Legislature(1999 - 2000)
02/02/1999 03:32 PM Senate STA
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* first hearing in first committee of referral
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+ teleconferenced
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SENATE STATE AFFAIRS COMMITTEE
February 2, 1999
3:32 p.m.
MEMBERS PRESENT
Senator Lyda Green, Vice Chair
Senator Jerry Mackie
Senator Randy Phillips
Senator Kim Elton
MEMBERS ABSENT
Senator Jerry Ward, Chair
COMMITTEE CALENDAR
SENATE JOINT RESOLUTION NO. 4
Relating to a national ballistic missile defense system.
-MOVED CSSJR 4(STA) OUT OF COMMITTEE
SENATE BILL NO. 46
"An Act naming the Alex Miller Building."
-SCHEDULED BUT NOT HEARD
SENATE BILL NO. 43
"An Act making a special appropriation from the earnings reserve
account to the principal of the permanent fund; and providing for
an effective date."
-HEARD AND HELD
SENATE BILL NO. 36
"An Act relating to state procurement of certain computer-related
contracts."
-MOVED SB 36 OUT OF COMMITTEE
PREVIOUS SENATE COMMITTEE ACTION
SJR 4 - No previous Senate action.
SB 43 - No previous Senate action.
SB 36 - See State Affairs minutes dated 1/28/99.
WITNESS REGISTER
Senator Tim Kelly
Alaska State Capitol
Juneau, Alaska 99801-1182
POSITION STATEMENT: Sponsor of SJR 4
Chris Nelson, Staff
Joint Committee on Military Bases
Alaska State Capitol
Juneau, Alaska 99801-1182
POSITION STATEMENT: Supports SJR 4
Jim Kelly
Director of Communications
Alaska Permanent Fund Corporation
PO Box 25500
Juneau, AK 99802-5500
POSITION STATEMENT: Commented on SB 43
Ross A. Kinney
Deputy Commissioner
Department of Revenue
PO Box 110405
Juneau, AK 99811-0405
POSITION STATEMENT: Commented on SB 43
ACTION NARRATIVE
TAPE 99-2, SIDE A
Number 001
VICE-CHAIR GREEN called the Senate State Affairs Committee to order
at 3:32 p.m. Present were Senators Phillips, Elton, and Vice-Chair
Green. The first order of business to come before the committee
was SJR 4.
SJR 4-NATIONAL BALLISTIC MISSILE DEFENSE SYSTEM
SENATOR TIM KELLY, sponsor of SJR 4, informed committee members
that Secretary of Defense William Cohen announced that the United
States will proceed with the deployment of a national ballistic
missile defense system and confirmed that Alaska and North Dakota
are under active consideration as potential sites. SJR 4 states
the reasons why that system should be deployed in Alaska, primarily
because its strategic location makes it the only site in which all
50 states can be defended. The North Dakota base cannot defend
Alaska and Hawaii. Alaskans have always supported a strong
national defense system. Brigadier General Willy Nance, Program
Manager for the National Ballistic Missile Defense Organization, is
making a special trip to Juneau on February 22 to brief the
Legislature on the details of the program. SENATOR KELLY urged
bipartisan support of SJR 4 so that the resolution can be presented
to Brigadier General Nance upon his arrival. He requested the
committee amend SJR 4 to include Secretary of Defense William Cohen
as a recipient of the resolution.
VICE-CHAIR GREEN noted that SJR 4 does not make any reference to
the fact that North Dakota's location does not have Alaska's
strategic advantage.
SENATOR KELLY reiterated that the problem with a North Dakotan site
is that it cannot protect Alaska and Hawaii. He added it is
possible that missiles will be located in both Alaska and North
Dakota.
CHRIS NELSON, staff director for the Joint Committee on Military
Bases, gave the following testimony. Five months ago North Korea
launched a multi-stage ballistic missile that landed in the North
Pacific. The New York Times made the following comments in an
editorial the next day.
North Korea's test of a medium range missile, capable of
reaching targets in Japan and beyond, represents a
technological breakthrough. Officials and arms experts said
that the test suggested that North Korea had made real
progress in its efforts to build a longer range missile, the
Tapo Dawn (ph) II, which is reportedly capable of traveling
2400 to 3600 miles. That would give North Korea the ability
to strike targets throughout Asia and as far away as
Alaska....
MR. NELSON stated military experts believe that North Korea intends
to put nuclear warheads on its intercontinental missiles or export
its missiles to someone who would. North Korea's launch confirmed
the conclusion reached by a bipartisan commission headed by former
Defense Secretary Donald Rumsfelt: that the United States is now
vulnerable to ballistic missile attack and that our nation has no
means to defend itself. He summarized by saying the rules of
international relations and national defense changed when North
Korean launched its missile. Support for SJR 4 indicates Alaska's
traditional agreement and commitment to defending Alaska and fellow
Americans.
SENATOR PHILLIPS moved to amend page 2, line 8, by adding "the
Honorable William Cohen, Secretary of Defense," to the list. There
being no objection, the motion carried.
SENATOR MACKIE moved CSSJR 4(STA) out of committee with individual
recommendations. There being no objection, the motion carried.
VICE-CHAIR GREEN announced that SB 46 would not be heard during the
meeting.
SB 43-APPROP: EARNINGS RESERVE TO PERM FUND
MARK HODGINS, staff to Senator Ward, sponsor of SB 43, explained SB
43 will transfer an amount, equal to the unappropriated balance of
the Earnings Reserve Account on June 30, 1999, into the principal
of the Permanent Fund.
Number 162
JIM KELLY, Director of Communications for the Alaska Permanent Fund
Corporation (APFC), made the following comments. SB 43 would
appropriate the funds in the Earnings Reserve, less the dividend
and inflation proofing costs, into the principal of the Permanent
Fund. SB 43 is similar to past legislation except that the
Government Accounting Standards Board (GASB) has adopted Rule 31
which changes the accounting standards applied to the Permanent
Fund. The 6/30/98 annual balance sheet for the Permanent Fund was
calculated using GASB Rule 31. That rule requires both unrealized
and realized gains be considered as income. By including the
unrealized gains, the total Earnings Reserve amount is probably
higher than the amount the Legislature expects to appropriate. MR.
KELLY explained in the past the balance sheet total did not include
unrealized earnings, but GASB Rule 31 requires the APFC to mark its
funds to market.
VICE-CHAIR GREEN asked what the difference was under the previous
accounting system.
MR. KELLY replied if one looked at the regular projection sheet,
the Earnings Reserve for the year ending June 30, 1999, will be
about $2.7 billion. The dividends, based on the statutory formula,
will reduce that amount by $989 million. Inflation proofing,
calculated at 1.54 percent, will reduce it further by $287 million,
leaving $695 million in current year income to add to the Earnings
Reserve balance. The 1998 cash balance in the Earnings Reserve was
about $1.4 billion; the $695 million will increase the cash balance
to $2.084 billion. In addition, the Earnings Reserve contains an
unrealized cash balance of $3.8 billion. It is unclear whether SB
43 would appropriate $2.084 billion or $5.8 billion according to
GASB Rule 31. The APFC has contracted with a legal firm to review
the GASB ruling and Alaska statutes to provide an opinion on what
"earnings reserves" means.
Number 222
SENATOR PHILLIPS noted that his staff contacted Mr. Kelly's office
in early January and was told the projected amount for 6/30/99 was
$1.9 billion, after inflation proofing and dividend costs were
deducted. He questioned why the projection is now over $2 billion.
MR. KELLY replied his office was probably basing the earlier
projection on the September quarterly report; the latest projection
was based on the December quarterly report which wasn't available
in early January.
SENATOR MACKIE asked Mr. Kelly if he thought SB 43, as written,
will appropriate the entire $5.8 billion.
MR. KELLY said SB 43 could be interpreted to do so.
SENATOR MACKIE asked what the projection for the excess interest
earnings is this year.
Number 253
MR. KELLY replied $695 million will be left after dividend and
inflation proofing costs are deducted.
SENATOR ELTON pointed out SB 43 does not mention inflation proofing
and asked if that omission will cause a problem.
MR. KELLY answered that the same dollars would be put into the
Permanent Fund, but not specifically into the inflation proofing
segment. The effect, in terms of dollars, would be the same, but
the explanation will be more complicated.
SENATOR ELTON suggested that the sponsor be informed.
Number 267
ROSS KINNEY, Deputy Commissioner of the Department of Revenue, gave
the following testimony. He echoed Mr. Kelly's statement that GASB
promulgates regulations, and in order to get a "clean" opinion from
the auditing firm that audits the Permanent Fund records, GASB
guidelines must be adhered to. GASB Rule 31 is unclear, for
accounting purposes, about how the Permanent Fund income is
recognized. A firm decision needs to be made as to whether the
unrealized gains and losses should actually be added to the corpus
of the fund.
MR. KINNEY stated that during the last few weeks, a tremendous
amount of discussion has occurred about Governor Knowles' long
range fiscal plan. The plan proposes that approximately $4 billion
be transferred from the Earnings Reserve to the Constitutional
Budget Reserve (CBR). If SB 43 is enacted as written, that
transfer could not occur. Additionally, the Legislature could not
appropriate funds from the Earnings Reserve for any other purpose
it desires. Once that appropriation is made it cannot be touched
because the principal of the Permanent Fund is constitutionally
protected. The principal of the Permanent Fund can be increased in
three ways: through dedicated oil revenues; through the
appropriation of Earnings Reserve or general funds; and through
inflation proofing, which has occurred on an annual basis.
MR. KINNEY cautioned that one risk the Legislature could incur, if
it appropriates the full amount of the Earnings Reserve to the
corpus of the Permanent Fund, is that Alaska could find itself in
a position where it cannot pay out the total dividend entitlement
if it is calculated using the traditional 5 year average and 10+
percent. The state might only be able to pay a dividend amount
based on 50 percent of the amount in the Earnings Reserve. That
situation could occur if a major market correction took place along
with high inflation. The state has never come up against the
Earnings Reserve limitation for dividend calculations, but it is
not out of the question. Also, the Earnings Reserve limitation
comes into play in years 2, 3, and 4, in the Governor's long range
plan. At this point in time, the Administration does not support
SB 43, pending a thorough review of the Governor's long range plan.
VICE-CHAIR GREEN asked for clarification of the GASB changes.
MR. KINNEY said the change was to a definition. Alaska statutory
language related to the Permanent Fund defines income as interest,
dividends, and realized gains. Up until 1997, GASB accepted that
definition. However, as the result of the Orange County situation
and other factors, the term "mark to market" has come into play.
That term means that all financial statements require that the
value of assets held have current market values placed upon them
based on current market conditions. That changes the definition of
income to interest, dividends, realized gains, and unrealized gains
and losses. That definition results in an income increase of $4
billion in the Earnings Reserve as compared to the statutory
definition, which does not include unrealized gains. The statutory
definition is used to calculate the dividend because APFC does not
want to pay a dividend based on unrealized gains.
VICE-CHAIR GREEN asked for an example of an unrealized gain.
MR. KINNEY explained that if a person bought Microsoft stock at $50
per share and that stock increased to $100 per share, the
unrealized gain would amount to the $50 increase. If the stock was
sold for $100 per share, you would realize a $50 gain. For
dividend calculations, that $50 gain is only recognized when the
stock is sold. Under GASB's definition, the $50 unrealized paper
gain must be recognized as income even though the stock has not
been sold. He noted all income from the Permanent Fund goes into
the Earnings Reserve. Mr. Kelly's financial statements now show a
fourth income component: unrealized gains and losses. That is
where the question comes into play. APFC does not know what the
interpretation for the Earnings Reserve amount under SB 43 would
be.
VICE-CHAIR GREEN asked if the bill could be crafted to exclude
unrealized gains.
MR. KINNEY replied that is the question the APFC has posed to its
legal counsel.
SENATOR MACKIE maintained an amendment could be offered during the
budget process to appropriate a specific amount of dollars to the
corpus.
MR. KINNEY stated there is no difference as to whether the money is
in the Permanent Fund corpus or in the Earnings Reserve from a
dividend calculation standpoint. The only difference is that the
corpus of the Permanent Fund is not inflation proofed for the
amount that sits in the Earnings Reserve but it is still added
together when looking at the total assets of the Permanent Fund.
SENATOR PHILLIPS asked how the $2 billion in the excess earnings
reserve is being invested.
MR. KELLY replied for investment purposes, all of the money is co-
mingled; he could not determine which investments were from the
principal and which were from the Earnings Reserve.
SENATOR MACKIE asked if it is earning at the same rate as the
Permanent Fund.
MR. KELLY said that it is.
SENATOR PHILLIPS asked if the CBR is being invested using the same
principles as the Permanent Fund.
MR. KELLY replied this year the Permanent Fund is earning about an
8.83 percent total rate of return, a little higher than the CBR.
VICE-CHAIR announced SB 43 would be held in committee for
consideration at a later date.
SB 36-YEAR 2000 COMPLIANCE REQUIREMENT
VICE-CHAIR GREEN noted SB 36 was heard in committee during the
previous week, but was held in order to get an opinion on a
question posed by a committee member.
MR. HODGINS explained SB 36 will require any new State of Alaska
government computer hardware or software purchases to be Y2K
compatible. He noted Senator Elton questioned whether the language
on page 1, line 11, could be interpreted to mean that a contractor,
who was hired to produce a brochure or publication, would have to
certify that he/she was Y2K compatible if his/her publisher was
not. According to the Division of Legal Services, if the state was
to become the owner of the software then it would have to be Y2K
compatible under SB 43, but if the product to be delivered was the
brochure, it would not.
SENATOR ELTON clarified that he was concerned that some
professional service contracts require that the product be a disk
that contains an advertisement to be published in a newspaper. He
questioned whether the contractor would have to prove his/her
equipment was Y2K compatible. The Division of Legal Services
determined that the deliverable product is the published
advertisement, therefore the contractor does not have to use Y2K
compatible equipment. He stated he no longer had any concerns with
that language in the bill.
Number 418
There being no further questions or testimony, SENATOR MACKIE moved
SB 36 out of committee with individual recommendations. There
being no objection, the motion carried.
There being no further business to come before the committee, VICE-
CHAIR GREEN adjourned the meeting at 4:01 p.m.
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