the charts have already been completed.                     
 SENATOR HALFORD requests a copy of the charts.                                
 CHAIRMAN TAYLOR asks which chart gives the highest yield.                     
 MR. KELLY directs the committee to sheets #15 and #16.  Sheet #15             
 assumes that the money is added to the reserve account, while sheet           
 sheets assume there would be an 11.33% rate of return.                        
 SENATOR HALFORD asks if there is a comparison of the current status           
 with those returns.                                                           
 MR. KELLY responds that a comparison is contained in sheets #7 and            
 CHAIRMAN TAYLOR and SENATOR HALFORD discuss those two sheets.                 
 MR. KELLY states the corporation expects to beat inflation by 4.5%            
 over the next five years.  If a formula of growth for the dividend            
 was compared to a cap, this would allow the dividend to grow over             
 the long term.                                                                
 SENATOR HALFORD opposes changing the formula, which would                     
 drastically reduce future dividends.  For every $100 million taken            
 out of the dividend revenue stream, $32 million would be taken away           
 from children and $15 million would be taken away from retired and            
 senior citizens.  He asks if the sponsor is interested in making              
 inflation-proofing a higher priority, or the changing the formula.            
 Number 437                                                                    
 SENATOR RIEGER responds nothing has been earned unless inflation              
 has been beaten.  Accounting has not been structured to accommodate           
 inflation.  We are leading ourselves to believe that we are doing             
 better than we really are.  He thinks real earnings should be used            
 when adopting policies, otherwise it is misleading.  The method on            
 which earnings are based needs to be restructured.  SB 170 would              
 structure payouts on what is really earned, which would give the              
 most protection to the corpus.  In concluding, Senator Rieger                 
 states SB 170 prioritizes inflation-proofing.                                 
 SENATOR HALFORD states what is being done to dividends is for the             
 benefit of the reserve.  He thinks it would help with inflation-              
 proofing the permanent fund management structure, which would be              
 better than a cap.  SB 270 could be drafted to match the current              
 permanent fund payout, the reserve would then not be as needed.               
 The reserve would then be more likely to be placed in state                   
 revenues to help fund government.  Senator Halford states that                
 changing the permanent fund dividend formula, while continuing to             
 spend, would result in disaster.                                              
 CHAIRMAN TAYLOR suggests providing a formula in the bill which                
 would roll the reserves into the corpus of the fund after they                
 reach a certain level.                                                        
 SENATOR HALFORD talks about the schedules for setting dividends.              
 He thinks reducing the dividends and using that reduction for                 
 government expenses would be a regressive form of taxation.                   
 CHAIRMAN TAYLOR thinks both the long-term and short-term concerns             
 can be addressed by changing where the money goes.                            
 Number 514                                                                    
 SENATOR HALFORD states that Hammond's original proposal was much              
 simpler than all this stuff: put half the money back into the                 
 principal for inflation-proofing, and put the other half into                 
 CHAIRMAN TAYLOR states that formula isn't any good if the fund is             
 only earning 10%, and inflation just hit 15%.  A simple answer to             
 a complex problem will normally be incorrect.                                 
 SENATOR HALFORD asks Mr. Kelly what the highest rate of return has            
 been on the permanent fund.                                                   
 MR. KELLY responds the highest rate of return was somewhere around            
 12% to 13%, but he could not say for certain.                                 
 CHAIRMAN TAYLOR says he thought it was up around 14% or 15% a                 
 couple of years ago.                                                          
 MR. KELLY replies that would have been total return; he is speaking    ng   
 of cash return.                                                             
 Number 535                                                                    
 CHAIRMAN TAYLOR comments the committee needs to look at a title               
 change and discuss the issue further.  The Chairman asks if there           
 is any further comment on SB 170.  Hearing none, the chairman                 
 announces he will bring SB 170 up at a later date.                            
 CHAIRMAN TAYLOR brings up  CSHB 254(JUD) am(ct rule fld)  (OPEN               
 MEETING ACT) as the next order of business before the Senate                  
 Judiciary Committee.                                                          
 Number 549                                                                    
 SENATOR LITTLE moves the adoption of SCS CSHB 254(JUD).  CHAIRMAN             
 TAYLOR asks if there is any objection.  Hearing none, the Chairman            
 states the committee substitute has been adopted.                             
 Number 552                                                                    
 SENATOR LITTLE states there may be some amendments offered on                 
 HB 254, though she does not expect there will be any major                    
 CHAIRMAN TAYLOR thanks Senator Little and brings up the next bill             
 on the agenda.                                                                
 OF PAROLE) as the next order of business before the Senate                    
 Judiciary Committee.  The Chairman calls Mr. Stark to testify.                
 Number 569                                                                    
 MICHEAL STARK, Assistant Attorney General, Criminal Division,                 
 Department of Law, states there were two purposes to HB 286.  The             
 first involved extending the Board of Parole.  The second purpose             
 is to address the historical practice of having a single board                
 member set special conditions of mandatory parole.  The intent is             
 to acknowledge and validate that practice.  Mr. Stark states that             
 the concerns expressed in the last meeting by Senator Halford are             
 addressed on page 2 of the bill.  (Senator Halford wanted a number            
 of discretionary parole conditions, conditions that are mandatory             
 by regulation and by direction of the board, changed to mandatory             
 parole conditions.)                                                           
 SENATOR LITTLE asks Mr. Stark if he sees any problems with placing            
 these provisions in statute.                                                  
 Number 591                                                                    
 MR. STARK responds he does not.  Mr. Stark states he worked closely           
 with Mr. Luckhaupt of Legislative Legal Services in drafting the              
 bill, and no problems were foreseen.                                          
 CHAIRMAN TAYLOR asks Mr. Stark if he discussed the bill with                  
 Senator Halford.                                                              
 MR. STARK replies he did not.                                                 
 SENATOR HALFORD comments he has seen the bill and thinks it is a              
 step in the right direction.                                                  
 CHAIRMAN TAYLOR asks if there are further questions or if anyone              
 else would like to testify on SB 286.  Hearing none, the Chairman             
 states the committee substitute needs to be adopted.                          
 SENATOR HALFORD moves the adoption of CSSB 286(JUD).                          
 TAPE 94-14, SIDE B                                                            
 Number 001                                                                    
 CHAIRMAN TAYLOR, hearing no objection, states the committee                   
 substitute has been adopted.  The Chairman asks the pleasure of the           
 SENATOR HALFORD makes a motion to discharge SB 286 from the Senate            
 Judiciary Committee with individual recommendations.  Hearing no              
 objection, it is so ordered.                                                  
 CHAIRMAN TAYLOR brings up  HB  71  (DISSOLUTION OF NATIVE                     
 CORPORATIONS) as the next order of business before the Senate                 
 Judiciary Committee and calls Mr. LaBolle to testify.                         
 LARRY LABOLLE, Aide to Representative Foster, prime sponsor of                
 HB 71, gives a brief background history on the bill.                          
 SENATOR LITTLE asks Mr. LaBolle how many village corporations would           
 be affected by HB 71.                                                         
 MR. LABOLLE responds there is one in their region, but he does not            
 know how many there are statewide.  He has heard that there are               
 several in the Southeast Region of the state.                                 
 SENATOR TAYLOR commented that an annual report has to be filed and            
 in many instances the corporations have failed to file those                  
 reports.  This legislation would give those corporations the                  
 opportunity to go back and start filing these reports again.  He              
 added his support for the legislation.                                        
 Because the committee lacked a quorum, SENATOR TAYLOR said HB 71              
 would be held for final action until later in the meeting.                    
 Number 546                                                                    
 SENATOR TAYLOR brought  HB 280  (UNIFORM CUSTODIAL TRUST ACT) before     e    
 the committee as the next order of business.                                  
 KAREN BRAND, staff to Representative Carl Moses, explained that               
 currently, through state law, an individual can create a trust, but           
 it is very expensive and time consuming for an attorney to do such.           
 However, there is no reference to trusts in Alaska statute now, and           
 HB 280 creates a guideline that can either be filled out by an                
 owner or put together by an attorney with minimal time.                       
 The Uniform Custodial Trust Act (UCTA) covers all personal                    
 property, financial assets, tangibles, etc.  Control remains with             
 the individual until that individual becomes incompacitated, at               
 which time the property would be cared for in the manner set out in           
 the trust by that individual.                                                 
 Number 520                                                                    
 SENATOR LITTLE asked if this legislation would change any of the              
 inheritence tax policies.  ART PETERSON, a Uniform Tax Law                    
 Commissioner, responded that it shouldn't.  There is the potential            
 for a person with a large or complicated estate, but the liklihood            
 of that situation occuring is extremely slim.  One of the effects             
 of the use of this kind of trust would be probate avoidance,                  
 because the owner can create this trust and designate the                     
 SENATOR TAYLOR disagreed, saying the liklihood of it occuring with            
 anyone that has a very large estate is very great; that they are              
 going to utilize some form of trust mechanism for probate or estate           
 avoidance.  He asked what the effect would be on marital estates.             
 ART PETERSON said a married person could create one of these trusts           
 and have the effect of precluding the spouse's share.  It doesn't             
 change the law, but it does add an option that will have a fairly             
 broad range of uses.                                                          
 ART PETERSON then outlined provisions in the bill, and noted that             
 nine states have now adopted a Uniform Custodial Trust Act.  He               
 said he doesn't know of any downside to the Act, and it does                  
 provide something that would put into the statute a simple,                   
 inexpensive option for people to use.  He also pointed out that               
 there are numerous protections built into the Act, both for the               
 grantor/beneficiary or for the grantee/beneficiary, and for the               
 Number 325                                                                    
 SENATOR TAYLOR stated it was his intention to move HB 280 out of              
 committee, once a quorum was reestablished in the committee.                  
 Number 316                                                                    
 SENATOR TAYLOR brought  CSHB 415(JUD)  (1994 REVISOR'S BILL) before           
 the committee as the final order of business.                                 
 DAVE DIERDORFF, Revisor of Statutes, Legislative Affairs Agency,              
 said the bulk of HB 415 relates to a piece of legislation that                
 passed last year transferring energy programs and related programs            
 out of the Alaska Energy Authority into the Department of Community           
 & Regional Affairs.  There were some oversights in terms of getting           
 "commission," "department" and "authority" straightened out.  He              
 added that the rest of the legislation is pretty routine.                     
 SENATOR TAYLOR stated that because the committee still lacked a               
 quorum, HB 415 would be held in committee for further action.                 
 There being no further business to come before the committee, the             
 meeting was adjourned at 3:10 p.m.                                            

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