CS FOR SENATE JOINT RESOLUTION NO. 19(JUD) Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund. This was the first hearing for this resolution in the Senate Finance Committee. Co-Chair Wilken stated this resolution, "places the current method to calculate the PFD dividend in the Constitution. In addition, the constitution amendment requires a majority vote by Alaskans before the Permanent Fund earnings reserve may be appropriated by the legislature. This is a constitutional amendment that must be placed in front of the voters in November of 2004." MARK STOPHA, Staff to Senator Georgianna Lincoln, informed that Senator Lincoln is out of town and he read testimony into the record as follows. SJR 19 before you contains three elements. It puts the Permanent Fund Dividend into the Constitution. It puts inflation proofing of the Permanent Fund into the Constitution, and it creates a special account for the remaining earnings reserve of the Permanent Fund, rather than depositing those earnings into the general fund as we do now. Those earnings will be available for use by the legislature, but only by a vote of Alaskan voters. This bill does not change the current structure of the dividend program. It continues to payout dividends and inflation proofs the Permanent Fund in that order, as we do now, but places these processes in the Constitution. The bill would never use the principal of the Permanent Fund to pay out dividends or pay for other government services. Subsection (a) of Section 3 was added in the Senate Judiciary Committee. Senator Lincoln did not concur with that amendment. The vast majority of our constituents are in favor of putting the Permanent Fund Dividend into the Constitution period. We believe the Judiciary Committee amendment of an unknown spending limit as part of this bill is a separate issue and should be addressed in separate legislation. Finally, subsection (b) and (c) of Section 3 ensures that if the bill were to make the Permanent Fund taxable by the IRS if dividends become part of the Constitution, then the amendment would be suspended and repealed. Attorney General Renkes has provided an opinion that he does not believe that the bill would make the Permanent Fund taxable. Section 3 provides a provision to rescind the amendment if it does. As you can see from this stack of e-mails in front of me that has been sent to all legislators for the most part, the bill is supported by voters from all corners of the State. The bill is easy for the public to understand because it maintains the status quo regarding how the Permanent Fund Dividends are paid out. Guarantees payment of Permanent Fund Dividends as a priority and protects the earnings reserve from legislative spending by requiring a vote of the people. Co-Chair Wilken questioned the claim made in the sponsor statement that permanent fund dividends represent one-eighth of Alaska's economy. He therefore calculated the economy of Alaska at $8 billion, but had understood the amount to be approximately $40 billion. MARK GNADT, staff to Representative Eric Croft, was unsure where this figure was derived. Co-Chair Green acknowledged her comments were premature, recalling the conversation from the previous meeting indicating that the Permanent Fund is currently being over inflation proofed and asked if this resolution contains a provision in the event that a determination is made that investments are self-inflation proofing, the inflation proofing provision could be "relaxed". Mr. Stopha responded that the Permanent Fund would be inflation proofed in the same manner as currently provided for in statute, except this resolution would place the provisions in the Constitution. Co-Chair Green asked if the language in Section 1 on page 1, lines 10 - 12, inserting new language into Article IX, sec. 15 Alaska Permanent Fund, reflect this. This language, following "All income from the permanent fund shall be deposited in the…" reads "…earnings reserve account and distributed as provided for under AS 37.13.140, 37.13.145, and AS 43.23.025, as those statutes read on July 1, 2002." Mr. Gnadt affirmed and explained this is standard method of determining inflation proofing from the prior year. Co-Chair Green asked if changes were made in current statutes whether changes would automatically be made to this amendment. Co-Chair Wilken answered yes. SENATOR RALPH SEEKINS asked if the witnesses were aware of the Bess versus Ulmer case. Mr. Gnadt was aware of this litigation. Senator Seekins asked if the sponsor had procured a legal analysis regarding whether or not this resolution would be defined as an amendment or a revision to the Constitution. Mr. Gnadt did not have an official legal opinion to address this resolution specifically. He indicated that other legal opinions pertain to a "potential Bess v. Ulmer problem"; however, he stated these opinions recommend language to comply the resolution with the amendment criteria. Senator Seekins asked if witnesses were concerned that a constitutional amendment establishing a percentage of the annual budget that would be allocated to the Permanent Fund and thereby removing this authority from the legislature would constitute a revision to the Constitution. Mr. Gnadt replied that no such formal analysis of this had been conducted. Senator Seekins expressed concern that any constitutional amendment that removes significant discretion from the legislature may constitute a revision rather than an amendment. Senator Bunde spoke to the proposal presented by Governor Jay Hammond, referred to as "the Hammond Plan", and a related legal opinion that determines the proposal to likely be unconstitutional because it proposes major revisions to the Alaska Constitution. Senator Bunde was unsure whether this pertains to the resolution before the Committee, but recommended a legal opinion be procured on this resolution before proceeding. Senator Bunde remarked that the framers of the Alaska Constitution "learned from the mistakes" of other state constitutions and chose to not allow dedicated funds in Alaska's Constitution. He pointed out this resolution would dedicate funds and asked if the sponsor has considered the potential situation of required dividend payments in the event of inadequate funding for public safety, education, or other government services. Mr. Stopha replied that funding for those purposes would continue to be available, however would require a vote of the people to authorize such expenditures from the Permanent Fund. Senator Bunde clarified that each year in drafting the budget an election would be required to authorize specific expenditures from the Permanent Fund. Mr. Stopha affirmed and noted the voting structure for these appropriations could be negotiated as to whether they were specific appropriations, "blanket" appropriations, or "forward funding," etc. Senator Hoffman reported he has heard much on the topic of dedicated funds and concluded that the State has turned a non- renewable resource, oil, into a renewable resource i.e. the Permanent Fund, and that the Constitution allows the Legislature to allocate resources. He therefore questioned whether this resolution would be dedication of funds or rather, an allocation of resources. SENATOR HOLLIS FRENCH asked about public reaction to this resolution since it was introduced. Mr. Stopha qualified he has only worked for Senator Lincoln for one year, but relayed Senator Lincoln's claim that no other bill she has sponsored has received this much attention during her tenure in the legislature. He told of the importance of dividends to families in the Yukon Kuskokwim census area, where these payments comprise 18 percent of annual family income. Mr. Gnadt added that constituents of Representative Croft are also very supportive of this proposal. Senator Bunde asked if this resolution would not change the method in which dividends are calculated. Mr. Stopha affirmed. Senator Bunde noted testimony provided at the previous hearing warning that if the dividend calculation were unchanged, the dividend amount would be very low or zero in some years. He asked if the sponsor has relayed this to constituents. Mr. Stopha responded that the "spirit" of this resolution is constitutional protection of the Permanent Fund Dividend. Senator Hoffman asked if public feedback on this resolution has been primarily related to constitutional protection of the dividend program, inflation proofing, or other provisions. Mr. Stopha replied that Permanent Fund Dividends has been the primary concern. Senator Hoffman asked if a large margin of expressed interest has been related to the dividends. Mr. Stopha answered yes. Mr. Gnadt added that Representative Croft's office has had the same experience. He noted that residents are accustomed to the current system and how it affects their dividend payments. Senator Olson addressed Senator Bunde's comments regarding public understanding of the Percent of Market Value (POMV) approach to managing the Permanent Fund. Senator Olson reported that constituents are largely in favor of retaining the current system despite understanding that POMV would stabilize the amounts of dividend payments. He conveyed these residents are "wary" of the POMV management method. Co-Chair Green recalled that she introduced legislation in 1997 that would have accomplished similar goals but in a different way. She learned from these efforts that to "get to the end of the race", actions must be taken to provide assurance to the public. She opined that legislatures have been "very honorable stewards" of the earnings reserve fund and have "faithfully put forward the dividend program to the greatest extent every year" as well has had "great expectations of the investment boards" and Fund managers. She reiterated that the public must be provided assurance that the dividend program would continue, although she was unsure of the proper procedure to attain this. She was unsure she supported all elements of this resolution, but recognized it as an option. Senator Hoffman concluded the dilemma is that three-quarters of the members of the legislature must approve any changes to the dividend program, after which, Alaskan voters must then approve those changes. He heard "overwhelming" support for a constitutional guarantee of dividend payments. He also noted that the membership of the Conference of Alaskans did not make recommendations as to what amounts should be allocated for dividends and government spending. He reiterated that the Committee must address, and subsequently reach an agreement that could receive support from both the full Senate and the House of Representatives. Senator Dyson paraphrased Senator B. Stevens comments made at the Conference of Alaskans that guaranteeing the dividend in the Constitution would "tie the hands of legislators" in the future in the event of a fiscal crisis in which inadequate funds were otherwise available for education, public safety or other critical needs. Senator Dyson warned this would be a difficult situation and he asserted that future legislature should not be subjected to this possibility. He quoted Carl Marx, "The and once they've tasted it they will be insatiable until they have drained it." Senator Dyson cautioned the Committee to be wary of this. Senator Bunde asserted the reason legislators are not elected at- large for the entire State is because they represent different constituencies. He reported that his constituency is of the opinion that the dividend program has "morphed" from an opportunity to receive extra money for themselves, into an entitlement. He deemed this a serious matter and did not support an enshrinement of the dividend in the Constitution and stated that residents in his election district do not support this either. He told of findings of a poll conducted by Dittman Research, in which a question was posed as to whether the dividend should be guaranteed in the Constitution. He informed that the results of this poll show an equal division among respondents. He commented this could be considered contentious, but disputed that a Constitutional enshrinement is widely supported statewide. SENATOR BERT STEDMAN commented that some aspects of this resolution might seem "attractive" but do not fit well into the entire "mosaic". He asked what consideration the sponsor has given to the effect a constitutional guarantee of dividends would have in the event of an immediate need to respond to a disaster, or in addressing the current fiscal dilemma. Mr. Stopha pointed out the earnings reserve account would remain. He understood the concerns that a vote of the people would be required before dividend funds could be expended even if an immediate need were present, such as in the event of a disaster. He emphasized this resolution is intended to be a part of a long-range fiscal plan and he relayed Senator Lincoln's assertion that the all options should be considered and that the permanent fund should not be singled out. Senator Stedman gave a historical perspective noting that since its inception, the legislature has had the authority to appropriate funds from the earnings reserve account; rather than doing this, he noted the legislature has deposited $7.1 billion more into the Permanent Fund than required. Mr. Gnadt agreed the legislature has a "fairly good history" of depositing monies into the Permanent Fund. However, he cautioned against relying upon past actions to reflect future decision- making. He furthered that the past actions were primarily taken during years with high oil prices and a strong economy. He assured this resolution would not eliminate the ability to appropriate funds from the earnings reserve account, but rather stipulates that the State currently garners 75 percent of oil revenues for the general fund and the remaining revenues are "the people's money". He furthered this resolution would require voter approval before the remaining 25 percent of oil revenues could be spent for government services. Senator Bunde challenged characterization that the legislators are "running off to Vegas" to spend oil revenues unscrupulously, and countered that much of the money is spent in rural areas in which residents do not contribute to education or public safety. Senator Olson commented that much of the oil revenues are expended in rural Alaska just as much of the resources came from rural Alaska. Senator Hoffman pointed out that Alaska is the only state with a permanent fund situation and subsequent perceived "problems" with deciding how to utilize those funds. He disagreed that this resolution would "tie our hands", arguing that this is the "peoples' money" and if "they want to tie our hands," voters had that right. He also surmised that this resolution could also fail and therefore the voters would not impose these restrictions on the legislature. He remarked this would not be known unless the question is placed in the ballot. Co-Chair Wilken ordered the bill HELD in Committee. AT EASE 9:45 AM / 9:46 AM