Legislature(2001 - 2002)

03/21/2002 03:35 PM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                        ALASKA STATE LEGISLATURE                                                                                
                    SENATE STATE AFFAIRS COMMITTEE                                                                            
                             March 21, 2002                                                                                     
                                3:35 p.m.                                                                                       
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Gene Therriault, Chair                                                                                                  
Senator Ben Stevens                                                                                                             
Senator Bettye Davis                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Randy Phillips, Vice Chair                                                                                              
Senator Rick Halford                                                                                                            
                                                                                                                              
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE JOINT RESOLUTION NO. 35 am                                                                                                
Relating to urging the United States Congress to amend the tax                                                                  
code to permanently repeal the estate tax.                                                                                      
      MOVED HJR 35 am OUT OF COMMITTEE                                                                                          
                                                                                                                                
SENATE BILL NO. 306                                                                                                             
"An Act establishing the Prescription Drug Assistance Task Force;                                                               
and providing for an effective date."                                                                                           
      MOVED CSSB 306 (STA) OUT OF COMMITTEE                                                                                     
                                                                                                                                
SENATE JOINT RESOLUTION NO. 13                                                                                                  
Proposing amendments to the Constitution of the State of Alaska                                                                 
relating to inflation- proofing the permanent fund.                                                                             
HEARD AND HELD                                                                                                                  
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
HJR 35 - No previous action to record.                                                                                          
                                                                                                                                
SB 306 - No previous action to record.                                                                                          
                                                                                                                                
SJR 13 - See State Affairs minutes dated 4/26/01 and                                                                            
          2/22/02                                                                                                               
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Representative Jeannette James                                                                                                  
Alaska State Capitol, Room 214                                                                                                  
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT: Sponsor of HJR 35                                                                                         
                                                                                                                                
Heath Hilyard                                                                                                                   
Alaska State Capitol, Room 214                                                                                                  
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Presented HJR 35                                                                                         
                                                                                                                                
Senator Bettye Davis                                                                                                            
Alaska State Capitol, Room 504                                                                                                  
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT: Sponsor of SB 306                                                                                         
                                                                                                                                
Richard Benavides                                                                                                               
Alaska State Capitol, Room 504                                                                                                  
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Explained SB 306                                                                                         
                                                                                                                                
Steve Ashman                                                                                                                    
Department of Administration                                                                                                    
Director of Senior Services                                                                                                     
3601 C Street Suite 310                                                                                                         
Anchorage, AK 99503                                                                                                             
POSITION STATEMENT: Testified on SB 306                                                                                       
                                                                                                                                
Gene Dau                                                                                                                        
AARP member                                                                                                                     
P.O. Box 20995                                                                                                                  
Juneau, AK 99801                                                                                                                
POSITION STATEMENT: Testified on SB 306                                                                                       
                                                                                                                                
John Furuness                                                                                                                   
NARFE member                                                                                                                    
1285 Fritz Cove Road                                                                                                            
Juneau, AK 99801                                                                                                                
POSITION STATEMENT: Testified on SB 306                                                                                       
                                                                                                                                
Marie Darlin                                                                                                                    
AARP member                                                                                                                     
No address provided                                                                                                             
POSITION STATEMENT: Testified on SB 306                                                                                       
                                                                                                                                
Nancy  Weller                                                                                                                   
Division of Medical Assistance                                                                                                  
Department of Health &                                                                                                          
  Social Services                                                                                                               
PO Box 110601                                                                                                                   
Juneau, AK  99801-0601                                                                                                          
POSITION STATEMENT: Testified on SB 306                                                                                       
                                                                                                                                
Joe Balash                                                                                                                      
Staff to State Affairs Committee                                                                                                
Alaska State Capitol, Room 121                                                                                                  
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Introduced SJR 13                                                                                        
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 02-16, SIDE A                                                                                                            
                                                                                                                                
CHAIRMAN    GENE   THERRIAULT    called    the   Senate    State   Affairs                                                    
Committee   meeting   to  order  at  3:35   p.m.  Present   were  Senators                                                      
Davis,   Stevens   and  Chairman    Therriault.   Senators    Halford   and                                                     
Phillips were out of town.                                                                                                      
                                                                                                                                
                                                                                                                                
                        HJR 35-REPEAL ESTATE TAX                                                                            
                                                                                                                                
HEATH HILYARD, staff for Representative Jeannette James,                                                                        
introduced HJR 35 and read the following into the record:                                                                       
                                                                                                                                
      This  resolution  is  similar  in wording   and intent  to  HJR
      34  introduced  by  Rep.  Coghill   in the  first  session   of                                                           
      the  twenty  first  Alaska  Legislature.     The major  reason                                                            
      we've  chosen   to  revisit   this  issue  is  that   in 2001,                                                            
      President   Bush  signed  into  law  a  tax  relief   act  that                                                           
      included  a  temporary   repeal  of  the  Death  tax  and  that                                                           
      repeal sunsets in 2010.                                                                                                   
                                                                                                                                
      To  address  some  of  the  technical   elements   of  the  new                                                           
      provisions   I have  included   with my  sponsor  statement   a                                                           
      timeline,   prepared   by   Deloitte   &  Touche   LLP,  which                                                            
      demonstrates   the graduated   decline  in  tax rates  and  the                                                           
      increasing   exemption   levels   as  a  result  of  the   2001                                                           
      law.    Alaska   currently   has   its  own   Estate  tax   (AS                                                           
      43.31)  and our  rate,  and  thus the  revenue  generated,   is                                                           
      driven  by the  federal  law.   According   to Brett  Fried,  a                                                           
      tax   economist    with   the   Alaska   Dept.   of   Revenue,                                                            
      regardless  of  whether  or  not the  federal  repeal  becomes                                                            
      permanent,   the   temporary   repeal   will  cause   Alaska's                                                            
      revenue stream from this tax will dry up by FY06.                                                                         
                                                                                                                                
      In the  same  study  cited in  the  sponsor  statement,  using                                                            
      very  sophisticated   econometric   models,  analysts  believe                                                            
      that  had  the  tax  been   repealed   in  1996  the  nation's                                                            
      economy  would  have  yielded  an average   of $11  billion  in                                                           
      additional   output,   created  an  average   of  145,000   new                                                           
      jobs,  and  personal   income   would  have  increased   by  an                                                           
      average  of  $8  billion   over  the  following   nine  years.                                                            
      The overall   increase  in the  national  economy   would  have                                                           
      created   enough   additional   revenue   to  compensate    for                                                           
      that which had been generated by the tax.                                                                                 
                                                                                                                                
      In a  statement  of  support  from  NFIB  Alaska  for  HJR  35,                                                           
      the  NFIB   states,   "In   addition   to   the   tax  itself,                                                            
      thousands  of  small  businesses  are  impacted  each  year  by                                                           
      expensive  fees  paid  to attorneys,   accountants,   and  life                                                           
      insurers  necessary   to prepare  for  an eventual   death  tax                                                           
      debt."    Further,   an  article  appearing   in  Farm  Bureau                                                            
      News  published   by  the American   Farm  Bureau   Federation                                                            
      states   "many  farmers   and  ranchers   feel   compelled   to                                                           
      spend  money   for  estate   planning,   an  expense   that  is                                                           
      drain  on ongoing   farm  operations."    In  addition  to  the                                                           
      NFIB,   efforts   to  permanently    repeal  this   tax  enjoy                                                            
      broad   support   from   the   National   Black    Chamber   of                                                           
      Commerce,   the  National   Association   of   Women  Business                                                            
      Owners  and  the   National  Congress   of  American   Indians                                                            
      among others.                                                                                                             
                                                                                                                                
      As  indicated   in  the  sponsor  statement,   not  only   does                                                           
      the  death  tax  disproportionately    tax  several   specific                                                            
      demographic   groups,   it  also  does  not  justify   its  own                                                         
      existence   from  a  fiscal   perspective    costing   more  to                                                           
      collect than the revenue it generates.                                                                                    
                                                                                                                                
      Finally,  I  will  leave  with  a quote  from  President   Bush                                                           
      in   a   speech    given    this    week   to    the   Women's                                                            
      entrepreneurship    summit,   "We  must  make  the  repeal   of                                                           
      the  death  tax  permanent.     I call  upon  Congress   to  do                                                           
      this immediately."                                                                                                        
                                                                                                                                
CHAIRMAN    THERRIAULT   asked   whether    the   phone   call   that   was                                                     
scheduled   for   the  following   day   from  Speaker   Hastert   was   in                                                     
regard  to  the  national   effort   to permanently    repeal  the  estate                                                      
tax.                                                                                                                            
                                                                                                                                
                                                                                                                                
REPRESENTATIVE    JEANNETTE   JAMES,   resolution   sponsor,   replied   it                                                     
was  for  that  purpose  and  she  had  already  had  one  teleconference                                                       
meeting with the U.S House on the issue.                                                                                        
                                                                                                                                
CHAIRMAN  THERRIAULT   stated  that  his  office  received  a notice  that                                                      
contained   a copy  of a suggested   resolution   for the  Legislature   to                                                     
consider.    He  asked   whether    HJR   35  contained    the   suggested                                                      
language.                                                                                                                       
                                                                                                                                
MR.   HILYARD   replied    that  legislative    legal    had  that   basic                                                      
document when they drafted the resolution.                                                                                      
                                                                                                                                
CHAIRMAN   THERRIAULT   noted   there  was  a  zero  fiscal   note.  There                                                      
were no further questions or additional testimony.                                                                              
                                                                                                                                
CHAIRMAN   THERRIAULT   disclosed    his  wife  is  an  attorney   with   a                                                     
master degree in tax issues.                                                                                                    
                                                                                                                                
REPRESENTATIVE    JAMES   announced    she  changed    the  name   of   the                                                     
resolution to "Repeal Estate Tax" from "Repeal Death Tax."                                                                      
                                                                                                                                
CHAIRMAN THERRIAULT said he appreciated the change.                                                                             
                                                                                                                                
There was no prepared CS and no proposed amendments.                                                                            
                                                                                                                                
He asked for the will of the committee.                                                                                         
                                                                                                                                
Senator   Davis  made  a  motion  to  move  HJR  35  am  and  zero  fiscal                                                      
note from committee with individual recommendations.                                                                            
                                                                                                                                
There being no objection, HJR 35 am moved from committee.                                                                       
                                                                                                                                
                                                                                                                                
                                                                                                                              
           SB 306-PRESCRIPTION DRUG ASSISTANCE TASK FORCE                                                                     
                                                                                                                                
SENATOR  BETTYE   DAVIS,  bill  sponsor,   stated  that  she  has  spent  a                                                     
lot  of time  reviewing   prescription   drug  issues.  She  is  currently                                                      
serving   on  the   Committee   on  Aging   for   the  Council   of  State                                                      
Governments   and  recently   attended   a  conference   on  prescription                                                       
drugs.  Representative    Joe  Hayes  is  the sponsor   of  the same  bill                                                      
on  the  House   side  and  asked   that  she  mirror   his  bill   in  the                                                     
Senate.  She  hopes  that  this legislation   will  help  to find  ways  to                                                     
aid senior citizens in the purchase of prescription drugs.                                                                      
                                                                                                                                
RICHARD   BENAVIDES,   aide  to  Senator   Davis,  explained   that  while                                                      
Congress   has  been  debating  proposals   to  add  a prescription   drug                                                      
benefit   to  Medicare,   many   states  are   taking  steps   to  protect                                                      
their  more  vulnerable   residents   from  rising  out  of  pocket  costs                                                      
and   declining     insurance    coverage    for   prescription     drugs.                                                      
According   to the  National   Conference  of  State  Legislatures,   over                                                      
40  states   have  considered   legislation   to  help   seniors  and   the                                                     
disabled   address   these   issues.   SB  306  only   involves   Alaska's                                                      
growing  senior  population.   American   Association  of  Retired  People                                                      
(AARP)  statistics   report  that  the annual  growth  rate  for  Medicaid                                                      
spending   on medications   in  Alaska  rose  23.4  percent  between  1996                                                      
and  1998.  They  also  reported   that  about   11,000  seniors   have  no                                                     
prescription drug coverage whatsoever.                                                                                          
                                                                                                                                
Between   October    31,  1999   and   October   31,   2000,  over   5,500                                                      
Alaskans   aged  65  and   above  who  were   eligible   for  the  state's                                                      
Medicaid  program,   received  263,000  prescriptions    at a cost  to  the                                                     
state  of  over  $10  million.  SB  306  would  create  a method   to look                                                      
at  ways  to provide  meaningful   relief   to seniors  without   creating                                                      
large new expenditure programs.                                                                                                 
                                                                                                                                
STEVE   ASHMAN,   Director    of  the   Division   of   Senior   Services,                                                      
testified     via     teleconference      that    the    Department      of                                                     
Administration    would  be  charged   with  putting   together  the  task                                                      
force  called   for  in  the  legislation.   Currently   they  don't  have                                                      
accurate    information    on  the   number   of   seniors   in   need   of                                                     
prescription    drug  relief   but  there   are  certainly   a  number   of                                                     
anecdotal   cases.  It is  a significant   problem  and  one of  the goals                                                      
of   the  legislation    is   to  investigate    the   options   that   are                                                     
available as well as other states' practices.                                                                                   
                                                                                                                                
He looks  forward   to working  with  the  sponsor  and  will help  in  any                                                     
way possible.                                                                                                                   
                                                                                                                                
GENE  DAU,  AARP  member   testified   in support   of  SB 306.  He  noted                                                      
AARP  Alaska   sent  a letter   in  support  as  well.  Washington   state                                                      
doctors  are  now able  to  fax prescriptions   directly   to pharmacists                                                       
in  Canada  who will  mail  the  medicine  to  you  in the  U.S.  He asked                                                      
why this wouldn't be possible in the state of Alaska.                                                                           
                                                                                                                                
CHAIRMAN  THERRIAULT   commented   he didn't  know  that  you couldn't   do                                                     
that here.                                                                                                                      
                                                                                                                                
SENATOR  DAVIS  stated  that  would  be an  option  the  task force  could                                                      
look into.                                                                                                                      
                                                                                                                                
SENATOR  STEVENS   asked  if the  method  of  payment  was  a credit  card                                                      
or similar and not a credit against a U.S. based program.                                                                       
                                                                                                                                
MR. DAU replied payment was cash.                                                                                               
                                                                                                                                
3:50 p.m.                                                                                                                       
                                                                                                                                
JOHN  FURUNESS,   National  Association   of  Retired  Federal   Employees                                                      
(NARFE),   testified  in  support  of  SB 306.  Prescription   drugs  need                                                      
to be made more affordable.                                                                                                     
                                                                                                                                
MARIE  DARLIN,  AARP  member,  testified   in support  of  SB 306.  She  is                                                     
the  coordinator  for  the  Capital  City  Task Force  and  although  they                                                      
are  following   many   bills  this   session,   this  is  of  particular                                                       
concern. The AARP letter of support is in the bill file.                                                                        
                                                                                                                                
CHAIRMAN  THERRIAULT   asked  Ms.  Darlin  whether  she  had a comment   on                                                     
the makeup of the task force.                                                                                                   
                                                                                                                                
MS.  DARLIN  said  she  was pleased   with the  composition   of  the task                                                      
force.                                                                                                                          
                                                                                                                                
CHAIRMAN    THERRIAULT   asked   whether    the   Department   of   Social                                                      
Services   had  any  concern  about   the makeup   of  the  proposed  task                                                      
force.                                                                                                                          
                                                                                                                                
NANCY   WILLER,   a  representative    from   the  Division    of  Medical                                                      
Assistance,    said  they   had  no  concerns   with   its  makeup.   They                                                      
understand   that  most   of  the  federal  proposals   that   are  in  the                                                     
President's   budget  use  Medicaid  as a  funding  source  for  providing                                                      
prescription   drug  coverage  to  additional  senior  populations.   They                                                      
would be available to provide assistance to the task force.                                                                     
                                                                                                                                
CHAIRMAN  THERRIAULT   asked  Mr.  Benavides  about  the  meaning  on page                                                      
2, lines 4-6.                                                                                                                   
                                                                                                                                
MR.  BENAVIDES   said  the wording   came  from  the  drafters  and  legal                                                      
terminology isn't always easy for the layperson to understand.                                                                  
                                                                                                                                
SENATOR   DAVIS  explained   the   meaning  is  that   we  would  have   to                                                     
adopt   other   state's   strategies   to   fit  Alaska.   She   said   she                                                     
supports the statement but was receptive to more artful wording.                                                                
                                                                                                                                
CHAIRMAN   THERRIAULT    moved  conceptual    amendment   number   one   to                                                     
replace    page   2,  lines    4-6  with    something   similar    to   the                                                     
following:   "In  considering    the  adoption   of  a  strategy  to  help                                                      
senior   citizens   cope  with  the  cost   of prescription    drugs,   the                                                     
State   of  Alaska   should   review   what   has  been   done   in  other                                                      
states."                                                                                                                        
                                                                                                                                
SENATOR DAVIS said she could support the change.                                                                                
                                                                                                                                
CHAIRMAN  THERRIAULT   said  he would  work  with  Senator  Davis  and  the                                                     
drafters   rather  that  holding   the bill  and  presenting   a  proposed                                                      
CS at the next meeting.                                                                                                         
                                                                                                                                
There was no objection to the conceptual amendment.                                                                             
                                                                                                                                
He asked Mr. Benavides to explain the fiscal note.                                                                              
                                                                                                                                
MR.  BENAVIDES   said  the second   page  of the  fiscal   note  explained                                                      
this  would  cover  the  cost  of  three  meetings   if travel,   lodging,                                                      
per  diem  and  telephonic   costs  were  incurred.   Mr. Ashman   was  the                                                     
author of the note and could answer specific questions.                                                                         
                                                                                                                                
CHAIRMAN   THERRIAULT  said  he  didn't  have  any  particular   questions                                                      
and  the bill  had  a referral  to  the Finance   Committee  where  fiscal                                                      
questions would be addressed.                                                                                                   
                                                                                                                                
There were no further amendments.                                                                                               
                                                                                                                                
He asked for the will of the committee.                                                                                         
                                                                                                                                
SENATOR  STEVENS  made  a  motion  to move  CSSB  306 (STA)  and  attached                                                      
fiscal note from committee with individual recommendations.                                                                     
                                                                                                                                
There being no objection, CSSB 306 (STA) moved from committee.                                                                  
                                                                                                                                
                                                                                                                                
                   SJR 13-CONST. AM: PERMANENT FUND                                                                         
                                                                                                                                
CHAIRMAN   THERRIAULT   said  he  would   like  to  discuss  some   of  the                                                     
information    they   received   from   the   Permanent    Fund   Trustees                                                      
regarding   the  tax  problems   that  might  be  triggered   if  anything                                                      
was  done  to  guarantee    any  part  of  the  dividend   in  the  Alaska                                                      
State  Constitution.    He asked   Mr. Balash   to distribute   copies   of                                                     
the  legal   opinions   the   trustees   have  gotten   from   Morrison   &                                                     
Foerster   LLP over  the  years.  He  understood   the trustee's   concern                                                      
and  desire  to  let  the Legislature    know that  if  anything   is done                                                      
regarding   ensuring  any  kind of  dividend,  there  is  a potential   tax                                                     
problem.   His reading   of  the legal   opinions  leads  him  to  believe                                                      
it is not an absolute.                                                                                                          
                                                                                                                                
Mr.  Balash  conducted  research   based  on discussions   from  the legal                                                      
memos   and  developed   a  grid   sheet   comparing   funds   from  other                                                      
states.  He  also prepared   a paper  that  discusses  the  Integral  Part                                                      
Theory,   which  is  a legal   theory  that  protects   state  activities                                                       
from taxation.                                                                                                                  
                                                                                                                                
MR.  BALASH,  staff  to  Senate  State  Affairs  Committee,   established                                                       
the  report  given  to  the  trustees  was  conducted   by a  tax  firm  in                                                     
Washington    D.C.   The   letter   was   addressed    to   the   Attorney                                                      
General's   office   because   that  office   is  statutorily   the  legal                                                      
counsel   to  the   Permanent   Fund   Corporation.    They  discussed    a                                                     
variety   of ways   the Permanent   Fund  can  claim   an  exemption  from                                                      
federal   taxation.    Primarily   they   focus  on   the  Integral   Part                                                      
Theory;   the  underlying    doctrine   is  that  Congress   can  tax   the                                                     
income  of  states   if they  expressly   say  so,  but  they  have  never                                                      
chosen  to  do so.  Additionally,   an entity  that  is  an integral  part                                                      
of   the   state   is   not   subject   to   taxation   unless    Congress                                                      
specifically   subjects   it to  taxation.   This has  been  a successful                                                       
defense  against   taxation   with  the IRS  in  a number   of instances.                                                       
Primarily they look at three points.                                                                                            
                                                                                                                                
   1. First they look at the type of entity. Is it a public                                                                     
           corporation, a state agency or a type of fund within the                                                             
      treasury or even apart from the treasury?                                                                                 
   2. Second they look at state creation, control and domination                                                                
           of the entity. Did the state create the fund and does the                                                            
            state maintain strict control over or domination of the                                                             
      entity?                                                                                                                   
   3. Third they look at both the source and destination of the                                                                 
         funds. Where did the money come from that is in the fund and                                                           
      what is the destination of the proceeds or assets?                                                                        
                                                                                                                                
There  is  no  single  determinant    factor;  rather   the IRS  looks   at                                                     
all  three   factors  and  sometimes    there  has  been  negotiation    of                                                     
what  features   the  state  needed   to have  to  create   the  different                                                      
disaster   insurance   funds   and  insulate   them   from  taxation    and                                                     
qualify for the Integral Part Theory.                                                                                           
                                                                                                                                
Of  particular    concern   is  the  third   part  of   the  test  or   the                                                     
destination.    In  Alaska   the   primary   destination   has   been   the                                                     
dividend.   Whether  or  not that  counts  as  a private   benefit  or  the                                                     
creation  of  a private  benefit   causes  some concern   because  anytime                                                      
the   destination     is   a   private   benefit    the   IRS    carefully                                                      
scrutinizes that benefit.                                                                                                       
                                                                                                                                
MR.  BALASH  referred   to  the  grid  sheet   found  at  the  end  of  the                                                     
minutes  to  discuss  and  compare  funds   from other  states   according                                                      
to the Integral Part Theory                                                                                                     
                                                                                                                                
For  example,   the   State  of  Michigan    set  up  a  prepaid   tuition                                                      
program   where   parents  invested    a  set  amount   of  money  into   a                                                     
public  corporation.   That  money  was invested   and returns   were paid                                                      
out  to  the  beneficiaries    that  were   designated   by  the  original                                                      
investors.   The  state  argued  it was  an  integral  part  of  the state                                                      
while  the  IRS held  that  it  was an  investment   scheme  in  which  the                                                     
investors   were  using  the  cloak  of  the  state's  tax-exempt   status                                                      
to  hide  their  gains.   Of particular   concern   to  the  IRS was  that                                                      
individuals   invested   their  personal   money,   earned  a  return   and                                                     
then got a benefit.                                                                                                             
                                                                                                                                
CHAIRMAN   THERRIAULT   pointed  out  that  it  was  largely   due  to  the                                                     
IRS  rejection  that  Congress   took  specific  action  to  approve  such                                                      
funds.                                                                                                                          
                                                                                                                                
MR.  BALASH   concurred   and  added  that  when   the  IRS  rejected   the                                                     
supposition    that   they   were  an   integral   part   of  the   state,                                                      
Michigan   filed  a  tax  return,   asked  for  a  refund  and  sued  when                                                      
they  didn't   get  it.  Although   they  lost   in  the  first  round   of                                                     
litigation,   the   Sixth  Circuit   Court  of  Appeals   ruled  in  their                                                      
favor.  The  court   ruled  it  was  serving  a  public  purpose;   it  was                                                     
used  in  the  State  of  Michigan   and  was  an  integral   part  of  the                                                     
state.  The  IRS  disregarded   the  court  and  simply  stopped   issuing                                                      
private  letter  rulings   on the  subject.  Other  states  wanted  to  get                                                     
similar   benefits  for  their  residents,   which  led  to  the  lobbying                                                      
effort  and  subsequent    passage  of  the  specific   exemption   in  the                                                     
IRS code.                                                                                                                       
                                                                                                                                
SENATOR  STEVENS   asked  if it  wasn't  a  specific  exemption   for just                                                      
Michigan.                                                                                                                       
                                                                                                                                
CHAIRMAN THERRIAULT stressed it was for that type of activity.                                                                  
                                                                                                                                
MR.  BALASH   added   that  Alaska   began   a  similar  program   at   the                                                     
University of Alaska.                                                                                                           
                                                                                                                                
CHAIRMAN  THERRIAULT   confirmed   it is  private  individuals   investing                                                      
their  money   and  those  private   individuals   specifically    receive                                                      
the benefit.                                                                                                                    
                                                                                                                                
He asked Mr. Balash to discuss the hurricane and disaster funds.                                                                
                                                                                                                                
                                                                                                                                
MR.  BALASH  explained  that  Florida,  Hawaii,   and California   are  all                                                     
states   where  natural   disasters   are  not  uncommon  or  unexpected.                                                       
Florida    and    Hawaii    have    hurricanes    and    California     has                                                     
earthquakes.    Those  states   have  established   entities   from  which                                                      
individuals   or insurance   companies  purchase   premiums.  The  premium                                                      
revenues  are  invested  to  earn  a return  and  if a disaster   strikes,                                                      
reimbursement    is  made   for  the   amount   of  the  policy.   If   you                                                     
purchased   a premium,  you  would  receive  a benefit   but you  wouldn't                                                      
if  you hadn't   purchased  a  premium.  Just  as in  the  Michigan  case,                                                      
individuals   or  individual   companies   invest   their  money   and  are                                                     
using  the  state's   tax-exempt   status  to  receive  a  benefit.  Those                                                      
states  negotiated   with   the  IRS  to ensure   the  funds  wouldn't   be                                                     
rejected.   The  IRS  wanted   the  states   to  contribute   some  public                                                      
money   into  the   funds  so  they   wouldn't   be  viewed   as  just   an                                                     
investment scheme.                                                                                                              
                                                                                                                                
It  is  clear  that  the  source   and  destination   is  key  to  the  IRS                                                     
determination.     As   stated   in   the   Alaska    Constitution,     the                                                     
Permanent   Fund  belongs   to the  state.   It does  not  belong   to  any                                                     
individuals,    corporation,   or  agency,   but  a  corporation   manages                                                      
it.  The  managing  corporation   always   refers  to  the  assets  of  the                                                     
fund  and  the  returns  of  the fund  in  its  annual  reports   and news                                                      
releases   in order  to  clearly   make  the distinction    that  the fund                                                      
belongs   to  the  state  and  not   the  corporation.   The  corporation                                                       
board  is  comprised   of state   officials  and  individuals   that  were                                                      
appointed   by  the executive   and  the  employees   of the  corporation                                                       
are state employees.                                                                                                            
                                                                                                                                
It   is  easy   to   demonstrate    that   the  state    has  controlling                                                       
domination    of  the   fund   because    the  Legislature    statutorily                                                       
restricts   how  the  corporation   can  invest   the  fund.  For  example                                                      
they  are  currently    able  to  invest  no  more   that  55  percent   in                                                     
equities.   Also,  the  Legislative    Budget  and  Audit   Committee   has                                                     
oversight of the fund and the corporation.                                                                                      
                                                                                                                                
The  source  and  destination   is different   for  the Alaska   Permanent                                                      
Fund  than  the  other  examples.   The  source  of the  fund  comes  from                                                      
state  royalties,   some  settlements    and  approximately   2.7  billion                                                      
general  fund  dollars  that  were  deposited  in  the early  1980's.   For                                                     
the  last   20  years,  Alaska   has  paid   out  a  benefit   to  private                                                      
individuals   in  the  state  so  there  is  clearly   a private   benefit                                                      
from  the  payment.  However,   the  individuals   receiving  the  benefit                                                      
never  put  any  of their  own  money  in  the  fund  and  never  used  the                                                     
fund  as  a tax  shield.   Thus,  the  source  and  destination   question                                                      
of the Alaska Permanent Fund has not been posed to the IRS.                                                                     
                                                                                                                                
CHAIRMAN   THERRIAULT   stated  that   according   to  the  Integral  Part                                                      
Theory,  it  is clear  to  him that  the  Permanent  Fund  is an  integral                                                      
part  of   the  State   of  Alaska.   Compared   to  the  disaster   funds                                                      
discussed,   Alaska  has a  much stronger   case  than the  others  due  to                                                     
the   structure   and   source   of   the   fund.   The   payout   is   not                                                     
necessarily   to  individuals   because  they  are  not  able  to  control                                                      
or  demand  it,  which  gives  Alaska  a  good  basis  to argue   that  the                                                     
fund  earnings   should   not  be  taxed  unless  Congress   specifically                                                       
authorizes    it.  Although    Congress   has   that   power,   they  must                                                      
explicitly   say  that  is  what  they  want   to do  and  they  have   not                                                     
done so.                                                                                                                        
                                                                                                                                
The  question   now is  whether   guaranteeing   some  level  of  dividend                                                      
is  enough   for   the   IRS  to   say  there   is  no   public   purpose.                                                      
Currently   some  parts  of the  operating   budget  are funded   with  the                                                     
earnings,   which  does  point  to  a  state  purpose.   Also,  if  all  of                                                     
the  earnings  aren't  used  for  a state   dividend  they  certainly   are                                                     
available   for  the Legislature    to use,  which  is  a  state  purpose.                                                      
Under  the  proposed   percent  of  market  value  methodology,    it says                                                      
that  if  a draw  is  made  it must  be  limited  to  five  percent.  That                                                      
draw  is permissive,   it  is not  dictated   that  a draw  must  be made.                                                      
The  state  could   elect  not  to  make  a  draw  and  that  money  would                                                      
remain  available   to  the  Legislature   or  to  the  citizens   if they                                                      
elected   to change   the  Constitution   and  put  that  money  toward   a                                                     
public purpose.                                                                                                                 
                                                                                                                                
Although   the  Legislature    and  the  trustees   have  been   counseled                                                      
that  guaranteeing   any kind  of  dividend  would  result  in a  negative                                                      
tax  ruling,  he's  not so  sure.  His reading  of  the  legal opinion   as                                                     
well   as   examining    some   of  the   cases    discussed   gives    him                                                     
confidence that the state would prevail.                                                                                        
                                                                                                                                
CHAIRMAN   THERRIAULT    stated   that  the   percent   of  market   value                                                      
proposal   from  the   Permanent   Fund  Corporation    has  been  in   the                                                     
committee   for some  time.  He wanted  to  have  the discussion   so that                                                      
members  would  be  apprised  of his  interpretation   and  give  them  the                                                     
opportunity    to  study   the  information    and   come  to   their   own                                                     
conclusion.   With  this  done,  the  committee   could  consider   taking                                                      
final action on SJR 13 in the next several weeks.                                                                               
                                                                                                                                
CHAIRMAN THERRIAULT held SJR 13 in committee.                                                                                   
                                                                                                                                
There  being   no  further   business   to  come  before  the  committee,                                                       
Chairman Therriault adjourned the meeting at 3:20 p.m.                                                                          
                                                                                                                                
                                                                                                                                
                             Alaska Michigan Florida Hurricane Hawaii California                                                
                                                                                                                                
                           Permanent Education Catastrophe Hurricane Earthquake                                                 
                                                                                                                                
                              Fund     Trust       Fund         Relief  Authority                                             
                                                                Fund                                                            
                                                                                                                                
                           State Fund; Public State Fund     Public    State Agency                                           
Corporate Status                                                                                                              
                           managed by Corporation            Corporation                                                        
                           a public                                                                                             
                           corporation                                                                                          
                   Ownership State   Investors Reverts to the state Reverts to Transferred                                      
                   of Assets                  upon termination the state to the state                                           
                                                             upon      upon                                                     
                                                             dissolution termination                                          
Control and Domination                                                                                                        
                           dictated by of the State;         operations operations                                              
                           law; LB&A decisions               subject to approved by                                             
                           Committee could not be            legislative the                                                    
                           has oversight overridden          review    legislature;                                             
                                     by any                            amendments                                               
                                     agency                            approved by                                              
                                                                       the insurance                                            
                                                                       commissioner                                             
                   Board   state officials    state officials state official state officials                                  
                   Make-up and public                        and public                                                         
                           members                           members                                                            
                           confirmed by                      confirmed by                                                       
                           the                               the senate                                                         
                           legislature                                                                                          
                   Employees state            Fund employees and Administered Employees                                         
                           employees          contract advisors by a state subject to                                           
                                                             agency    state civil                                              
                                                                       servant                                                  
                                                                       requirements                                           
                                                                                                                                
                                                                                                                              
Source and Destination                                                                                                        
                   Source  State     Participants Insurers/Participants; Participants Equivalent of                             
                           royalties and      some nonparticipant + additional state                                            
                           settlements        funds          state funds premium tax                                            
                                                             (mortgage collections;                                             
                                                             recording some seed                                                
                                                             fee)      money; sale                                              
                                                                       of fund                                                  
                                                                       premiums                                               
                   Destination Currently, a private revenues earmarked insurers and insurers and                                
                           matter of beneficiaries for the fund the insured the insured                                       
                           legislative                                                                                          
                           grace                                                                                                
                                                                                                                                
IRS ruling                 none      rejected exempt         exempt    exempt                                                 
                           requested                                                                                            

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