Legislature(1993 - 1994)
1994-04-08 House Journal
Full Journal pdf1994-04-08 House Journal Page 3187 HJR 48 The Judiciary Committee has considered: HOUSE JOINT RESOLUTION NO. 48 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. The report was signed by Representative Porter, Chair, with the following individual recommendations: Do pass (5): Green, Kott, Porter, Phillips, Nordlund No recommendation (1): Davidson A House Judiciary Committee letter of intent for HJR 48, signed by Representative Porter, Chair, appears below: "After reviewing HJR 48 (Restructuring the Permanent Fund) the subcommittee decided that before the legislature embarks on a new method of budget funding many policy issues must first be addressed. The decision was made after carefully evaluating the premises of HJR 48, in addition to information provided from individuals knowledgeable in evaluating financial proposals. This Letter of Intent contains 1) A Basic Outline of HJR 48, 2) Policy Questions That Must Be Asked and 3) A Proposal For Further Action by the Legislature 1) A Basic Outline of HJR 48 "The Cremo Plan" The purpose of the plan is to stabilize state resource revenues at a sustainable level, to increase the size of the Permanent Fund, and to minimize the negative consequences of the fiscal gap. The plan requires this session's legislature to propose - and the voters in the fall election to approve - an amendment to the State Constitution to provide that beginning July 1, 1995 and henceforth, all natural resource revenues be deposited in the Permanent Fund along with the assets of the state's two budget reserve accounts and the Railbelt Energy Fund. 1994-04-08 House Journal Page 3188 HJR 48 All future income earned by the Fund would be retained in the Fund, but there would be an annual withdrawal from the Fund based on its average market value over the past 12 quarters. The first year, the withdrawal would equal 20 percent, but then would be reduced geometrically each year until the permanent withdrawal rate of 6 percent is reached in the year 2006. 2) Policy Questions That Must Be Asked There are major policy and technical questions which must be thoroughly researched and answered before we are in a position to present any plan to the voters. Those issues include: 1. Revenue Allocation - If only resource revenues are used to determine the budget amount available, and our entitlement programs continue to grow, won't most of the available revenues eventually go into the entitlements and less into resource development, thereby reducing the revenue source which funds the cycle? Additionally, what about the negative impact to natural resource development by encouraging high severance and other taxes in order to generate enough income to support the growing needs of an expanding population? 2. Effect on Bonds - How will a budgetary funding mechanism such as this affect the State's current bond rate? If adopted, could it impair the State's credit and, thereby impair the ability of the State, state agencies and local governments to fund capital improvements through bonds? 3. Emergency Relief - The amendment makes perhaps 90 percent or more of the recurring unrestricted revenue of the state "not appropriable." The amendment then prescribes a set percentage for expenditure each year. There is no allowance of amounts necessary to meet unforeseen disaster emergencies. The State needs to have a rainy day fund for atrocities such as earthquakes and other natural disasters. 1994-04-08 House Journal Page 3189 HJR 48 4. Assumptions - The plan is based on the Department of Revenue's fall 1993 mid-case revenue projections, and assumes an annual total rate of return for the Permanent Fund of 10 percent and an annual inflation rate of 4 percent. The Alaska Permanent Fund Corporation's projections are based on the low-case revenue projections, and assume a long-term average rate of return for the Permanent Fund of 9 percent and a long-term average rate of inflation of 6 percent. Long term market history does not support conservative investments returning 2 1/2 times the inflation rate. The "Cremo" plan assumes some combination of state spending cuts and revenue increases. Given the plan's assumptions, a 12 percent annual increase in conventional revenues and a $30 million cut in annual state spending would eliminate the fiscal gap. This is a tremendous statement when no one has the ability to predict future deposits into the fund up to the year 2006. 5. Appointments to the Board of Directors - The directors of the corporation should not be subject to confirmation. Under the present approach used in the constitution, only department heads and the heads of quasi-judicial boards are subject to confirmation. The corporation would be the trustee of the source of most of the expendable money of the state. There could be an inherent conflict of interest if the legislature shares the power to make appointments to the board. 6. The Transition Period - The plan provides for a higher but gradually reduced withdrawal rate during a 10-year transition period in order to minimize the negative consequences of the fiscal gap. The proposed constitutional amendment states that the withdrawal rate shall decrease geometrically throughout the transition period, but does not provide specific details. This ambiguity should be cleared up. We lack sufficient information to know whether the percentages proposed beginning in fiscal year 1996 and thereafter will have the effect of depleting the corpus, or leave it unprotected from the effects of inflation. 7. Relevant Taxation - There needs to be a more cogent clarification of the kinds of taxes that go into the fund under this proposal. Resource related personal income should not be included. 1994-04-08 House Journal Page 3190 HJR 48 3) A Proposal For Further Action By the Legislature Before the legislature and the citizens of this state will approve this plan, they need to be convinced that it is clearly an improvement over the status quo. While there are some positive and intriguing aspects of HJR 48 there are also a number of undesirable outcomes which might occur should actual conditions in the future vary significantly from the assumptions upon which the plan is based. Indeed, the consequences for Alaska of this plan are too serious to rush a study. The subcommittee believes that it would be beneficial to the state and its citizens to establish a long-range plan that organizes the state's approach to handling its finances. It is for these reasons and the aforementioned concerns that the subcommittee proposes the establishment of a blue ribbon task force comprised from all branches of government, as well as technical experts in the field, that would thoroughly investigate the concept contained in HJR 48 and other feasible long-term financial plans. Unfortunately, there is not time enough during the current legislature to complete the study and think the task force should meet during the interim. We feel that further action, at this time, on this issue falls under the purview of the Finance Committee." The following fiscal notes apply to HJR 48: Fiscal note, Office of the Governor, 4/8/94 Zero fiscal note, Dept. of Revenue, 4/8/94 HJR 48 was referred to the Finance Committee.