HOUSE BILL NO. 304 "An Act relating to disposition of income of the permanent fund; and providing for an effective date." Co-Chair Williams observed that a proposed committee substitute, work draft 22-LS1207\L, 3/21/02 changed the split ratio to 40/40/20. PETER ECKLUND, STAFF, CO-CHAIR WILLIAMS explained that the proposed committee substitute uses the endowment principle and percent of market value payment method for the Permanent Fund. He explained that 7 percent of the value of the Permanent Fund would be taken in FY03, 6 percent in FY04, and 5 percent thereafter. An education fund of 40 percent would be created in the General Fund. An infrastructure account would be created and receive 20 percent of the funds. Dividends would be paid from the remaining 40 percent. He emphasized that deferred maintenance needs of the state of Alaska are over one billion dollars. Representative Hudson acknowledged the work of the chairman. He agreed with most aspects of the proposed committee substitute, with one exception. The 5 percent of market value principal originated with the Alaska Permanent Fund Corporation. The five percent payout would automatically inflation proof the fund. He observed that Governor Hammond referred to a 30/30/30 payout: inflation proofing/ dividend/general government. If you take 5 percent after inflation proofing and divide it on a 50/50 basis, the result would be 35 percent to general government and 35 percent to the dividend. He explained that the five-year average shows a reducing dividend. He spoke in support of a 50/50 dividend/state split, which would keep dividends at approximately the same level. The FY04 dividend amount would only be $35 dollars less than the current amount under Representative Hudson's proposal. He asked the Committee to consider changing the dividend amount to 50 percent on page 2, line 17. The infrastructure percentage on page 3, line 3 could be 10 to 15 percent and the education account could be 40 - 35 percent. He pointed out that the 50/50 provision has been well addressed. A 40 percent division would reduce dividends by $300 per person. Representative Whitaker observed that the proposed committee substitute no longer resembles the original legislation, but indicated that he would support the proposed committee substitute. He noted that the legislation has become a reformulation of the Permanent Fund. He recognized the challenges before the legislation, but stressed that action must be taken. Representative John Davies spoke in support of the legislation. He pointed out that the provisions of the bill have been well discussed. There was discussion by the Alaska Permanent Fund Corporation and the fiscal policy group. He felt that the changes recommended by Representative Hudson would assist passage of the bill. Representative Croft spoke in support of a 50/50 split. He noted that Alaska is the only state that has a common ownership of its resources. The public might not accept anything less than 50/50. He maintained that a 50/50 split would be fair. Representative Lancaster stressed that the plan would protect the dividend into the future and expressed support for the 50/50 provision. Vice-Chair Bunde summarized that "100 percent of nothing is still nothing" and pointed out that the dividend is in danger if no action is taken. Co-Chair Mulder MOVED to ADOPT proposed committee substitute, work draft, 22-LS1207\L, Cook 3/21/02. RECESSED: The Committee recessed at 10:05 a.m. RECONVENED: The Committee reconvened at 2:40 p.m. Representative Hudson provided members with Amendment 1 (copy on file). He explained that the amendment would pay 45 percent to dividends, 35 percent to education and 20 percent to the infrastructure or economic development account. The FY03 dividend would not change. He observed that, under the amendment, dividends would be $100 dollars less in FY04. Dividends would still grow, at approximately $100 less than under the status quo. In FY03, $965 million dollars would be available for to the General Fund. Approximately $839 million dollars would be available in FY04. By FY10 there would be approximately $948 million dollars to offset the deficit. Inflation proofing would continue at 7 percent in FY03,6 percent in FY04, and 5 percent in FY05 and out. Representative Hudson MOVED to ADOPT Amendment 1: 45 percent to dividends, 35 percent to an education fund and 20 percent to the infrastructure/economic development account. Representative John Davies questioned why 5 percent was taken out of education instead of infrastructure. Representative Hudson responded that the amendment would be a statutory allocation and pointed out that the legislature could chose to change the ratio. He stated that he was responding to the need for deferred maintenance. He observed that there is a one billion dollar need and reiterated that it could be changed in the future. He explained that by FY10 the education fund would be more than $600 million dollars. The intent is to find a middle ground while protecting the Permanent Fund and dividends. Representative Croft observed that the spreadsheet's projected rate of return is 8.25 percent. He thought that the Alaska Permanent Fund Corporation's projected rate of return was 7.95 percent. He expressed support for a 50 percent payout to dividends. He stated that he would not object to the amendment because it moved the legislation closer to the 50 percent target. There being NO OBJECTION, Amendment 1 was adopted. Representative Croft MOVED to ADOPT Amendment 2: 35 percent to education, 50 percent to dividends, and 15 percent to infrastructure. Co-Chair Williams OBJECTED. TAPE HFC 02 - 62, Side B  Representative Whitaker referred to the Constitution of the state of Alaska, Article 9, section 16. He maintained that the amendment has been ignored since it was put in place. The constitutional amendment would dedicate one-third of the expenditures of the state of Alaska to be spent on capital projects. He noted that the issues are whether an additional $100 dollars would go to dividends or be used to build the state. Representative John Davies interpreted Article 9, section 16 to mean not more than one-third of the state's budget would go to infrastructure. He observed that the 1999 ballot initiative indicated that the public wants to protect dividends. He emphasized that it is easy for the public to understand a 50/50 split. Representative Whitaker spoke against the amendment. A roll call vote was taken on the motion. IN FAVOR: Croft, Davies, Foster, Moses OPPOSED: Bunde, Harris, Hudson, Lancaster, Whitaker, Williams, Mulder The MOTION FAILED (4-7). Representative Foster MOVED to report CSHB 304 (FIN) out of Committee with the accompanying fiscal note. Representative John Davies OBJECTED for the purpose of discussion. He noted that he still supports a 50/50 split. Representative Foster WITHDREW his motion to move CSHB 304 (FIN) Co-Chair Mulder MOVED to ADOPT Amendment 3: "The legislation may appropriate to the dividend fund the additional amount needed so that the total amount of the 2002 dividend is $1,540. He explained that the intention is to keep the FY02 dividend at it's current level. There being NO OBJECTION, it was so ordered. Co-Chair Mulder MOVED to report CSHB 304 (FIN) out of Committee with the accompanying fiscal note. Representative John Davies and Representative Croft OBJECTED. Representative Croft stressed that there are structural problems with the manner that the dividend and earnings are calculated. He maintained that dividend creep has to stop. He did not think that the proposal would be successful without substantial sideboards, new revenues and a more clear and fair distribution. Representative Hudson spoke in support of the amended legislation. He maintained that the Permanent Fund was intended to meet the demand for state support when oil revenues declined. He stressed that the plan was balanced. Representative Whitaker spoke in support of the legislation, but emphasized that it cannot stand-alone. He pointed out that [the 1999 ballot initiative to use a portion of the Permanent Fund] was not supported. Representative John Davies pointed out that the amount available for the education fund would be diminished in FY 05, but would start to grow again. He stressed that there would need to be an $80 million dollar increase in general funds to maintain full funding for education when the fund dips. Co-Chair Williams stressed that the legislation is a tool and that the intent is to fully fund education. Vice-Chair Bunde maintained that education has never been reduced, although he acknowledged that it had not been increased. A roll call vote was taken on the motion to move the bill from Committee. IN FAVOR: Bunde, Foster, Harris, Hudson, Lancaster, Whitaker, Williams, Mulder OPPOSED: Croft, Davies, Moses The MOTION PASSED (8-3). CSHB 304 (FIN) was REPORTED out of Committee with a "do pass" recommendation and with previously published fiscal note: REV #1.