Legislature(1993 - 1994)

01/26/1994 09:06 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                 SENATE STATE AFFAIRS COMMITTEE                                
                        January 26, 1994                                       
                           9:06 a.m.                                           
  MEMBERS PRESENT                                                              
  Senator Loren Leman, Chair                                                   
 Senator Mike Miller, Vice Chair                                               
 Senator Johnny Ellis                                                          
 Senator Jim Duncan                                                            
  MEMBERS ABSENT                                                               
 Senator Robin Taylor                                                          
  COMMITTEE CALENDAR                                                           
 SENATE BILL NO. 253                                                           
 "An Act relating to reapplication for the 1993 permanent fund                 
 dividend when the United States Postal Service documents the loss             
 of mail during the 1993 application period; and providing for an              
 effective date."                                                              
 SENATE BILL NO. 170                                                           
 "An Act relating to income of the permanent fund."                            
 SENATE JOINT RESOLUTION NO. 38                                                
 Proposing amendments to the Constitution of the State of Alaska               
 relating to revenues from natural resources, the Alaska permanent             
 fund, the appropriation limit and the budget reserve fund; and                
 providing for an effective date for the amendments.                           
 Bills previously heard.                                                       
  PREVIOUS SENATE COMMITTEE ACTION                                             
  SB 253   - no previous senate committee action.                              
 SB 170 - no previous senate committee action.                                 
 SJR 38 - no previous senate committee action.                                 
  WITNESS REGISTER                                                             
 Roger Cremo                                                                   
 425 G Street, Anchorage, AK 99501¶333-8188                                    
  POSITION STATEMENT:  in favor of SJR 38                                      
 William H. Scott                                                              
 Executive Director, Permanent Fund Corporation                                
 P.O. Box 25500, Juneau, AK 99802-5500¶465-2047                                
  POSITION STATEMENT:  testified on SJR 38                                     
 Jim Kelly                                                                     
 Research & Liaison Officer, Permanent Fund Corporation                        
 P.O. Box 25500, Juneau, AK 99802-5500¶465-2047                                
  POSITION STATEMENT:  testified on SJR 38                                     
 Vincent O'Reilly                                                              
 1611 Toyon Way, Kenai, AK 99611¶283-4946                                      
  POSITION STATEMENT:  in favor of SJR 38                                      
 Mayor John Williams                                                           
 210 Fidalgo, Kenai, AK 99611¶283-3104                                         
  POSITION STATEMENT:  in favor of SJR 38                                      
 Karen Dempster                                                                
 Anchorage, AK ¶344-5468                                                       
  POSITION STATEMENT:  in favor of SJR 38                                      
 Senator Steve Rieger                                                          
 State Capitol, Juneau, AK 99801-1182¶465-3879                                 
  POSITION STATEMENT:  prime sponsor of SB 170                                 
 Thomas C. Williams                                                            
 Director, Permanent Fund Dividend Division                                    
 Department of Revenue                                                         
 P.O. Box 110460, Juneau, AK 99811-0460¶465-2323                               
  POSITION STATEMENT:  testified on SB 253                                     
  ACTION NARRATIVE                                                             
 TAPE 94-4, SIDE A                                                             
 Number 001                                                                    
 CHAIRMAN LEMAN calls the Senate State Affairs Committee to order at           
 9:06 a.m.                                                                     
 Number 003                                                                    
 CHAIRMAN LEMAN announces that SJR  2 CRIME VICTIM RIGHTS;CRIM                 
 JUSTICE ADMIN will be held over until the State Affairs Committee             
 meeting on Friday, January 28, 1994.                                          
 Number 033                                                                    
 as the first order of business before the committee today.  The               
 chairman calls Senator Ellis, the prime sponsor of SJR 38, as the             
 first witness.                                                                
 Number 038                                                                    
 SENATOR ELLIS, prime sponsor of SJR 38, says that desperate times             
 require bold solutions, and this resolution is a bold solution.               
 SJR 38 would dramatically change the way the state finances state             
 government.  Senator Ellis announces that there are a number of               
 benefits to the plan contained in SJR 38.  First, the                         
 constitutional amendment would set in place a long-range fiscal               
 plan.  Second, we would have in place a way to deal with windfalls,           
 so that those windfalls would not automatically go into the general           
 fund.  Third, one of the results would be a general belt-                     
 tightening, so SJR 38 could be considered a constitutional spending           
 limit.  The final benefit would be a much bigger permanent fund               
 under which dividends are more secure, in his view, than under the            
 current system.                                                               
 Number 098                                                                    
 SENATOR ELLIS poses a question to critics of SJR 38, asking if they           
 have a better plan.  He says some people deny that the state is               
 having problems with finances, but that most people recognize that            
 the state is having financial problems.  Senator Ellis is willing             
 to work with anyone to come up with potential solutions to the                
 problem with state finances.                                                  
 Number 120                                                                    
 CHAIRMAN LEMAN thanks Senator Ellis and recognizes the issue as an            
 important one.  He feels that the state budget should be forward              
 funded in order to level out spending and break some of the                   
 existing cycles.  SJR 38 would accomplish some of those goals.  The           
 chairman calls for Mr. Cremo to testify.                                      
 Number 133                                                                    
 ROGER CREMO, testifying from Anchorage, thinks that one of the                
 problems the state has arises from reductions in state spending.              
 Minor reductions are tolerable, but substantial reductions, such as           
 those that occurred in 1986, are not tolerable.  The economy in               
 Alaska is very dependent on government spending and is greatly                
 effected by substantial reductions.  The economy of Alaska differs            
 from that of other states in that there is a dearth of private                
 property and private wealth; the result of which is the economy is            
 heavily dependent upon state spending.  The wealth in Alaska is               
 based on natural resources.                                                   
 Number 162                                                                    
 MR. CREMO states that fluctuations in state income and state                  
 spending are the result of the present system of finance in Alaska.           
 He then makes an analogy between the liquid resource in the ground            
 (oil) and the liquidity of the wealth above the ground.  All of the           
 financial resources and budget reserves of the state are too                  
 liquid.  When these very spendable "liquid" funds are enlarged, the           
 legislature spends more money, and when the "liquid" funds shrink,            
 the legislature spends less.  He believes the result of this                  
 occurrence is instability in the economy.                                     
 Number 212                                                                    
 MR. CREMO says that we must determine that some portion of this               
 "liquid" wealth be protected from spending.  Under SJR 38, all                
 natural resource revenues would flow into the permanent fund, which           
 is protected from appropriation.  We would then determine what                
 percentage of money would be available for withdrawal from the                
 permanent fund every year.  The amount withdrawn would not be so              
 great that it would not allow the fund to grow.  The reasoning                
 behind this idea is that by having sustainable spending, the                  
 economy will not fluctuate.                                                   
 Number 240                                                                    
 MR. CREMO says this can be accomplished by declaring                          
 constitutionally that all natural resource revenues and all the               
 money in various principal funds be put into the permanent fund,              
 declared off-limits to spending, and invested.  Once the money is             
 invested, the income from the money would remain in the fund, with            
 the exception of an appropriate percentage of the income, which               
 would be withdrawn for the state budget.  Mr. Cremo believes that             
 6% would be an appropriate percentage for withdrawal, taking into             
 account an inflation rate of approximately 4%, which is his                   
 estimate.  He thinks the rate of withdrawal should remain constant            
 at 6% every year, rather than changing it to reflect the annual               
 earnings of the permanent fund.  The earnings should be calculated            
 from the market value of the twelve preceding calendar quarters, or           
 three years.  By using the twelve preceding calendar quarters for             
 calculation of earnings, the legislature would know how much money,           
 to the penny, would be available for expenditure the following                
 fiscal year.                                                                  
 Number 298                                                                    
 CHAIRMAN LEMAN thanks Mr. Cremo for his testimony and asks if there           
 are any questions.  Hearing none, he announces that SJR 38 will               
 also be heard Friday, January 28, 1994.  The chairman then calls              
 witnesses from the Permanent Fund Corporation.                                
 Number 307                                                                    
 WILLIAM H. SCOTT, Executive Director, Permanent Fund Corporation,             
 and JIM KELLY, Research & Liaison Officer, Permanent Fund                     
 Corporation, introduce themselves.                                            
 Number 313                                                                    
 WILLIAM H. SCOTT states the Permanent Fund Corporation has given              
 the committee all the financial data that has been accumulated by             
 the corporation, and that he and Mr. Kelly are available for                  
 questions.  The accuracy of the data is subject to the assumptions            
 that have been made, so every time there is a new assumption, there           
 will be a new answer.                                                         
 Number 321                                                                    
 CHAIRMAN LEMAN asks Mr. Scott if he is satisfied with the                     
 definitions contained in SJR 38, and if they will be clear to                 
 future interpreters of the constitutional amendment.                          
 Number 329                                                                    
 MR. SCOTT replies it is hard to tell.                                         
 Number 336                                                                    
 MR. KELLY comments he thinks the language relating to allocation of           
 revenues into the permanent fund are pretty clear, though he does             
 have questions about the money that would be withdrawn from the               
 fund.  He is not sure the constitution is a good place to specify             
 a percentage to be taken out for budgetary needs, since earnings              
 and interest rates will change over time.  Mr. Kelly thinks a more            
 legitimate approach would be the one set forth in Senator Rieger's            
 bill, SB 170, which would measure the amount of money to be                   
 withdrawn for budgetary use in terms of real earnings.                        
 Number 355                                                                    
 MR. SCOTT asks the committee to recognize while the permanent fund            
 has earned a very respectable 11% average total return over the               
 last fifteen years, we have been in the biggest bull market of                
 history.  So the earnings of the past fifteen years have to reflect           
 some of the exceptional economic increases we've had as a country.            
 However, if the bubble were to burst, you may not see 11% returns             
 on the permanent fund, and you may, at the same time, see a higher            
 level of inflation.  He echoes Mr. Kelly's concern regarding                  
 putting a fixed number in a constitutional amendment.  He does not            
 think that would serve the best interest of everyone, simply                  
 because we would need some flexibility in the future.                         
 Number 373                                                                    
 CHAIRMAN LEMAN asks if Mr. Scott thinks 20% in the initial year is            
 too high a figure.  He remarks that he, also, is not comfortable              
 with a fixed rate of 6% for some of the same reasons Mr. Scott and            
 Mr. Kelly are not comfortable with it.  The chairman thinks perhaps           
 the percentage could be tied to real earnings in some way.  The               
 plan, in concept, makes sense to him, but perhaps some of the                 
 details need to be refined.                                                   
 Number 380                                                                    
 MR. KELLY says that the Permanent Fund Corporation has done a run             
 using the assumption of low-case revenue forecasts.  The figures              
 used were 8.37% earnings over five years with a 4% inflation rate.            
 Assuming those factors over that period of time (five years), the             
 amount of money going into the fund, even with a 20% withdrawal               
 rate, would be greater than the amount of money coming out of the             
 Number 390                                                                    
 MR. CREMO understands why Mr. Scott and Mr. Kelly would like to see           
 the real growth approach to withdrawal, but thinks that approach is           
 backwards.  He says the state would be right back in the budgetary            
 fluctuations we are experiencing now; we would change from oil and            
 gas fluctuations to market fluctuations.  It would be a steadier              
 course to use the fixed percentage approach.  It is an approach the           
 Ford Foundation has used for years.  Mr. Cremo asserts the                    
 permanent fund operation has been one of "coupon clipping", or                
 essentially a bond fund, and not very dynamic.  He says the                   
 proposed 20% withdrawal figure for the initial year was arrived at            
 because he thinks it is a figure legislators could live with.  He             
 does, however, think the initial figure should be lower, perhaps              
 Number 444                                                                    
 SENATOR DUNCAN asks if printouts which were referred to earlier               
 from the Permanent Fund Corporation are available.  Mr. Kelly                 
 replies that he will leave a copy with the committee today so that            
 members can review the information before the next committee                  
 Number 449                                                                    
 SENATOR ELLIS comments that House Research and the House Finance              
 Committee are also doing a number of runs.  He will provide those             
 to the committee also, but is not sure when they will be available.           
 Number 455                                                                    
 MR. SCOTT makes one other observation, which is that the Permanent            
 Fund Corporation takes no position on this legislation, and their             
 only objective is to provide information on the issue to the                  
 Number 466                                                                    
 CHAIRMAN LEMAN states he is impressed with the performance of the             
 corporation and the quality of its staff, and hopes the corporation           
 can help analyze and develop the plan set forth in SJR 38.  The               
 chairman calls the next witness.                                              
 Number 475                                                                    
 VINCENT O'REILLY, testifying from Kenai, says many people have come           
 to two conclusions: first, there is a budget problem and                      
 forthcoming fiscal gap, and second, this state has a budget                   
 mechanism problem.  There are at least three deficiencies under the           
 present budget mechanism system.  Those deficiencies are violent,             
 unpredictable fluctuation of revenues, unbearable pressures on the            
 legislature to appropriate in a prudent manner, and the creation              
 and sustenance of the boom-bust cycle both in the private economy             
 and in government activities and programs.  He thinks SJR 38 would            
 tend to greatly resolve the budget mechanism problem.                         
 Number 519                                                                    
 MR. O'REILLY  adds several other factors he believes are important            
 in the consideration of this plan: one, it would encourage and                
 support the growth of the permanent fund principal, secondly, the             
 size of the permanent fund dividend would still rest with the                 
 legislature, and third, SJR 38 would tie the general fund to the              
 permanent fund.  Mr. O'Reilly asserts that SJR 38 has received                
 relatively wide-spread support on the Kenai Peninsula.  In                    
 addition, the Alaska Conference of Mayors unanimously endorsed                
 criteria calling for budget reform; this plan fills the criteria.             
 Drastic times call for drastic action.  He paraphrases Winston                
 Churchill, saying, "fiscally, this was...(the legislature's) finest           
 Number 542                                                                    
 CHAIRMAN LEMAN thanks Mr. O'Reilly for his testimony and calls the            
 next witness.                                                                 
 Number 543                                                                    
 JOHN WILLIAMS, Kenai Mayor, testifying from Kenai, states he is               
 representing the views of the city of Kenai, and hopes he also                
 represents the views of the Alaska Conference of Mayors.  A                   
 resolution relating to this subject which embodied most of the                
 philosophy of SJR 38 was adopted by the Alaska Conference of                  
 Mayors.  Mr. Williams philosophizes about the history of the state            
 and its budget system and financial operations.  He notes that one-           
 third of the money the state has earned has been saved, which is              
 extremely unusual.                                                            
 TAPE 94-4, SIDE A                                                             
 Number 579                                                                    
 MR. WILLIAMS contends an annuity government is probably the finest            
 type of government we could possibly have, and would encourage                
 growth and encourage further development of small businesses and              
 small industry in the state.  He thinks an annuity government would           
 solve some of the problems with stagnated resource development that           
 is occurring today.  We want to leave a legacy for our children and           
 grandchildren, and give them the same chances we have had.  We now            
 have the grand opportunity to be the creators of a major legacy for           
 our children and grandchildren.                                               
 Number 525                                                                    
 CHAIRMAN LEMAN thanks Mr. Williams for his testimony and calls the            
 next witness.                                                                 
 Number 522                                                                    
 KAREN DEMPSTER, testifying from Anchorage, wants the cycle of boom            
 and bust changed.  She believes the legislature has both the                  
 ability and the resources to change the boom and bust cycle.                  
 Economic stability is important.  We can use the budget reserve               
 account to make the transition to an annuity-funded government very           
 easy, with little disruption.  Economic stability is an incentive             
 for development.                                                              
 Number 473                                                                    
 CHAIRMAN LEMAN thanks Ms. Dempster for her testimony and announces            
 that SJR 38 will be held over until Friday, January 28, 1994.                 
 Number 466                                                                    
 CHAIRMAN LEMAN moves to bring up SB 170 DISPOSITION OF PERMANENT              
 FUND INCOME.  The Chairman calls on Senator Rieger, the prime                 
 sponsor of SB 170, to testify.                                                
 Number 463                                                                    
 SENATOR RIEGER explains the reason for SB 170 is to address the               
 issue of the difference between nominal earnings and real earnings            
 in the permanent fund.  Historically, in financial management,                
 inflation has not been a major issue until, perhaps, the last                 
 twenty or thirty years.  Because of that, it's taken a while for              
 the concept of real earnings, which means the earnings which exceed           
 inflation, to gain understanding.  The concept of real earnings is            
 extremely important when we're referring to an endowment fund.  Any           
 long-term plans, such as the permanent fund, must preserve the                
 underlying purchasing power by measuring growth in real earnings to           
 inflation-proof the fund.  SB 170 will define earnings based not on           
 nominal earnings, but real earnings: the total return minus the               
 rate of inflation.                                                            
 Number 428                                                                    
 SENATOR RIEGER states that the other statutory provisions, which              
 relate to how earnings are used, will not be changed under SB 170.            
 The way the amount of money to be disbursed in dividends is                   
 calculated will not be affected by this bill.  What will change,              
 however, is that real earnings will be used to calculate                      
 disbursements, not nominal earnings.  The affect of this change is            
 that the rate of growth of dividends will be slower, and could                
 possibly be reduced in the near-term.  But we will have the comfort           
 of knowing the fund is protected against inflation, and there will            
 not be an annual debate over whether or not to inflation-proof the            
 permanent fund.                                                               
 Number 404                                                                    
 SENATOR RIEGER notes that the Permanent Fund Corporation has made             
 some projections which use conservative, long-standing assumptions,           
 one of which incorporated the idea that over the long-term the                
 permanent fund would earn a total realized return of 9%, with an              
 inflation rate of 6%, for real earnings of 3%.  Over the last                 
 decade, the Permanent Fund Corporation has invested very heavily in           
 bonds, but is changing their asset allocation targets and investing           
 more in higher-yielding securities.  Senator Rieger mentions and              
 quotes from a January, 1994 study commissioned by the Legislative             
 Budget & Audit Committee (LB&A) which was prepared by Ibbotson                
 Associates, Inc.                                                              
 Number 364                                                                    
 SENATOR RIEGER notes the difference between variable-rate                     
 investments and fixed-rate investments, and says variable-rate                
 investments are considered to be riskier.  What people want to know           
 is what the effect will be of using real earnings as the basis for            
 projecting how much money will be available for appropriations                
 under various scenarios, and what the effect will be on the size of           
 dividends.  Under the most optimistic scenario, the size of the               
 dividends will continue to rise, but at a slower rate than if we              
 continue to compute dividends based on nominal earnings.                      
 Number 338                                                                    
 SENATOR RIEGER adds that the need for a large permanent fund                  
 earnings reserve would be reduced under SB 170.  He believes it is            
 a mistake to use total nominal earnings as a base for computation             
 of earnings of the permanent fund.  We need to prioritize                     
 inflation-proofing; it should be the top priority.  He thinks SB
 170 will make inflation-proofing of the permanent fund a priority.            
 Number 299                                                                    
 CHAIRMAN LEMAN asks if anyone has questions for Senator Rieger.               
 Hearing none, he announces SB 170 will be held over until Friday,             
 January 28, 1994, which will allow members to review the                      
 information they have received today on the bill.                             
 Number 289                                                                    
 SENATOR DUNCAN asks what the administration's opinion of SB 170 is.           
 Number 282                                                                    
 SENATOR RIEGER replies that he has not had any communications with            
 the governor in regards to SB 170; however in informal                        
 conversations with persons in the administration, they have voiced            
 concern over the impact of unrealized gains and whether those gains           
 should be considered if we move to a real earnings concept.                   
 Number 268                                                                    
 CHAIRMAN LEMAN thanks Senator Rieger for his testimony.                       
 Number 265                                                                    
 CHAIRMAN LEMAN brings up SB 253 REAPPLICATION PERIOD FOR 1993 PF              
 DIVIDEND and calls on Senator Miller, the prime sponsor, to                   
 Number 262                                                                    
 SENATOR MILLER says SB 253 will allow persons whose dividend                  
 application was lost in the mail last year to reapply.  The                   
 applicants would have to make a sworn statement that they posted              
 the application, they would have to have a sworn statement from a             
 person who either witnessed the original application or saw the               
 applicant mail the form, and there would have to be documentation             
 from the postal service that mail had been lost during that period            
 of time.  This problem occurred in the North Pole area last year.             
 There are approximately forty to fifty people who were affected by            
 lost mail.  This legislation would apply to anyone whose                      
 application was lost during the 1993 application period, not just             
 persons in the North Pole area.                                               
 Number 235                                                                    
 THOMAS C. WILLIAMS, Director, Permanent Fund Dividend Division,               
 Department of Revenue, states that the department is neutral on SB
 253 and that Senator Miller has covered the basic elements of the             
 bill.  The department does not foresee a significant impact from SB
 Number 227                                                                    
 CHAIRMAN LEMAN asks Mr. Williams what the source of funds will be             
 for these additional applicants.                                              
 Number 224                                                                    
 MR. WILLIAMS says there are probably enough funds to make immediate           
 payment, but if that is not the case, payment would simply be                 
 delayed until after July 1st when the dividend fund is filled with            
 the next years funds.                                                         
 Number 211                                                                    
 CHAIRMAN LEMAN asks Mr. Williams if the bill would also apply to              
 mail that might have been lost when a mail plane went down between            
 Homer and Kenai and if he knows of any applications that were lost            
 from that flight.                                                             
 Number 209                                                                    
 MR. WILLIAMS replies that there were applications lost from that              
 flight.  There is a provision that allows for reapplication, but              
 the applicant must reapply before September 1st, when the dividend            
 is calculated.  Mr. Williams clarifies that there are no                      
 outstanding claimants from the flight that went down between Homer            
 and Kenai of which he is aware.                                               
 Number 180                                                                    
 CHAIRMAN LEMAN asks if there are any further questions.                       
 Number 177                                                                    
 SENATOR MILLER makes a motion to discharge SB 253 out of committee            
 with individual recommendations.                                              
 Number 175                                                                    
 CHAIRMAN LEMAN, hearing no objections, orders SB 253 be released              
 from Senate State Affairs Committee with individual                           
 Number 170                                                                    
 CHAIRMAN LEMAN announces that Friday, January 28, 1994 the                    
 committee will hear SJR 2, SJR 38, SB 170, SB 244, and SB 245.  The           
 chairman adjourns the meeting at 10:28 a.m.                                   

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