Legislature(1993 - 1994)
01/26/1994 09:06 AM Senate STA
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE STATE AFFAIRS COMMITTEE
January 26, 1994
9:06 a.m.
MEMBERS PRESENT
Senator Loren Leman, Chair
Senator Mike Miller, Vice Chair
Senator Johnny Ellis
Senator Jim Duncan
MEMBERS ABSENT
Senator Robin Taylor
COMMITTEE CALENDAR
SENATE BILL NO. 253
"An Act relating to reapplication for the 1993 permanent fund
dividend when the United States Postal Service documents the loss
of mail during the 1993 application period; and providing for an
effective date."
SENATE BILL NO. 170
"An Act relating to income of the permanent fund."
SENATE JOINT RESOLUTION NO. 38
Proposing amendments to the Constitution of the State of Alaska
relating to revenues from natural resources, the Alaska permanent
fund, the appropriation limit and the budget reserve fund; and
providing for an effective date for the amendments.
Bills previously heard.
PREVIOUS SENATE COMMITTEE ACTION
SB 253 - no previous senate committee action.
SB 170 - no previous senate committee action.
SJR 38 - no previous senate committee action.
WITNESS REGISTER
Roger Cremo
425 G Street, Anchorage, AK 99501¶333-8188
POSITION STATEMENT: in favor of SJR 38
William H. Scott
Executive Director, Permanent Fund Corporation
P.O. Box 25500, Juneau, AK 99802-5500¶465-2047
POSITION STATEMENT: testified on SJR 38
Jim Kelly
Research & Liaison Officer, Permanent Fund Corporation
P.O. Box 25500, Juneau, AK 99802-5500¶465-2047
POSITION STATEMENT: testified on SJR 38
Vincent O'Reilly
1611 Toyon Way, Kenai, AK 99611¶283-4946
POSITION STATEMENT: in favor of SJR 38
Mayor John Williams
210 Fidalgo, Kenai, AK 99611¶283-3104
POSITION STATEMENT: in favor of SJR 38
Karen Dempster
Anchorage, AK ¶344-5468
POSITION STATEMENT: in favor of SJR 38
Senator Steve Rieger
State Capitol, Juneau, AK 99801-1182¶465-3879
POSITION STATEMENT: prime sponsor of SB 170
Thomas C. Williams
Director, Permanent Fund Dividend Division
Department of Revenue
P.O. Box 110460, Juneau, AK 99811-0460¶465-2323
POSITION STATEMENT: testified on SB 253
ACTION NARRATIVE
TAPE 94-4, SIDE A
Number 001
CHAIRMAN LEMAN calls the Senate State Affairs Committee to order at
9:06 a.m.
Number 003
CHAIRMAN LEMAN announces that SJR 2 CRIME VICTIM RIGHTS;CRIM
JUSTICE ADMIN will be held over until the State Affairs Committee
meeting on Friday, January 28, 1994.
Number 033
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.
| Document Name | Date/Time | Subjects |
|---|