Legislature(2001 - 2002)

05/06/2002 01:54 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                    
                   SENATE JUDICIARY COMMITTEE                                                                                 
                           May 6, 2002                                                                                          
                            1:54 p.m.                                                                                           
MEMBERS PRESENT                                                                                                               
Senator Robin Taylor, Chair                                                                                                     
Senator Dave Donley, Vice Chair                                                                                                 
Senator Gene Therriault                                                                                                         
Senator Johnny Ellis                                                                                                            
MEMBERS ABSENT                                                                                                                
Senator John Cowdery                                                                                                            
COMMITTEE CALENDAR                                                                                                            
CS FOR HOUSE BILL NO. 330(FIN) am                                                                                               
"An Act relating to providing alcoholic beverages to a person                                                                   
under 21 years of age."                                                                                                         
     MOVED SCS CSHB 330(JUD) OUT OF COMMITTEE                                                                                   
CS FOR HOUSE BILL NO. 304(2d RLS) am                                                                                            
"An Act relating to the education  fund and the infrastructure and                                                              
economic development  fund, to the  market value of  the permanent                                                              
fund, to distribution of the income  of the permanent fund, and to                                                              
the determination of net income of  the mental health trust fund."                                                              
     HEARD AND HELD                                                                                                             
PREVIOUS SENATE COMMITTEE ACTION                                                                                              
HB 330 - No previous action to record.                                                                                          
HB 304 - No previous action to record.                                                                                          
WITNESS REGISTER                                                                                                              
Representative Norm Rokeberg                                                                                                    
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Explained the contents of HB 330                                                                         
Ms. Anne Carpeneti                                                                                                              
Assistant Attorney General                                                                                                      
Department of Law                                                                                                               
PO Box 110300                                                                                                                   
Juneau, AK  99811-0300                                                                                                          
POSITION  STATEMENT:     Answered  questions  about   HB  330  and                                                            
suggested an amendment                                                                                                          
Marti Greason                                                                                                                   
No address provided                                                                                                             
POSITION STATEMENT:  Supports HB 330                                                                                          
Representative Bill Hudson                                                                                                      
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Explained the contents of HB 304                                                                         
Ms. Linda Reynolds                                                                                                              
No address provided                                                                                                             
POSITION STATEMENT: Opposed to HB 304                                                                                         
ACTION NARRATIVE                                                                                                              
TAPE 02-26, SIDE A                                                                                                            
Number 001                                                                                                                      
CHAIRMAN  ROBIN  TAYLOR  called  the  Senate  Judiciary  Committee                                                            
meeting  to order  at 1:54  p.m. Senators  Donley, Therriault  and                                                              
Chair Taylor  were present.  The  first matter to come  before the                                                              
committee was HB 330.                                                                                                           
        HB 330-PROVIDING ALCOHOL TO MINORS/ BREWPUB LIC.                                                                    
REPRESENTATIVE  NORM ROKEBERG,  sponsor  of HB  330, told  members                                                              
that  on July  9, 2001,  police officer  Justin  Wollam and  three                                                              
others were  killed when  Robert Esper crossed  the median  of the                                                              
Glenn  Highway  and collided  with  Officer Wollam's  patrol  car.                                                              
Esper  was suspected  of driving  while intoxicated  with a  blood                                                              
alcohol level of .091. Representative Rokeberg stated:                                                                          
     While investigating the events  leading up to the tragic                                                                   
     and deadly  accident, police  discovered that Esper  and                                                                   
     his underage friends had been  drinking at a party where                                                                   
     alcohol was  furnished by two  adults. Both  men pleaded                                                                   
     guilty  to   furnishing  alcohol  to  minors   and  were                                                                   
     sentenced  on  February  20   of  this  year.  Currently                                                                   
     furnishing alcohol to a minor  is a class A misdemeanor,                                                                   
     subject to  no more than one  year in prison and  a fine                                                                   
     of not more than $5,000.                                                                                                   
     What HB 330 does, quite simply,  is increase the penalty                                                                   
     for  an adult who  furnishes  the alcohol  to a class  C                                                                   
     felony, but only in those cases  where the minor goes on                                                                   
     to negligently  cause the death and or  serious physical                                                                   
     injury of  another while acting  under the influence  of                                                                   
     Mr. Chairman,  on the House  floor one of  my colleagues                                                                   
     added on lines 12 and 13 the  words 'operating motorized                                                                   
     equipment, firearms,  or watercraft' to  further tighten                                                                   
     the  implementation  of this  particular  bill. In  your                                                                   
     deliberations  today I ask  that you  look at the  words                                                                   
     'motorized equipment' and perhaps  substitute 'motorized                                                                   
     vehicle'  because  conceptually -  because  there is  no                                                                   
     definition for  'motorized equipment' in  state statute.                                                                   
     That concludes my testimony,  Mr. Chairman. I'd be happy                                                                   
     to answer any questions.                                                                                                   
CHAIRMAN TAYLOR took public testimony.                                                                                          
MS. ANNE CARPENETI, Assistant Attorney  General, Department of Law                                                              
(DOL), said that  DOL has supported HB 330 all along  but the term                                                              
"motorized equipment"  is not defined  in statute.  Alaska statute                                                              
does contain a  definition of "motor vehicle" that  could be cross                                                              
referenced  to  AS 28.40.100;  and  definitions  of "firearm"  and                                                              
"watercraft"  that could  be  cross referenced  to  Title 11.  She                                                              
thought the cross references would make the bill clearer.                                                                       
CHAIRMAN  TAYLOR  asked if  the  cross-references  should also  be                                                              
noted within the body of the language.                                                                                          
MS. CARPENETI said that adding to the definitions in Section (2)                                                                
(A) and (B) would work better.                                                                                                  
CHAIRMAN TAYLOR  asked Ms.  Carpeneti to  draft an amendment  with                                                              
the changes she suggested.                                                                                                      
MS. CARPENETI agreed to do so.                                                                                                  
MS.  MARTI GREASON,  representing  Mothers  Against Drunk  Driving                                                              
(MADD),  thanked Representative  Rokeberg for  introducing HB  330                                                              
and  said that  national  research,  as  well as  anecdotal  self-                                                              
reporting  at an  Anchorage middle  school, show  that when  young                                                              
people choose  to drink, they frequently  start around the  age of                                                              
12. All  have had the  assistance of  an adult to obtain  alcohol.                                                              
Alcohol  is involved  in too  many  deaths and  injuries of  young                                                              
people. MADD believes that adults  who provide alcohol to underage                                                              
persons  who, while  under the  influence, cause  injury or  death                                                              
must  be  held   to  a  higher  standard  of   responsibility  and                                                              
culpability. MADD supports HB 330 to accomplish that objective.                                                                 
MS.  CATHIE MAURO  told  members  that she  lost  her 14  year-old                                                              
daughter  in  the  July  9 accident.  She  first  started  getting                                                              
support for  making this action a  felony in August  by contacting                                                              
her legislators  and MADD. With their  support, HB 330  has gotten                                                              
this  far.  She  expressed  concern about  some  of  the  language                                                              
changes made during  the committee process. She  originally wanted                                                              
adults who furnish alcohol to children  to not only be accountable                                                              
for  the children's  actions while  impaired by  the alcohol,  but                                                              
also accountable  for the lives of  the children they  provide the                                                              
alcohol  to. She  said if  one removes  the  car from  the July  9                                                              
scenario, the children  could have died from alcohol  poisoning or                                                              
hypothermia. She noted  that many things can happen  when children                                                              
are impaired  by alcohol.  She suggested  that fine-tuning  HB 330                                                              
could save many  lives. She asked that committee  members not wait                                                              
until  they experience  a  similar tragedy  before  doing more  to                                                              
deter adults from furnishing alcohol to children.                                                                               
CHAIRMAN TAYLOR noted the arrival of Senator Ellis.                                                                             
REPRESENTATIVE  ROKEBERG repeated that  the House floor  amendment                                                              
added  the  words "operating  motorized  equipment,  firearms,  or                                                              
watercraft" on lines  12 and 13. He noted the intent  of the floor                                                              
amendment was to narrow the scope of the bill.                                                                                  
SENATOR DONLEY  asked for  a synopsis of  the floor debate  on the                                                              
REPRESENTATIVE ROKEBERG said, in  his opinion, the only reason for                                                              
the  debate was  that  his colleagues  were  feeling guilty  about                                                              
their own  experiences in  life. He believes  they didn't  wish to                                                              
raise culpability to the level of  a felony if an assault occurred                                                              
that  resulted in  an  injury and  death.  He  said he  personally                                                              
disagreed but lost the debate.                                                                                                  
SENATOR  DONLEY  asked  if  this  bill will  hold  the  adult  who                                                              
provides  the alcohol  responsible and  charges the  adult with  a                                                              
class C felony.                                                                                                                 
REPRESENTATIVE ROKEBERG  said that is  correct. He added  one part                                                              
of  the  issue  is  furnishing  alcohol  within  a  family.  Under                                                              
existing  statute,  a  parent  can  give a  child  alcohol  and  a                                                              
majority  spouse can  give a  minority spouse  alcohol. The  issue                                                              
becomes one of  hosting and discussions on the House  floor and in                                                              
House committees  centered around presumed liabilities  if a minor                                                              
secretly took alcohol.  He said that is not what  this bill covers                                                              
and,  because the  standard is  criminal negligence,  there is  no                                                              
mens rea for intent if a minor steals alcohol at one's home.                                                                    
SENATOR DONLEY  asked what the  interrelationship is  between this                                                              
felony and the existing statutes  that allow a parent to furnish a                                                              
child  with alcohol.  He  asked, "Are  we  only criminalizing  the                                                              
activity when  it's -  are we accelerating  the criminal  fine for                                                              
only the activity that is currently  a criminal activity or are we                                                              
also creating some sort of criminal  penalty when the providing of                                                              
the  alcohol is  actually legal  under existing  statute but  then                                                              
there's a subsequent serious physical injury or death?"                                                                         
REPRESENTATIVE ROKEBERG  replied, "No. All we're  doing here under                                                              
the original  bill before they put  the motorized craft  and stuff                                                              
in was  to create  an aggravator  if there  was serious  injury or                                                              
death.   That  is   all  we're   doing,   basically  creating   an                                                              
aggravator." He  repeated the House  floor amendment  narrowed the                                                              
CHAIRMAN  TAYLOR  suggested that  the  choices being  offered  are                                                              
either  to delete  the  House floor  amendment  or  clarify it  by                                                              
deleting  "motor   equipment"  and  inserting  the   words  "motor                                                              
vehicles,"  which is defined  in statute,  and then providing  for                                                              
additional  clean-up language, including  statutory references  to                                                              
"firearms" and "watercraft."                                                                                                    
SENATOR THERRIAULT  asked Representative  Rokeberg to  recount the                                                              
discussion on "motorized equipment" versus "motorized vehicle."                                                                 
REPRESENTATIVE ROKEBERG  said some  wordsmithing was done  to make                                                              
sure that ATVs and snowmobiles were included.                                                                                   
SENATOR THERRIAULT noted that those  vehicles will not be included                                                              
in the definition of "motor vehicle."                                                                                           
MS.  CARPENETI  told  members  if the  bill  cross  references  AS                                                              
28.40.100, snow machines will be included.                                                                                      
SENATOR  DONLEY said  that he  tends  to agree  that the  original                                                              
language  is  better  because  he  can  think  of  some  scenarios                                                              
involving  activities other  than  operating motorized  equipment,                                                              
firearms or watercraft that this bill should apply to.                                                                          
CHAIRMAN TAYLOR  agreed. He suggested amending CSHB  330(FIN)am by                                                              
deleting  the words  "operating motorized  equipment, firearms  or                                                              
watercraft" on page 1, lines 12 and 13.                                                                                         
SENATOR DONLEY asked Chairman Taylor  his opinion of retaining the                                                              
word "acting"  throughout the bill as  that word was added  by the                                                              
House Finance Committee.                                                                                                        
CHAIRMAN TAYLOR questioned whether  anything substantive was added                                                              
to the bill by inserting the word "acting."                                                                                     
REPRESENTATIVE  ROKEBERG  explained  that  the word  "acting"  was                                                              
included by the legal drafter to  make the provisions symmetrical.                                                              
MS. CARPENETI said  it was actually included by  the House Finance                                                              
Committee at her suggestion. The  committee wanted to clarify that                                                              
the person was acting under the influence  of the alcohol that was                                                              
illegally  furnished.  She  was not  sure  its  addition  actually                                                              
clarifies the causal relationship.                                                                                              
CHAIRMAN TAYLOR  maintained that  it does  clarify that  the adult                                                              
can only be involved  if the minor was under the  influence of the                                                              
alcoholic beverage received in violation of this section.                                                                       
SENATOR DONLEY  asked Ms. Carpeneti  if she could  recommend other                                                              
MS. CARPENETI said  she would recommend using  the House Judiciary                                                              
Committee language.                                                                                                             
CHAIRMAN TAYLOR maintained that Amendment  1 would return the bill                                                              
to  the House  Judiciary  Committee version.  He  then noted  that                                                              
without further discussion or objection,  Amendment 1 was adopted.                                                              
There being no  further discussion, SENATOR DONLEY  moved SCS CSHB
330(JUD) from  committee with  individual recommendations  and its                                                              
accompanying fiscal notes.                                                                                                      
CHAIRMAN  TAYLOR announced  that without  objection, SCS  CSHB 330                                                              
(JUD) moved from committee.                                                                                                     
2:15 p.m.                                                                                                                       
The committee took up HB 304.                                                                                                   
           HB 304-PERM. FUND INCOME/ DIVIDENDS/ FUNDS                                                                       
REPRESENTATIVE BILL  HUDSON, sponsor  of HB 304,  informed members                                                              
that  HB 304  is one  of several  bills  that the  House has  been                                                              
working  on over  the last  year  to try  to create  revenue on  a                                                              
recurring  basis  to  fill  the fiscal  gap.  HB  304  adopts  the                                                              
recommendation  from the  Permanent  Fund  Corporation's board  of                                                              
trustees. The board suggested the  distribution of the earnings of                                                              
the permanent  fund change from an  average of annual income  to a                                                              
percent  of  market  value (POMV).  The  legislation  creates  the                                                              
market value  concept in the  distribution scheme  and identifies,                                                              
in statute,  the distribution  on  a 50-50 split  with 50  percent                                                              
deposited into the  dividend fund and 50 percent  deposited into a                                                              
new  education  fund  in  the  general  fund.  The  House  Finance                                                              
Committee amended  the bill  to create a  second fund,  termed the                                                              
infrastructure  and economic  development  fund,  with 20  percent                                                              
deposited in  it and 30 percent  deposited in the  education fund.                                                              
The  bill was  amended on  the House  floor  so that  the full  50                                                              
percent will  go directly  into the  education fund. He  explained                                                              
that the distribution of funds will  not begin until FY 2004 so to                                                              
begin  to fill  the  fiscal gap  in  2003, the  bill  calls for  a                                                              
transfer at the  end of FY 2002 of $300 million  or the balance of                                                              
the earnings  reserve account, whichever  is less, to  the general                                                              
REPRESENTATIVE  HUDSON said  if one  looks at  these changes  long                                                              
term,  the  first  significant  draw  from  the  earnings  of  the                                                              
permanent fund would occur in 2003:  $300 million to offset a $798                                                              
million deficit. The  House has gone further and  introduced other                                                              
legislation; HB 304  is just one piece of a larger  plan. He noted                                                              
that  concern was  expressed  among House  members  about using  a                                                              
straight  5 percent. The  possibility of  using 7,  6, and  then 5                                                              
percent  was  discussed but  those  two  scaled down  models  were                                                              
dropped  in  favor  of  the  Permanent  Fund  Corporation  board's                                                              
proposal  of 5 percent.  He noted  the adoption  of the  5 percent                                                              
automatically  inflation  proofs  the  market value  of  the  fund                                                              
predicated  on   annual  earnings  of  7.95  percent.   The  board                                                              
recommended  that the  5 percent  payout would  allow the fund  to                                                              
continue to grow and provide for dividends.                                                                                     
REPRESENTATIVE HUDSON referred to  a chart in members' packets and                                                              
said it was put together to present  all elements discussed by the                                                              
House to  address the fiscal gap.  The third line from  the bottom                                                              
shows the  effective inflation proofing  rate, which amounts  to a                                                              
little less than 3 percent. He said HB 304:                                                                                     
   · protects the corpus of the permanent fund;                                                                                 
   · grows the earnings reserve account from $2.7 billion this                                                                  
     year to $9.4 billion in 2010;                                                                                              
   · increases the market value from $24.6 to $32.9 billion; and                                                                
   · provides for a dividend that is not capped but subject to                                                                  
     grow according to the annual earnings of the permanent fund.                                                               
REPRESENTATIVE  HUDSON added  that models  indicate that  by 2010,                                                              
the dividend  will be  alive and healthy  and the contribution  by                                                              
FY04 will  be about $633  million to  offset the deficit  and $633                                                              
million  to distribute  to  dividends.  According  to the  models,                                                              
dividends will not drop below $1,000.                                                                                           
REPRESENTATIVE   HUDSON   said  HB   304   is  revolutionary   and                                                              
controversial.   The  proponents   of  this   bill  believe   that                                                              
continuing   to  fill  the   fiscal  gap   by  drawing   from  the                                                              
constitutional  budget  reserve  fund  will exhaust  it  by  2005,                                                              
leaving  the next legislature  and  governor with  no place  to go                                                              
except  the earnings  reserve  of the  permanent  fund. That  will                                                              
predicate the  beginning of  the end of  the dividend  program. He                                                              
offered to answer questions.                                                                                                    
CHAIRMAN  TAYLOR asked  how much  the permanent  fund earned  last                                                              
REPRESENTATIVE HUDSON said the permanent  fund actually lost money                                                              
over the  last couple  of years.  He deferred to  Mr. Kelly  for a                                                              
detailed answer.                                                                                                                
CHAIRMAN  TAYLOR asked  if HB  304 is  predicated on  a draw  of 5                                                              
percent of the market value so that  15 percent would be drawn out                                                              
over  a three-year  period even  though the  earnings during  that                                                              
same time period could be negative.                                                                                             
REPRESENTATIVE HUDSON  said it would be averaged  over five years,                                                              
as it is now, but that Chairman Taylor is correct.                                                                              
CHAIRMAN  TAYLOR said it  would be  even worse  if the income  was                                                              
averaged instead of basing it on actual income. He stated:                                                                      
     If you've  had two  or three good  years - or  four good                                                                   
     years  as we've  had just recently  - we  had four  very                                                                   
     good  years, then  we had  a bad  year, two  bad ones  I                                                                   
     guess. If  you average that  over five, you're  going to                                                                   
     indicate  a market  value of  the  fund that's  inflated                                                                   
     above what  [the] actual value  of the fund is  and when                                                                   
     you  take  your 5  percent  back  as against  the  fund,                                                                   
     you're actually  taking more than  5 percent out  of the                                                                   
     corpus - aren't  you - because it has to  come from some                                                                   
REPRESENTATIVE  HUDSON said,  according  to law,  money cannot  be                                                              
taken out of the  corpus except to invest. All of  the draws would                                                              
come out of the earnings reserve account.                                                                                       
CHAIRMAN  TAYLOR said  that  in using  the  average, the  earnings                                                              
reserve account  would be exhausted  within a couple of  years. He                                                              
asked if it contains about $3 billion now.                                                                                      
REPRESENTATIVE  HUDSON  said  it   has  $3  billion  plus  and  is                                                              
anticipated  to grow. The  5 percent  pay-out was the  recommended                                                              
pattern given to House Finance Committee  members by the Permanent                                                              
Fund trustees.  They said all of  the major trusts are  better off                                                              
to set up  a fixed draw on  an annual basis, subject  to automatic                                                              
inflation  proofing. He  said  he doesn't  think  it matters  much                                                              
whether the annual net earned interest  or the 5 percent of market                                                              
value (POMV)  pay-out method  is used.  According to the  experts,                                                              
using the  POMV is  the best way  to provide  for the most  stable                                                              
draw. The  bill requires the payment  to be prorated down  if less                                                              
money is in  the earnings reserve  account so that no draw  can be                                                              
made from the principle of the permanent fund.                                                                                  
CHAIRMAN  TAYLOR  argued that  the  proration  would result  in  a                                                              
lessening of income back to the state for general fund purposes.                                                                
REPRESENTATIVE HUDSON said that is true.                                                                                        
CHAIRMAN  TAYLOR  asserted that  would  mean  there would  not  be                                                              
enough money to run government.                                                                                                 
REPRESENTATIVE  HUDSON said the  bill is not  designed to  run the                                                              
government; it is designed to draw  a portion of what is necessary                                                              
to  run the  government.  He said  an income  tax  would bring  in                                                              
another $250 million. He stated:                                                                                                
     We're simply trying to have  a balanced draw across from                                                                   
     a number  of different sources  - payroll and  everybody                                                                   
     who has  a dividend will  pay something into  government                                                                   
     with  this whole  instance here...."  He  said he  knows                                                                   
     this approach  is controversial  because it will,  if it                                                                   
     passes,  distribute half  of the 5  percent payout  into                                                                   
     dividends  and  half  into   government  to  offset  the                                                                   
CHAIRMAN TAYLOR asked about inflation proofing.                                                                                 
REPRESENTATIVE  HUDSON said  inflation  proofing is  automatically                                                              
retained within  the fund by virtue  of limiting the payout  to no                                                              
more than 5 percent.                                                                                                            
CHAIRMAN TAYLOR said  that assumes a 7.9 percent  return. He noted                                                              
there is no inflation proofing this year.                                                                                       
REPRESENTATIVE   HUDSON  disagreed   and  said,   "We  would   not                                                              
distribute it, we retain it. We only distribute 5 percent."                                                                     
CHAIRMAN TAYLOR said it would be  retained in the earnings reserve                                                              
account where it would be available  for appropriation. He pointed                                                              
out that  the inflation-proofing  amount  has been deposited  into                                                              
the corpus of the fund.                                                                                                         
REPRESENTATIVE HUDSON explained:                                                                                                
     Well  it's  inflation-proofed  the entire  fund  because                                                                   
     we've set  it up now on  a market value concept.  We now                                                                   
     consider  - I think  we always  have anyway  - that  the                                                                   
     corpus  of   the  fund,  the  realized  gains   and  the                                                                   
     unrealized gains, are all a  part of the permanent fund.                                                                   
     By setting  up the POMV -  you're right in  this respect                                                                   
     Robin,  we are,  according  to this  draft,  essentially                                                                   
     maintaining  the  inflation-proofing   in  the  earnings                                                                   
     reserve  account   and,  in  years  past,   we  have  by                                                                   
     statutory  action on  an annual  basis, transferred  the                                                                   
     money  directly into  the corpus of  the permanent  fund                                                                   
     and  that's why  we've seen  the  - you  know we've  got                                                                   
     about  $5.5 billion  into the  corpus  of the  permanent                                                                   
     fund that  is there on  the basis of legislative  action                                                                   
     over  the  last  20  years.  We  have  transferred  that                                                                   
     inflation  money into  the corpus,  in addition I  might                                                                   
     add, to other money that has  stacked up after dividends                                                                   
     were  paid according  to  the formula  that  we have  in                                                                   
     existing  law and periodically  over the  years -  and I                                                                   
     think we've  got another $4.5  billion that is  into the                                                                   
     corpus of the fund by virtue  of those actions. So we've                                                                   
     had  the   automatic  distributions  according   to  the                                                                   
     constitutional  formula and  the action  by those of  us                                                                   
     who  have been  around here  for  the last  20 some  odd                                                                   
     years  of  putting  in the  inflation  proofing  in  the                                                                   
     corpus   of  the  fund   and  additional   contributions                                                                   
     periodically  when the earnings  reserve account  got up                                                                   
     to as much as $8 or $9 billion.                                                                                            
     Now what  we'll have  if we adopt  this measure  is that                                                                   
     we'll  have the,  by  virtue of  the  5 percent  payout,                                                                   
     we'll  have the  balance  of  - let's  say  they make  8                                                                   
     percent  or 7.9  percent -  the balance  of that  annual                                                                   
     earnings  will be  maintained  in the  earnings  reserve                                                                   
     account. That is a difference  and you hit upon it right                                                                   
     off the bat.  In my original HB 335, I  had those monies                                                                   
     automatically  being transferred over  to the corpus  of                                                                   
     the  fund,  as we  do  at  the present  time.  Over  the                                                                   
     hearing  of this  bill, and  this has  come through  the                                                                   
     Finance  Committee  and  other  areas  there  obviously,                                                                   
     other people felt that it should  just simply be stacked                                                                   
     into  the earnings  reserve  of the  permanent fund.  So                                                                   
     that's where  you see the  earnings reserve  rising from                                                                   
     $2.7 to $9  billion, but you also see the  corpus of the                                                                   
     fund  rising from  $21 billion to  about $23.5  billion,                                                                   
     roughly  speaking.  So, you  have  a lesser  growth  but                                                                   
     there's  nothing in  here that precludes,  you know,  us                                                                   
     from here on out, as that account  gets, say, well above                                                                   
     where we need to have [indisc.]  assurance for stability                                                                   
     of transferring  $1 billion  as we always have.  Because                                                                   
     we're    doing     this    statutorily     instead    of                                                                   
     constitutionally,  everything we have been doing  in the                                                                   
     past we can continue to do in this legislation so...                                                                       
CHAIRMAN TAYLOR said the sad part  is that the legislature has not                                                              
always made  the transfers.  He put the  last amendment on  to the                                                              
budget bill  to convey the excess  earnings that were  retained in                                                              
the  undistributed  income account  of  the permanent  fund  about                                                              
three or four years ago and the House refused. He stated:                                                                       
     As a consequence, we've not  shipped another one over to                                                                   
     you  guys 'cause  we  figured you'd  just  turn it  down                                                                   
     again. That's  the only reason you've got  the amount of                                                                   
     money to play  with sitting in the undistributed  income                                                                   
     account that  you've got right now. Rick  Halford did it                                                                   
     for many years. I put the last  two on myself. The first                                                                   
     one  succeeded and  the  second one  was  failed by  the                                                                   
     House so that people could retain  what they hoped would                                                                   
     be  a larger amount  of money  within the  undistributed                                                                   
     income  account  that they  could  then access  with  21                                                                   
     votes because  people wanted  to spend it on  government                                                                   
     and I  felt it ought to  go back into the  fund. Because                                                                   
     that had  been the previous  attitude and policy  around                                                                   
     here  that we  put money  back  into the  corpus of  the                                                                   
     fund,  where it wasn't  available on  a simple  majority                                                                   
     vote, and by  so doing, you're correct. We've  grown the                                                                   
     fund  by over $8  billion. I'm  very proud  that we  did                                                                   
     that. Had we left it in an undistributed  income account                                                                   
     where you're proposing to keep  all of it now, including                                                                   
     the 'inflation proofing' of  the fund - you never have a                                                                   
     time when inflation  proofing goes back to  the fund, do                                                                   
REPRESENTATIVE  HUDSON said it  is a simple  matter of  leaving it                                                              
the way it is,  which was the will of the House.  His interest was                                                              
to put it all back in the corpus of the permanent fund.                                                                         
CHAIRMAN TAYLOR  said what was to  be used to inflation  proof the                                                              
fund   will  now   sit  in   an  account   that's  available   for                                                              
appropriation by the legislature.  He then asked if a shorter-term                                                              
investment regime is required for those funds.                                                                                  
REPRESENTATIVE  HUDSON  said  not  necessarily.  He  believed  the                                                              
return would be  more stable if it is maintained  in the corpus of                                                              
the  permanent fund.  He  deferred  to Mr.  Kelly  for a  detailed                                                              
CHAIRMAN  TAYLOR  said that  by  placing  the five  year  averaged                                                              
earnings into  a constitutional budget  reserve account,  it would                                                              
be invested on a  much shorter term basis and it  is not available                                                              
for  long term  equity  investment  because  it is  available  for                                                              
appropriation at  any time by the  legislature and easy  access is                                                              
necessary. He stated that further  diminishes the earning capacity                                                              
of those  monies, especially  when there is  a down cycle  in both                                                              
bonds and long term interest issues.                                                                                            
SENATOR THERRIAULT said  he is glad the 6 and  7 percent provision                                                              
was removed  from the  bill because  he feels  very protective  of                                                              
inflation  proofing the  fund. He  then  asked why  Representative                                                              
Hudson  why he  chose to  go with  this mechanism  instead of  the                                                              
mechanism  suggested   by  the  trustees.   He  said  it   is  his                                                              
understanding that when the legislature  proposes a constitutional                                                              
amendment, the public is suspicious  of complex issues with regard                                                              
to the Constitution.                                                                                                            
REPRESENTATIVE HUDSON said as the  bill worked its way through the                                                              
House, members preferred  making the statutory changes  that are a                                                              
mirror  image of  what the  Permanent Fund  board suggested  doing                                                              
constitutionally.  House  members  were  a  little  nervous  about                                                              
moving forward with a constitutional amendment this year.                                                                       
SENATOR  THERRIAULT  asked  if Section  11  repeals  the  existing                                                              
statutory inflation proofing mechanism.                                                                                         
REPRESENTATIVE HUDSON said it does.                                                                                             
SENATOR  THERRIAULT  expressed  concern that  if  the  legislature                                                              
adopts  the methodology  in  HB 304,  inflation  proofing will  be                                                              
repealed.  If a  future  legislature  makes some  other  statutory                                                              
change, there is no guarantee that  inflation proofing will be put                                                              
back into the statutes.                                                                                                         
REPRESENTATIVE HUDSON  said the limitation of the  distribution of                                                              
income to  the 5 percent payout  is the mechanism that  most large                                                              
trust funds use  in order to guarantee that inflation  proofing is                                                              
maintained. He said:                                                                                                            
     If  you feel  uncomfortable  with having  the  inflation                                                                   
     proof accrue  to the earnings  reserve account,  which I                                                                   
     [indisc.] is  far more accessible - it's  not accessible                                                                   
     at  all if  it  goes into  the corpus  of  the fund.  So                                                                   
     that's the  question and  on my side  I was not  able to                                                                   
     essentially get  this amendment in by bill.  My original                                                                   
     bill  had  all of  the  inflation  proofing  essentially                                                                   
     distributed  to  the corpus  of  the permanent  fund  so                                                                   
     that's the choice of the deliberative process.                                                                             
SENATOR  THERRIAULT  asked  if the  education  and  infrastructure                                                              
funds will be sub-funds of the general fund.                                                                                    
REPRESENTATIVE   HUDSON  said  they   are  indicated   funds,  not                                                              
dedicated funds.                                                                                                                
TAPE 02-26, SIDE B                                                                                                              
2:41 p.m.                                                                                                                       
REPRESENTATIVE HUDSON said in regard  to Chairman Taylor's concern                                                              
about   inflation  proofing,   the   current   situation,  as   he                                                              
understands  it, is  that  in the  earnings  reserve account,  the                                                              
unrealized  gains are  the inflated  value  of the  stock that  is                                                              
maintained in  the corpus of the  permanent fund. Therefore,  if a                                                              
stock increases  by $10  million in  value over  a year,  that $10                                                              
million is  maintained in  the unrealized  gains of the  permanent                                                              
fund. He  said if one looks  at the earnings reserve  account, the                                                              
realized gains  were funds that were  invested so that  they could                                                              
be accessed  easily and deposited  in the general fund.  So, other                                                              
than the  fact that inflation proofing  is not deposited  into the                                                              
corpus of the permanent fund automatically,  the bill contains the                                                              
suggestions by  the Permanent Fund  trustees. He believes  it will                                                              
sustain, maintain  and actually grow the permanent  fund dividends                                                              
over time and its purpose is to split the income.                                                                               
CHAIRMAN TAYLOR  expressed concern that Representative  Hudson has                                                              
estimated  a growth  rate of 7.5  percent and  that all  schedules                                                              
into the future are based on that.  The hard money of 5 percent is                                                              
taken  based on  whatever the  market value  of the  fund is  at a                                                              
given moment in  time. Market value means unrealized  gains, which                                                              
does not become money in one's pocket  until the stock is actually                                                              
sold.  He said  he can  imagine that  a real  disaster would  have                                                              
occurred if  this system  was in place  two years ago  because the                                                              
market value  of the permanent fund's  stock was much  higher than                                                              
it  is  now and  the  high  number  would  have been  used  as  an                                                              
REPRESENTATIVE  HUDSON replied  the average  of the four  previous                                                              
years and the current year would be used for the estimate.                                                                      
CHAIRMAN  TAYLOR  said  he  is suggesting  that  HB  304  uses  an                                                              
automatic take  of 5  percent and, if  calculated today,  would be                                                              
based upon an average that had $28  billion in value several years                                                              
ago and $22 billion  in value today. He noted the  $6 billion loss                                                              
is not reflected  because it has been averaged in.  He noted the 5                                                              
percent  will be  drawn on  an average  of $24  billion. And,  the                                                              
income left over  after 5 percent will be used  to inflation proof                                                              
the fund, but that  amount will be zero because the  fund had zero                                                              
income. He stated:                                                                                                              
     Then we're  going to say  that we're going  to inflation                                                                   
     proof  the fund  based  on the  extra  income left  over                                                                   
     after 5  percent. This year  there was zero  income. So,                                                                   
     as there  was zero income,  there's zero that  goes into                                                                   
     inflation proofing because the  only inflation proofing,                                                                   
     it appears  from your formula,  is that money  left over                                                                   
     that is income  after the 5 percent draw  has been made.                                                                   
     That  is  then  inflation  proofing   -  that  inflation                                                                   
     proofing not  going back into the fund but  instead goes                                                                   
     into the same bucket that you're  going to draw the next                                                                   
     five  years - or  the next  year's 5  percent out of  no                                                                   
     matter  what the market  does. This  thing doesn't  have                                                                   
     anything  to do  with market  anymore.  It doesn't  have                                                                   
     anything  to do with  income anymore. All  it has  to do                                                                   
     with  is an annual  draw of  5 percent  out of a  bucket                                                                   
     over  here  that  we've  now   -  we  used  to  call  it                                                                   
     undistributed income  account and constitutional  budget                                                                   
     reserve and now you're going  to move that fund into the                                                                   
     constitutional  budget  reserve account  which  requires                                                                   
     three-quarter  vote to access.  That's why your  friends                                                                   
     were so willing to vote for it.                                                                                            
REPRESENTATIVE HUDSON  clarified that nothing from HB  304 will be                                                              
going into the CBR.                                                                                                             
CHAIRMAN TAYLOR  said it  will then be  accessible by 21  votes in                                                              
the House.                                                                                                                      
REPRESENTATIVE  HUDSON replied,  "Absolutely."  He then  clarified                                                              
that 50  percent of the  5 percent payout  will be  distributed to                                                              
the permanent fund  dividend account, and 50 percent  to the other                                                              
account, or  the amount that is  in the earnings  reserve account,                                                              
whichever is less. He responded:                                                                                                
     Robin, it's really, I think  at any rate, the same as we                                                                   
     have at  the present time  except we're using  a percent                                                                   
     of market value  for even distribution of  the income as                                                                   
     opposed to  an average of  the annual earnings  over the                                                                   
     last  five years  so -  that's what  they're doing  now,                                                                   
     they're taking  21 percent of the five-year  average and                                                                   
     they're  distributing that  to -  by law.  You can  look                                                                   
     back and see  the statutes. We distribute  50 percent of                                                                   
     that to the  permanent fund and then we use  the CPI and                                                                   
     all that type  of stuff and we distribute  the inflation                                                                   
     proofing  into the corpus  of the  permanent fund.  As I                                                                   
     said, that's  your argument  with my legislation  as you                                                                   
     have it before you now. And  then we take the balance of                                                                   
     it  and it  just simply  is invested  into the  earnings                                                                   
     reserve  account.   That's  why  the  earnings   reserve                                                                   
     account got  all the way up  to $8 billion at  one point                                                                   
     in  time and  then we  had boom-boom,  she dropped  down                                                                   
     with  those   terrible  two   years  there.  This   will                                                                   
     establish it on  a prorated basis. If it  falls below it                                                                   
     will never get below whatever's  in the earnings reserve                                                                   
     of the permanent fund. I really  urge you to take a good                                                                   
     hard  look at  this  and call  some  of these  financial                                                                   
     experts  in here because  what we've tried  to do  is to                                                                   
     listen to  the experts  and figure out  how can  we best                                                                   
     protect  the fund  and,  at the  same  time, fairly  and                                                                   
     equitably distribute the income.                                                                                           
CHAIRMAN TAYLOR  repeated his concern  about using an  automatic 5                                                              
percent  that is not  dependent upon  any income  coming into  the                                                              
fund. He said that he realizes that  over time that might work for                                                              
major trust  funds, but he is  very frightened of  an inflationary                                                              
situation during  the Carter presidency with 18  percent inflation                                                              
coupled with a 5 percent draw whether  or not the market performed                                                              
well. He then  noted the committee would have to  recess to attend                                                              
a  majority caucus  and  that he  would  continue  the hearing  on                                                              
Wednesday.  He  then asked  Ms.  Reynolds  to testify  before  the                                                              
committee recessed.                                                                                                             
MS. LINDA REYNOLDS  said she shares Chairman Taylor's  concern and                                                              
that HB  304 is  a way to  use the  permanent fund for  government                                                              
expenses. She asked  what is to stop the legislature  from using 5                                                              
percent this year  but a higher percent over the  years. She noted                                                              
that Alaska state  government spends $48,000 for a  family of four                                                              
now. The public  has asked that government spending  be controlled                                                              
and that private  sector growth of natural resources  be opened up                                                              
to generate  revenues. She said the  legislature does not  seem to                                                              
be  addressing private  sector  jobs in  the  state. Instead,  the                                                              
state is going  toward a socialistic system in which  it will take                                                              
the wealth  of Alaska  to fund government.  She said  that history                                                              
shows that  socialism is not the  answer. She emphasized  the need                                                              
for responsible  economic development of renewable  resources. She                                                              
noted that  using the permanent  fund dividend to  fund government                                                              
services will be taking money from the poor.                                                                                    
CHAIRMAN TAYLOR  thanked Ms.  Reynolds. He  announced that  HB 304                                                              
would be heard  again on Wednesday, at which time  Mr. Kelly would                                                              
SENATOR  DONLEY  asked for  information  from the  Permanent  Fund                                                              
Board of Trustees on the true national  average for the foundation                                                              
There being no further business to come before the committee,                                                                   
CHAIRMAN TAYLOR adjourned the meeting at 2:58 p.m.                                                                              

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