Legislature(2003 - 2004)
10/29/2003 07:00 PM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE JUDICIARY STANDING COMMITTEE
MAT-SU LIO
October 29, 2003
7:00 p.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Scott Ogan, Vice Chair
Senator Johnny Ellis (via teleconference)
Senator Hollis French (via teleconference)
MEMBERS ABSENT
Senator Gene Therriault
OTHER LEGISLATORS PRESENT
Senator Lyda Green
Representative Mike Hawker (via teleconference)
Representative Eric Croft (via teleconference)
Representative Vic Kohring
COMMITTEE CALENDAR
SENATE JOINT RESOLUTION NO. 18
Proposing amendments to the Constitution of the State of Alaska
relating to limiting appropriations from and inflation-proofing
the Alaska permanent fund by establishing a percent of market
value spending limit.
HEARD AND HELD
SENATE JOINT RESOLUTION NO. 19
Proposing amendments to the Constitution of the State of Alaska
relating to the Alaska permanent fund.
HEARD AND HELD
PREVIOUS ACTION
SJR 18 - See State Affairs minutes dated 5/1/03 and 5/6/03 and
Judiciary minutes dated 5/15/03, 6/26/03 and 10/28/03.
SJR 19 - See State Affairs minutes dated 5/13/03 and Judiciary
minutes dated 5/17/03, 6/26/03 and 10/28/03.
WITNESS REGISTER
Mr. Eric Wohlforth
Wohlforth, Vassar, Johnson and Brecht
900 West Fifth Avenue, Suite 600
Anchorage, AK 99501-2048
POSITION STATEMENT: Presented SJR 18 to the committee
Mr. Phil Furbush
Palmer, AK
POSITION STATEMENT: Opposed to any legislation that allocates
any portion of the fund for the state budget
Mr. Games Garhart
Wasilla, AK 99687
POSITION STATEMENT: Likes the direction of SJR 18 but expressed
concerns
Mr. Dirk Nelson
Ester, AK 99725
POSITION STATEMENT: Believes the budget shortfall is due to the
fact that Alaska oil is being sold at below market value
Mr. George Williams
No address provided
POSITION STATEMENT: Believes SJR 18 should contain a fixed
percent that the Legislature can spend, not "up to" 5 percent
ACTION NARRATIVE
TAPE 03-58, SIDE A [RECORDING BEGINS SEVERAL MINUTES AFTER THE
MEETING CONVENED.]
SJR 18-CONST. AM: PF APPROPS/INFLATION-PROOFING
CHAIR RALPH SEEKINS called the Senate Judiciary Standing
Committee meeting to order at 7:00 p.m.
MR. ERIC WOHLFORTH, public member of the Alaska Permanent Fund
Corporation (APFC) Board of Trustees, said that both SJR 18 and
HJR 26 [House companion legislation] propose a constitutional
amendment, which he informally calls, "the 5 percent solution."
They provide for a permissible legislative payout of 5 percent
of the fund's market value, averaged over a 5-year period from
the permanent fund. Under the current system, actual earned
income from the fund is available for legislative appropriation.
The Board of Trustees supports a 5 percent market value payout
solution for a number of reasons. It will conserve the fund for
future generations and maintain its ability to pay out monies
for current generations.
MR. WOHLFORTH referred to a handout he distributed to members
and gave the following presentation.
The seven trustees of the permanent fund are not taking any
stance on how the income from the permanent fund should be used.
The trustees are promoting what they believe is a more efficient
and effective mechanism for the availability of income each
year.
The chart on the top of page 2 shows the permanent fund market
value over the last four years. In the year 2000, the value was
$26.5 billion, comprised of the reserved account - the
principal, of $23.5 billion, and the realized income account of
$3 billion. The total value of the fund eroded to $23.5 billion
during the poor performing market for 2.5 years until nine
months ago. The amount of the realized income available for
distribution at June 30, 2002 was $100 million. The realized
earning account is the account from which the Legislature
appropriates income each year for payment of dividends and for
inflation proofing. That account is comprised of actual income
earned by the fund.
The fund's asset allocation is illustrated on page 3 of the
handout. In 1978, the fund was invested almost entirely in
bonds. Since that time, the fixed income portion of investments
has become a minority amount, around 40 percent. A substantial
amount of the fund is invested in domestic and foreign stocks,
and the balance is invested in real estate. When the fund was
invested in bonds, interest payments were received every six
months. The amount available for expenditure was based on actual
income. Now that a major portion of the fund is invested in
stocks, that formula is no longer correct and should be
superseded. The Board of Trustees proposes a constitutional
amendment to limit spending to 5 percent of market value (POMV).
MR. WOHLFORTH said the POMV is explained at the top of page 4.
Various studies have shown, over a 30 to 40 year period, that a
fund like the permanent fund can expect to have an average
annual return of about 8 percent. Inflation will average 3
percent. Those studies show that the maximum annual sustainable
payout is 5 percent, based on the 8 percent earnings and the 3
percent cost of inflation proofing. Should the Legislature pass
either of the resolutions and the voters support a
constitutional amendment, the Legislature could spend up to 5
percent of the market value.
MR. WOHLFORTH said the fund's performance as shown at the bottom
of page 4 shows that historically the fund's return would have
met this rate of return target. He said he refers to the Board
of Trustees' proposal as the 5 percent solution because the
phrase "POMV" is unfamiliar to people. It will protect the fund
by eliminating the distinction between principal and earnings.
It protects the option of having an annual distribution for
dividends and it protects the fund for future generations by
restricting spending.
MR. WOHLFORTH said the current formula payouts are shown on the
bottom of page 5, projected to 2005. They are based on
projections of earnings provided by the APFC's outside
consultant and show the statutory amount currently available for
appropriation. The actual figures through 2003 show what was
available for the dividend transfer and for inflation proofing.
He said the $490 million figure for 2005 is due to the fact that
the current payout formula requires a calculation based on the
average of the last five years and some of the worst years in
the stock market occurred during that time period. Dividend
payments for the next two years are projected to be below $1170.
MR. WOHLFORTH referred to the top of page 6, and said the 5
percent formula requires that the funds be calculated by
multiplying the current market value, which today is $25.9
billion, by 5 percent, which amounts to a $1.3 billion payout.
The chart on the bottom of page 6 shows volatility. The chart
shows that the investment of the permanent fund is far more
volatile and apt to jump up and down in large measure from year
to year if the current formula continues to be used. That is
because the new formula is based on a straight 5 percent of the
market value each year; the old formula is based on actual
earnings over 5 years.
MR. WOHLFORTH said the new formula ensures the Legislature will
have the ability to make an annual payout. It will make the
payout amounts more stable from year to year and will make the
payout amounts compatible with investment strategy. At the
present time, if the APFC decides to terminate an investment
manager because of poor performance, and the account contains
$300 million of unrealized capital gains, the manager would sell
the account upon transfer and produce $300 million in actual
income. Those monies would go into the actual payout formula.
Some of the very large amounts of realized income during the
bull market years were realized for exactly that reason. Those
earnings had nothing to do with investment strategy but were due
to management changes. That is not the way modern endowment
funds are managed. He pointed out the North Slope Borough
endowment fund is managed using the POMV formula, as is the
Municipality of Anchorage fund. He urged the committee to give
favorable consideration to one of the two resolutions.
CHAIR SEEKINS noted that Senator French was participating via
teleconference, as was Representative Croft. He then opened the
meeting to questions of Mr. Wohlforth.
SENATOR OGAN noted that he attended the Senate Judiciary
Committee meeting in Kenai the previous night and learned a few
things. The committee heard an interesting discussion on how the
5 percent of market value would be paid. One testifier noted
even though the 5 percent of the market value is paid out, the
fund would have no realized income until stocks are sold. He
asked if assets would have to be liquidated to make the payout.
MR. WOHLFORTH said the proposed 5 percent would be available,
regardless of liquidating assets. That might well require the
liquidation of assets. The whole range of assets would be
considered to fund the 5 percent.
CHAIR SEEKINS said when he served on the Board of Trustees, a
certain amount of the permanent fund was in cash while ownership
was transferred. He asked Mr. Wohlforth about his statement that
firing a manager would cause a realized gain. He asked if the
equity would still be held in the name of the State of Alaska
and transferred to another manager without a sale.
MR. WOHLFORTH said that is possible on some occasions. The
endeavor, when a manager is terminated, is to see if those
stocks can be transferred to another manager. However, there are
also sales to make up the transfers at times. He said any sale
of an asset could produce a capital gain.
CHAIR SEEKINS said to his recollection, the board had investment
managers but depositories held the stocks that were being
managed.
MR. WOHLFORTH said the APFC still has a custodian that does all
of that.
SENATOR GREEN pointed out it is important to emphasize that the
Legislature could use "up to" 5 percent under the proposal, and
would not be mandated to use that much.
MR. WOHLFORTH agreed and said the suggested language for the
constitutional amendment says the Legislature can pay out up to
5 percent of the market value on a 5-year average basis. It is
the board's strong belief that how the 5 percent is used [will
be determined by the Legislature].
CHAIR SEEKINS noted the arrival of Representative Kohring.
MR. WOHLFORTH explained the first step is to get the 5 percent
spending limit enacted to get in line with how other funds are
managed.
CHAIR SEEKINS asked Representative Hawker if the language on
page 2, line 4 that says "may not exceed 5 percent" is also in
his resolution [HJR 26].
REPRESENTATIVE HAWKER said that is correct and explained the
difference between the House and Senate version is some
predicate language that was modified in the House version. The
substance of the resolutions remains the same.
CHAIR SEEKINS said it is important to emphasize that neither
resolution mandates that the Legislature draw 5 percent from the
permanent fund every year. The amount drawn, up to 5 percent,
would be at the Legislature's discretion so that the Legislature
could opt to draw nothing in the case of a financial disaster in
the markets.
SENATOR OGAN said he believes his constituents are very
mistrustful of any suggestions to change the permanent fund. He
said there have been a couple of runs on using the earnings
reserve for government expenses. He asked Mr. Wohlforth to
review how this proposal would change the dividend program
because he fears a lot of people do not understand the
difference between the constitutionally protected corpus of the
permanent fund and the dividend program. The dividend is not a
constitutionally protected entitlement. He asked Mr. Wohlforth
to describe how the amount of the dividend would be determined
and distributed.
MR. WOHLFORTH said the best way to approach that would be to go
back almost two years ago when the earnings reserve had dipped
substantially and everyone feared that no money would be
available for the dividend. By good fortune, the markets
corrected and the earnings reserve showed a positive balance. He
said using up to 5 percent of the market value allows for any
use the people and Legislature determine. It will provide
assurance that funds will be available for the dividend and
other uses, whereas the current formula is an outmoded regime
designed when the entire permanent fund was invested in bonds
and there was no uncertainty about the earnings. He repeated the
5 percent market value would make certain that funds are
available each year. He said he understands people's
apprehension but wishes this proposal had advanced years ago.
SENATOR OGAN said this is not a change to the formula used to
calculate the dividend; it is simply a change in how the corpus
of the permanent fund is managed.
MR. WOHLFORTH said that is an accurate statement.
CHAIR SEEKINS said when he was a member of the Board of Trustees
in 1990, the Board discussed the possibility of a different
distribution method and the percent of market value. At that
time, the POMV was emerging in endowment funds. He asked if 85
percent of endowment and retirement funds are now using the POMV
method of distribution.
MR. WOHLFORTH said that is correct and that the POMV has almost
become the universal way to measure how much can be paid out in
a given year.
SENATOR OGAN asked if the payout has traditionally been about
4.5 percent.
MR. WOHLFORTH said that is about right.
SENATOR OGAN asked if it is prudent to say 5 percent.
MR. WOHLFORTH said saying "up to" 5 percent provides some
flexibility.
CHAIR SEEKINS said the Legislature will have the opportunity to
decide the amount on an annual basis. He said any legislator
could propose any amount up to 5 percent.
REPRESENTATIVE CROFT asked if the corpus of the fund could ever
be invaded if the Legislature pays out 5 percent over several
years of poor markets.
MR. WOHLFORTH explained that under the POMV approach, the
concept of principal would no longer exist; the principal and
earnings reserve will be treated as one entity.
CHAIR SEEKINS asked Representative Croft if he would vote for a
5 percent drawdown in a bad year.
REPRESENTATIVE CROFT said he would not but expressed concern
that relying on the Legislature to spend less than it can get
its hands on is an "iffy" proposition.
CHAIR SEEKINS said in the history of the permanent fund, over
one-third of the deposits to the principal have been made by the
Legislature, showing a good track record.
REPRESENTATIVE CROFT said Chair Seekins has more faith than he
does.
CHAIR SEEKINS said he would not vote for a 5 percent payout in a
poor market year either.
REPRESENTATIVE CROFT commented that most of the endowments he
has reviewed are in the 4.7 to 4.8 percent range; very few pay
out 5 percent. He asked if that is correct and why 5 percent is
supposed to be the correct number.
MR. WOHLFORTH said the university endowment funds show a payout
of 5 to 5.5 percent. He said the Board of Trustees believes that
5 percent is a good long term average, based on the National
Association of College Endowments Study of 2002.
CHAIR SEEKINS asked if the board proposed a 5 percent payout or
a payout not to exceed 5 percent.
MR. WOHLFORTH said the Board proposed a payout not to exceed 5
percent.
SENATOR GREEN asked if one of the provisions makes the entire
permanent fund subject to legislative appropriation.
MR. WOHLFORTH said that is incorrect.
SENATOR GREEN said she wondered whether a chart is available
that shows the amount of the payout had the POMV method been
used and a chart showing a futuristic comparison if the current
formula continues to be used. She questioned whether they would
show a substantial difference looking back or forward.
MR. WOHLFORTH said those charts do exist. They show an
interesting degree of sameness of payout permission if one
superimposes the new formula on the old payout rule. He said, in
further response to Representative Croft, a letter to Senator
French dated September 9 shows the average payout of the 660
members of the National Association of College Endowments is 5.3
percent. He said he would be glad to supply committee members
with further detail and background information.
SENATOR FRENCH said his question deals with years when the
return on the permanent fund is zero or negative. During those
years the Legislature could take a 5 percent payout, however the
overall value of the fund would be reduced. He said it seems the
check on that is the language in the bill that says the
Legislature can pay out up to 5 percent, so it therefore could
pay out nothing, to match market conditions.
MR. WOHLFORTH said that is the case. The Legislature could
determine that a lesser payout is appropriate if the market is
"sick."
SENATOR FRENCH responded:
My next thought is that if the Legislature starts to
sort of be wise and the Legislature starts to protect
the value of the permanent fund by sort of setting the
payout at the rate of return that the fund is making,
then aren't we kind of reinventing the wheel? Aren't
we going back to the plan that we have in effect right
now, which is that we let the market determine how
much is available for appropriation every year?
MR. WOHLFORTH said no one is able to say with certainty that the
permanent fund will earn 5 percent under all circumstances.
However, under the circumstances [Senator French referred to],
the Legislature can determine what is appropriate for that year.
He believes this proposal is substantially better than what is
used now, but he does not believe there is a perfect formula for
all foreseeable contingencies.
CHAIR SEEKINS asked if the POMV formula would have been
sustainable over the last 20 years.
MR. WOHLFORTH said it would have.
CHAIR SEEKINS announced that he would take public testimony.
MR. PHIL FURBUSH, a resident of Palmer representing himself,
said he strongly opposes any legislation that would remove the
constitutional protection of the permanent fund, which SJR 18
would do. In addition, he opposes any legislation that allocates
any portion of the fund for the state budget or reduces the
amount of revenues allocated to the fund. He said if the goal is
to protect the permanent fund, more amendments would have to be
made to the Constitution to do that, such as an amendment that
would not allow any portion of the permanent fund to be used for
the budget. Another amendment might require that more money be
deposited into the fund. He said if the goal is to provide a
predictable dividend, then only a portion of the earnings should
be used, not a portion of the entire fund. He said he cannot see
how removing the protections and taking any percentage of the
fund, whether it is making money or not, protects the fund. If
more money is needed for the state budget, the Legislature
should implement an income tax that more fairly spreads the
burden among those who are able to pay. He said if the permanent
fund dividend is taken away from a family of four living on
$20,000, the loss would equal 20 percent but taking the dividend
away from a family of four earning $200,000 would amount to two
percent. That puts a bigger burden on the lower income family.
MR. FURBUSH said the permanent fund is all the state has to show
for the nonrenewable resources it has consumed. He asked what
the state will do to provide energy for the state when the oil
is gone. He said the permanent fund is all the state will have
to use. He said his biggest worry is the state will use up its
oil and spend the permanent fund and leave future generations
with no way to provide for energy or their other needs.
REPRESENTATIVE KOHRING said he concurs with many of Mr.
Furbush's statements. He, too, is worried about the future of
the fund if the POMV concept is adopted. He said he is looking
at the POMV concept from a money management perspective and
questions whether it is prudent management to threaten the
principal of the fund by virtue of guaranteeing a payout
dividend when the market is such that the fund is not profiting.
He said from the perspective of a private corporation, spending
seed core money to pay a dividend would be a bad thing. He
repeated that it appears to him that the POMV concept will risk
the principal of the permanent fund. He also expressed concern
about the issue of spending a portion of the permanent fund on
government expenditures, which will provide a disincentive to
government reform.
TAPE 03-58, SIDE B
MR. JAMES GARHART, a resident of Wasilla representing himself,
said the [APFC} fall 2002 revenue booklet says the annual
permanent fund dividend distribution has been equal to about 4
percent of the market value of the fund. He said the fact that
the 5 percent is a cap and not a mandate seems straightforward.
He asked if use of the 5 percent would be restricted to
permanent fund-related expenses, such as administration,
inflation proofing and dividends.
CHAIR SEEKINS said that would remain exactly the same, meaning
the disbursement of those funds would be up to the Legislature.
MR. GARHART asked whether any amount over 5 percent would be
rolled back into the fund.
CHAIR SEEKINS said not necessarily, and that it has not been
that way in the past. He explained that $7 billion of the fund
today is comprised of earned income that was redeposited by the
Legislature into the principal to protect it from being spent on
other areas of government.
MR. GARHART asked where those excess funds would go if the POMV
proposal goes into effect.
CHAIR SEEKINS said there would not be any excess funds because
the drawdown would be determined using 5 percent, even though
the fund may have earned 20 percent. The 15 percent difference
would remain in the fund so it would not have to be redeposited.
SENATOR GREEN contended that in some ways, if the permanent fund
had a huge earning year, it would be less vulnerable under the
POMV system.
CHAIR SEEKINS said having been a trustee he is aware that under
the current system the trustees can play God with the permanent
fund profit every year. He referred to page 6 of the handout,
which shows the volatility of the fund, and said in 1996 a huge
spike occurred in the realized gains. That was created at the
instruction of the Board of Trustees. Those six people
determined what became realized gains. He said the trustees can
cherry pick the fund during a bad year and sell the winning
investments off thereby increasing the gains and reducing the
principal. He indicated the principal of the fund is not
absolutely protected today. He expressed concern about the
political volatility that can come into play under the current
system that would no longer come into play under the POMV.
MR. GARHART said his understanding is that under the current
system, the earnings are supposed to be deposited into the
general fund unless otherwise specified by law. The 5 percent
proposal would eliminate that because the earnings reserve
account would no longer exist. He then said, regarding Senator
Ogan's comment about 83 percent of the voters being opposed to
allowing the permanent fund earnings to be used to fund
government several years ago, he also voted against that ballot
initiative because it said a portion of the earnings could be
used but did not specify how much. He said his biggest concern
is that a portion of the 5 percent will start being used to pay
government expenses.
CHAIR SEEKINS said nothing in this proposal mandates or
prohibits that from happening. SJR 18 is strictly a way to have
a reasonably predictable distribution on an annual basis.
MR. GARHART said most of the people he has talked to share his
concern.
CHAIR SEEKINS said the Legislature could use every penny of the
earnings reserve today to fund government under the current
program. He said whether the political will to not use it will
be there in the future depends on what kind of a disaster may
arise.
MR. GARHART mentioned that one of his biggest concerns with the
budget shortfall is the mandate that 25 percent of the royalty
amount must be deposited into the corpus of the permanent fund
in addition to inflation proofing, which builds the corpus of
the permanent fund at the expense of the budget deficit.
CHAIR SEEKINS said the inflation-proofing mandate is statutory,
not constitutional. The Legislature has acted responsibly over
the years by inflation proofing the fund. However, if a decision
has to be made as to whether to inflation proof the fund or pay
for education that would entail a big discussion. If the 5
percent proposal is adopted, inflation proofing becomes inherent
to the process.
MR. GARHART said he likes the direction the 5 percent proposal
takes but believes more protections are needed.
MR. DIRK NELSON, a resident of Ester testifying on his own
behalf, said his main concern is that changing the rules of the
game of making the permanent fund inaccessible to the
Legislature is not the problem; the game itself is. He has
talked to people who have researched the market value of North
Slope crude versus what the oil corporations are paying for that
oil. He said Conoco-Phillips posted a $1.3 billion profit
according to a newspaper story published yesterday, while North
Slope crude is being sold at well below market value. He
questioned why the Legislature is not looking in that direction.
He said the state should be looking at market value and,
likewise with the gas line, exactly how Alaska accrues its
royalties and why certain persons who claim to represent the
citizenry are fond of specific plans that give the citizens less
royalty.
MR. NELSON said he opposes changing the current rules governing
the permanent fund and anything that will further allow
legislative access to the fund when the state is not being
responsible in getting market value for its resources.
CHAIR SEEKINS asked Representative Hawker, a member of the House
Ways and Means Committee, to take Mr. Nelson's comments under
advisement.
REPRESENTATIVE HAWKER agreed to do so and said the House Ways
and Means Committee has scheduled meetings in several locations
during the months of November and December.
CHAIR SEEKINS asked for comments from the members or public.
There were none. He then asked Mr. Wohlforth if he is correct in
assuming that the benefit to the 5 percent proposal is that it
will provide a relatively simple, predictable number.
MR. WOHLFORTH said that is correct.
CHAIR SEEKINS said even though the number will be more
predictable, based on the history of the permanent fund, it will
not "eat" into the principal to the fund.
MR. WOHLFORTH said that is correct. He added that according to
the volatility chart, the permanent fund has had enormous
earnings in a given year, 20 percent, all of which would have
been available for legislative appropriation. The new formula of
even, annual, permitted "up to" distributions is the telling
point of preserving the fund and will sustain the fund on a
long-term basis.
CHAIR SEEKINS asked whether the current method or the POMV gives
the Board of Trustees the opportunity to look at long-term
investments versus remaining in a short-term investment.
MR. WOHLFORTH answered the 5 percent of market value proposal is
the tool that fund managers, trustees, and investment managers
need to sensibly manage for the long-term and not be concerned
by an annual spike. In addition, the POMV will prevent the
Legislature from using all of a 20 percent return, if 20 percent
was available. He said the point he is trying to get across is
that the realized earning formula just doesn't work for a fund
that is no longer composed solely of bonds.
CHAIR SEEKINS asked if the POMV method would eliminate political
volatility as well as market volatility.
MR. WOHLFORTH said that any potential political volatility would
be eliminated.
CHAIR SEEKINS said he threw out a theoretical situation where a
person could convert unrealized gains into realized gains for
political reasons during a poor market. He asked if the POMV
would eliminate that possibility and thereby protect the fund
even more.
MR. WOHLFORTH replied:
Absolutely, Mr. Chair, and if it should ever happen,
God forbid, in a future year - there's an election
year, and we've gotten into such a mess that somebody
running for governor would say wouldn't it be great if
we could, in fact, enhance the dividend this year,
even realizing it's a 5-year average, by selling out
these securities, all of which have got some
appreciation over cost even though it's a down year.
The 5 percentage of market value solution takes even
the possibility of politics out of an action program
like that.
SENATOR OGAN asked Mr. Wohlforth if such a move has ever been
made for political purposes.
MR. WOHLFORTH said not to his knowledge. He said he believes
Chair Seekins will agree that the trustees, during his term on
the board, simply acted as professionally as they could to
manage the money.
CHAIR SEEKINS said he was never asked to do that and had he
been, he probably would have resigned.
SENATOR OGAN asked Mr. Wohlforth if the permanent fund earnings
have exceeded the amount of revenue the state has generated from
royalties.
MR. WOHLFORTH said he believes that line is very close to
crossing.
SENATOR OGAN commented if the state does not get more resource
development going, "We're all in deep kimchee folks."
CHAIR SEEKINS agreed.
MR. GEORGE WILLIAMS, a resident of the Mat-Su Valley, said his
concern is that SJR 18 allows the Legislature to spend "up to" 5
percent. He believes people will not be satisfied without a
fixed number. He said most people do not trust the Legislature
to handle their money. They worry the Legislature will dip into
it to manage government. He believes the Legislature should
establish an income tax before making any changes to the
permanent fund and believes the majority of Alaskans would
support an income tax today.
SENATOR OGAN said he believes the permanent fund represents the
fact that the citizens collectively own the subsurface rights of
the minerals in the state. The permanent fund reflects their
share of that mineral wealth. He believes it is appropriate to
distribute some of that wealth, especially in light of the fact
that people in the Mat-Su Valley are waking up to the fact that
they do not own subsurface rights to their land.
MR. WILLIAMS said he learned a lot at the meeting and believes a
large part of the problem is that most people don't understand
issues. He noted Congress passed a law in 1916 that prohibited
homesteaders from owning the mineral rights on their land. He
believes shallow gas drilling is great for the Mat-Su Valley.
CHAIR SEEKINS said he believes the permanent fund is owned by
current and future generations of Alaskans and he intends to
protect it for them.
MR. WILLIAMS repeated his concern is that SJR 18 allows the
Legislature to spend an amount up to 5 percent. He prefers a
fixed amount.
MR. GARHART asked if the earnings are insufficient to cover
inflation proofing and the 5 percent payout, whether the
Legislature could tap into the corpus to make up the difference
under the new proposal.
CHAIR SEEKINS said it could. He explained the Legislature could
draw a maximum of 5 percent from the permanent fund even though
the annual gain was 4 percent. He said the corpus of the fund
could be reduced in the early years if the market was
disastrous.
CHAIR SEEKINS closed public testimony on SJR 18 and thanked all
participants.
SJR 19-CONST. AM: PERMANENT FUND INCOME
CHAIR SEEKINS noted that Senator Lincoln, sponsor of SJR 19, has
asked Representative Croft to present SJR 19 to the committee at
this time.
REPRESENTATIVE ERIC CROFT told members that Senator Lincoln was
tending to an emergency in Rampart and asked him to address the
committee because he is the sponsor of companion legislation in
the House, HJR 3. He said when he and Senator Lincoln presented
to the Senate Judiciary Committee during session, the main
discussion was about an asserted potential tax difficulty with
SJR 19 He noted the permanent fund is tax exempt at this time
but SJR 19 would constitutionally protect the dividend. Whether
doing that would affect the public purpose of the fund and
imperil its tax-free status is in question. His review of recent
cases over the last two years led him to believe that a change
in the tax status was not within the realm of possibility.
Attorney General Renkes recently commissioned an outside firm to
research the question and has sent a letter to legislators
confirming that constitutionally protecting the dividend will
not imperil the fund's tax status.
REPRESENTATIVE CROFT submitted that SJR 19 provides a spending
limit that makes the most sense from an individual taxpayer's
perspective. He wants the spending limit to reflect the limit on
how much legislators can take out of his pocket. He said
limiting either input or output could create a spending limit.
It makes the most sense to him to limit input - how much
government can take from his pocket and to require government to
live within that limit. He said the output limits can have
unintended consequences and stated:
The one used now is a suit that's way, way too big. It
doesn't fit and you could guess wrong and fit a suit
for the next 20 or 30 or 40 years that unnecessarily
constrained what we spent on education and roads or
police officers. It's really hard to predict those
things.
REPRESENTATIVE CROFT said what is predictable is the amount you
do not want government to take from individuals. SJR 19 is a way
to constrain the size of government and, more importantly, the
amount it can take from individuals. He said making sure the
Legislature cannot touch the dividend is crucial to the oncoming
debate of whether or not the structure of calculating the
earnings of the fund is changed. He pointed out there is a large
mistrust of the Legislature on this issue, some of that mistrust
is warranted. He said so many politicians have promised not to
use the dividend without a vote of the people. Many Alaskans
are concerned that the POMV, despite its merits, will become a
Trojan horse. It could become the justification vote for
legislators to say a vote was taken and they can now use the
dividend. Legislators can prove they don't intend to use
people's dividends by enacting SJR 19, the companion legislation
that enshrines the dividend in the Constitution.
REPRESENTATIVE CROFT summarized by saying SJR 19 will not create
tax problems, it creates a real spending limit in terms of how
much it can take from people's pockets, and it will be vital to
convincing Alaskans that the POMV or any other change to the
permanent fund is appropriate.
SENATOR OGAN asked if AS 37 and AS 43, as cited in the
resolutions, would constitutionally protect the hold harmless
agreement.
REPRESENTATIVE CROFT said he would get an answer to that
question to Senator Ogan. He then said he meant to mention the
provisions in the statute that directly relate to how the
dividend would be calculated. He was not sure if the hold
harmless provision is in that same provision, but offered to get
that information to the committee.
SENATOR OGAN said the [hold harmless provision] is not something
he wants to constitutionally protect; he would prefer to
eliminate it.
CHAIR SEEKINS noted that no one was present to testify so he
closed testimony on SJR 19. He announced that the committee
would meet the following day at 7:00 p.m. at the Anchorage
Legislative Information Office and would take testimony at that
time. He then adjourned the meeting.
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