SENATE BILL NO. 267 "An Act establishing the Alaska veterans' memorial endowment fund and providing for credits against certain taxes for contributions to that fund; relating to other tax credits for certain contributions; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. LADDIE SHAW, Special Assistant, Office of Veteran Affairs, Department of Military and Veterans Affairs read a statement into the record as follows. SB 267 sets up an endowment fund to support the maintenance of existing and construction of new memorials, to Alaska veterans and the military. Today Alaska has over 70 memorials to our veterans. These tributes range from small plaques to memorials like Byers Lake. Funds to maintain these existing memorials are few. The bill before the Committee would allow the Department of Revenue to accept donations from the private sector of legislative appropriations, to invest the funds to earn a real rate of return of at least 5%, and identify amounts available for appropriation each year. The Department of Military and Veterans Affairs, with the assistance of appropriate veterans' organizations would grant the appropriated funds to organizations that would maintain the monuments or memorials. If funds were available, new memorials or monuments could be constructed. Regulations would be promulgated to describe this process. In addition, the bill allows a tax credit to taxpayers that choose to donate money to the endowment fund. Credits would be limited to 50% of the first $100,000 and 100% of the second $100,000. The tax credit mirrors the structure of the existing education tax credit. A taxpayer's total credit under both of these credits would be limited to $150,000. By providing a mechanism to take care of the existing veterans' memorials in Alaska and to building additional in the future, this bill recognizes the contribution that veterans and the military have made to our state. Co-Chair Kelly referenced language in Sec. 4 on page 3, lines 21 through 25, which reads as follows. Article 8. Alaska Veterans' Memorial Endowment Fund. … Sec. 37.14.730. Use of the fund. (a) As soon as practicable after July 1 of each year, the commissioner of revenue shall determine the average month-end market value of the fund for the immediately preceding three fiscal years. The commissioner shall identify five percent of that amount as available for appropriation by the legislature for uses described in (b) of this section… Co-Chair Kelly asked if this would essentially create a "sinking fund" in the event of a period of poor earnings on the investment, noting the requirement that five-percent must be appropriated. SFC 02 # 83, Side B 10:38 AM NEIL SLOTNICK, Deputy Commissioner, Department of Revenue, deferred to Mr. Jenks to explain how this would be avoided. JOHN JENKS, Chief Investment Officer, Treasury Division, Department of Revenue, assured that the "investment features" of this endowment are designed to ensure a "stable payout" over time, despite fund performance. He noted the amount available for appropriation is limited even in those years in which the fund earnings are high. He furthered that this legislation also directs the Department of Revenue to manage the endowment in a manner that provides a five-percent "real or inflation-adjusted return over time." Co-Chair Kelly posed a scenario whereby earnings in the first two years of the fund's existence are less than five percent and surmised that the corpus of the fund would immediately "erode" under the provisions of this legislation. Mr. Jenks agreed the value of the fund would decline. Co-Chair Kelly suggested amending the bill to stipulate that an appropriation would not be made using funds from this endowment before a year in which the endowment has realized a five-percent rate of return. Mr. Jenks replied that such a provision is possible, but cautioned it would defeat the purpose of establishing a link between the long-term investment policy i.e., the long-term expected earnings, and the payout of the fund. He acknowledged the corpus of the endowment could be reduced in the first two years, but assured that long-term performance is the higher priority. Co-Chair Kelly qualified his expertise on the matter is limited, but wanted to ensure that the principal of the endowment would not be compromised. He informed this has occurred with other endowments. Mr. Jenks reiterated that such action would be inconsistent with the intended management of the fund. Mr. Slotnick clarified that the language in the bill stipulates that the funds would be identified and made available for appropriation. However, he stressed the language does not require that an appropriation actually be made. He foresaw the Department issuing an annual report on the condition of the fund, and the legislature making the determination as to whether an appropriation is appropriate in a given year. Co-Chair Kelly indicated this is satisfactory. Senator Ward agreed. Senator Wilken referenced Sections 1, 2 and 3 of the bill and asked if the tax credits proposed in this legislation are comparable to donations made to the University of Alaska. Mr. Slotnick affirmed this legislation is modeled after the University of Alaska endowment program. Co-Chair Kelly noted the presence of students from Floyd Dryden Middle School in Juneau who were attending the meeting as part of the Close Up Program. He directed them to introduce themselves. Senator Wilken asked about other tax credit programs. Mr. Slotnick responded two programs are in existence, both relating to the University of Alaska and postsecondary education. Senator Wilken noted this legislation would establish a third tax credit program. Co-Chair Kelly directed attention to multiple statutory references in the bill relating to "credits taken during the taxpayer's tax year". He asked for elaboration. Mr. Slotnick noted the "seven different tax types" for which a contribution credit would be eligible, pointing out that "overlapping" credits is disallowed. He exampled an oil and gas company providing a contribution and explained the credit could be taken against the company's oil and gas property tax, oil and gas severance tax, or oil and gas corporate income tax in an amount not to exceed the maximum allowed $150,000. He listed fisheries business tax, fisheries landing tax, license tax, insurance premium tax, and the three aforementioned oil and gas taxes as the seven tax types. He qualified that other tax types are ineligible for this tax credit program including motor fuel tax and tobacco tax. Co-Chair Donley questioned the 100 percent tax credit allowed for the second $100,000 contribution and asked who made the decision to include this provision. Mr. Slotnick answered this legislation was drafted to model the University of Alaska endowment tax credit program. Co-Chair Donley wanted to know the "human being" who made the public policy decision to provide the 100 percent tax credit. Mr. Slotnick was unaware of who made the decision. He emphasized the intent is to provide an incentive for a second $100,000 contribution. Co-Chair Donley pointed out this would result in a "100 percent loss to the treasury" of those funds. Mr. Slotnick explained the rational that the fist $100,000 contribution is only available for 50 percent tax credit. Co-Chair Donley recalled the extensive debate on this issue at the time the University of Alaska endowment program was established. He expressed he did not support this structure in the University of Alaska endowment program and does not support it as proposed for the veterans' memorial fund. He stated this method does not benefit the State's treasury and predicted that rather than the government determining the best use of funds, companies would make donations in lieu of paying taxes. Co-Chair Donley disagreed with using the University of Alaska endowment program as a model for this legislation. He cautioned against "just blindly be copying mistakes of the past" without debating the issue. Senator Wilken suggested the fiscal note must be corrected, as it does not reflect the subsequent reduction of the credited donations from the general fund. Senator Ward requested the Department of Military and Veterans Affairs speak to the 100 percent tax credit for the second $100,000 contribution. Mr. Shaw qualified his limited understanding of the tax credit system. He predicted that actual donation amounts would be less than $100,000, citing information indicating actual donations average less than $5,000. He stated this legislation includes a $125,000 legislative appropriation to match the $125,000 the Department has already collected. Co-Chair Kelly ordered the bill HELD in Committee.