Legislature(1993 - 1994)
01/26/1994 09:06 AM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 CHAIRMAN LEMAN brings up SJR 38 RESTRUCTURE PERMANENT FUND 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 fund. 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 17%. 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 meeting. 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 committee. 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 hour." 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 testify. 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 253. 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 recommendations. 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.