Legislature(1995 - 1996)
03/01/1995 09:15 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 84
"An Act making a special appropriation to the principal
of the permanent fund; and providing for an effective
date."
Co-Chair Halford took up SB 84, an appropriation from the
permanent fund reserve to the permanent fund principal. In
the introduced form, it appropriates the entire reserve to
the principal. There are two areas which have raised
significant questions. What is the effect of the
appropriation of the entire reserve to the principal on
either dividends or inflation-proofing? What is the effect
of appropriating the reserve to the principal on any other
calculation on revenue available for appropriation as it
applies to the constitutional reserve account. He noted for
the record, "it is not his intention to make it easy to
spend funds from other accounts.
Co-chair Halford recognized the two different CS Work Drafts
indicating the differences between the two. He noted that
one provides, that at any time the amount in the reserve
account exceeds $250 million, after dividends and inflation-
proofing, it goes to the principal. The other CS
appropriates all but $250 million to the principal.
Senator Phillips stated his concern regarding this
appropriation affecting the constitutional budget reserve
account.
Co-chair Halford asked, "If you reduce the amount available
for appropriation by taking the permanent fund reserve off
the table, do you then trigger the simple majority vote to
the constitutional budget reserve?"
Senator Rieger expressed his reservations concerning the
bill. He supports making it more difficult to spend the
money. He noted with the fiscal gap, people are cautiously
looking at the spending. Some factions advocate no new
taxes, some factions do not want the dividend to be touched.
Today, it is possible to confirm that the budget will not be
cut, the taxes will not be raised, and the dividends will be
left alone. This would be possible for five years with the
present reserves. This measure makes it less possible after
that time. The reserves would be exhausted, in that context
he supports it. Senator Rieger is convinced there needs to
be measures taken to protect the permanent fund. He stated
that he is also reserved with a bill he has co-sponsored.
There is an effort to build up the fund which puts another
billion dollars into it if it were to pass. He indicated an
insecurity of the institutional protection of the fund in
inflation-proofing and management. The two previous
administrations have removed and selected new trustees. The
elected governor controls a $3 million budget which is
dwarfed in comparison to gaining control of a $16 billion
fund. He expressed strengthening the protection
institutionally, given the power vested in an individual to
control these funds. He stressed that as the fund is built
up, there is a need to protect it for future generations.
Co-chair Halford asked Mike Greany to give an update on the
"sweep" mechanism. Mr. Greany addressed the possible effect
on SB 84 on the constitutional budget reserve. He spoke
from a chart entitled, "Preliminary estimate of funds
available for appropriation for FY96 for illustrative
purposes". He provided information based on a rough
calculation on funds available. He noted that what is
needed is a process that identifies all the accounts that
the court would consider available for appropriation and
those accounts that are subject for sweep for repayment for
the fund.
Co-chair Frank spoke to the rough calculation. He asked, if
a remainder of $452.2 million was left in the permanent fund
reserve would that negate the provision? There are a number
of subsidiary accounts that have not been included that
could swing the number in either direction. He then asked,
"is there a direct dollar-for-dollar relationship for the
amount left in the permanent fund reserve, unprotected by
being in the principal, to the amount that can be
appropriated from the constitutional reserve by a simple
majority? Mr. Greany responded that the earnings reserve of
the permanent fund is the largest single fund available to
appropriate. Co-chair Frank asked that if the calculations
are correct and the funds were appropriated, except $452.2
million to the principal of the permanent fund, would there
be any affect at all on the availability of the
constitutional budget reserve? Mr. Greany answered that the
legislature would not be able to use the simple majority to
access the funds, it would return to Article IX, Section
17C, which requires a three-fourths vote. Co-chair Frank
noted that if $500.0 million were left in the fund to give a
margin of error, then it would be clear you would not be
able to use the simple majority feature under Section 17B.
If the funds were going to be utilized you would have to use
Section 17C. Mr. Greany pointed out the other variable is
the amount of money available from AHFC or AIDEA. The funds
from those corporations is available to the extent that they
have actually been appropriated as opposed to what may be
theoretically available to appropriate. Discussion was had
regarding Article IX, Section 17 B,C, and D.
Jim Kelly of the Alaska Permanent Fund in Anchorage joined
the committee via teleconference. Co-chair Halford
reiterated the previous discussion. He noted that two CS's
are before the committee. One provides that at any time the
amount in the reserve account exceeds $250 million, after
dividends and inflation-proofing, it goes to the principal.
The other CS appropriates all but $250 million to the
principal. There are questions to the effect of the
appropriation of the reserve on dividends or inflation-
proofing.
Mr. Kelly responded that the problems that arise are due to
the description of income available for distribution.
Income available for distribution is 21% of the last five
years income, but may not exceed that income of the current
year plus the balance. Mr. Kelly indicated that this year,
there is no problem with an appropriation of the total
amount. The reading of the bill would allow for the
dividend calculation to take place before the transfer. The
problem would arise next year potentially, if the amount of
money earned is less than the five year average. If the
funds earned 6.49% next year, there would be an earnings of
$993 million. The amount would be less than the five year
average. That would be the amount that would be available
for distribution. The appropriation for the dividend would
then take half of that, which would have a negative impact
on the dividend of approximately $60 million. The proposed
CS's that would leave $250 million in the account would
alleviate that problem. The permanent fund has added to the
earnings reserve account 13 years out of 15. The two years
it was taken out, amounted to a total of $30 million and $24
million, respectively.
Co-chair Halford stated that in the past, the money out of
the reserve, went to inflation-proofing not dividends.
There is a dependance upon income, inflation rate, and
average, which determines whether the short-fall occurs on
the dividend-side or inflation-proofing-side. Mr. Kelly
projects an 8.11% rate of return for next year. If
inflation is 3.75%, there would be an additional $100
million added to the earnings reserve account next year.
Co-chair Halford spoke to the committee substitute's. He
prepared a CS which provides that anytime the balance in the
reserve account exceeded $250 million, it would be
automatically transferred to the principal. With regard to
the impact of inflation-proofing, he said, and with $250
million in the earnings reserve account there would have
been no problem in the last 15 years at all. Co-chair
Halford then addressed the problem of the appropriation of
funds exceeding $250 million which becomes a dedication and
a substantive law opposed to an appropriations bill. He
asked Mr. Kelly to give the history of the appropriation
versus non-appropriation of inflation-proofing and dividends
with regard to the permanent fund? Mr. Kelly responded that
in the early years, dividends and inflation-proofing were
not appropriated. It wasn't until the Cowper administration
that sections of the bill provided for appropriated
dividends and inflation-proofing. Co-chair Halford asked if
it is based on the last phrase of the permanent fund
language in the constitution, "or as provided by law"? Mr.
Kelly responded that it was substantive law, and was
interpreted to count as the appropriations for all those
years. Co-chair Halford asked if it was ever successfully
challenged? Mr. Kelly said there was never any legal
action, just a change of policy. The legislature began
including those sections in the front part of the bill.
Senator Sharp asked if the 6.49% was a line of demarkation
in ending up without enough funds for inflation-proofing?
Mr. Kelly's projection using 6.49% would be a problem. He
stated that if the earnings were less than $1,130 billion,
there would be a problem.
Senator Zharoff asked, what is the balance in the permanent
fund to date? Mr. Kelly stated that the principle at the
end of the year will be $13,500,000,000; in the earnings
reserve account, $1,116,000,000, both at cost. There is an
additional $750 million in unrealized gains. Total is $15
billion. Senator Zharoff referred to the CS that made
mention of, "June 30th of each year after the transfers
under B and C of the Section, the amount that exceeds $250
million shall be transferred." He questioned if the CS
would bind the appropriation power of future legislators?
End: SFC-95, #6, Side 2
Begin: SFC-95, #8, Side 1
Mr. Baldwin, Assistant Attorney General, and Mr. Slotnick,
Assistant Attorney General were invited to join the
committee to review past and present interpretation of the
law. Mr. Baldwin stated that in a recent decision of the
supreme court interpreting the amendment, there was
discussion of the automatic transfer mechanism that is in
statute. The opinion written during the Hammond
administration expressed the opinion, that the inflation-
proofing transfer could be automatic, based upon a
fulfillment of a fiduciary obligation by the state to keep
the fund above the inflation level. He stated that it is not
set out in statute. Since it was established as a trust,
the reasoning dictated a fiduciary obligation as trustees
to treat it as a trust. He noted that a later
administration decided that the constitution was not clear
on how the provision was to be implemented. Whether the
last sentence of the amendment does authorize the automatic
transfer, or whether it implies that the legislature should
appropriate it. From the Cowper administration to the
present, the money has been appropriated along with the
dividend. With regard to the law, the implementation is not
clear. One could argue that the constitution does not take
away the legislative power to appropriate funds, that it
merely authorizes the legislature to act consistent with
other powers granted in the constitution.
Senator Rieger asked if there is a difference between the
responsibility of a fiduciary and a trustee in the context
of overseeing a fund? Mr. Baldwin stated a trustee has
fiduciary obligations, to make prudent investment and
management decisions.
Senator Rieger stated that much of the debate concerning the
constitutional provision on providing for the disposition of
earnings requires a definition of earnings. In the past the
handling of the return of capital, which represents the
inflation rate, was treated as if it were earnings.
Mr. Baldwin addressed the question of what is in the general
fund versus what is not in the general fund. He stated that
there is a difference of opinion between legislative lawyers
and executive branch lawyers.
Mr. Slotnick responded to the question of funds, other than
the earnings reserve, which would be available for
appropriation for purposes of Section 17B, but not for
purposes of 17D. He cited Science and Technology Funds as
an example. These particular funds are outside the general
fund and would be available for appropriation for purposes
of 17B, but not for 17D. There may also be other funds
within some of the public corporations which would be
available for appropriation. He said they cannot be spent
without further legislative action, but would not be
available for appropriation for purposes of payback because
they are lodged in public corporations.
Co-chair Frank asked how this was different from what Mr.
Greany said? Mr. Slotnick stated that Mr. Greany identified
only the earnings reserve as a certainty outside the general
fund and not available for sweep. He is correct that it is
the only fund the supreme court identified in the Cowper
case. Co-chair Frank said that at issue are the equity
balances of the large public corporations. Mr. Slotnick
stated that at issue are certain funds within those public
corporations which cannot be spent without further
legislative action. Actual equity balances of AHFC are not
on the table as available for appropriation unless in fact
they are appropriated. There may be funds that cannot be
used for revolving loans, or that the University cannot
spend without an appropriation. These would be considered
available for purposes of the calculation, but not
necessarily for purposes of payback.
Senator Rieger asked if this was made clear in the judge's
ruling or is this an interpretation of what was said? Mr.
Slotnick stated that the supreme court was very clear in
footnote 32 which recognizes the distinction between 17B and
17D. The court stated that "the earnings reserve fund is
outside the general fund." He went on to say that, "if no
further legislative action is required, then it would not be
considered available for appropriation unless it is actually
appropriated".
Senator Rieger questioned the feasibility of taking all
assets in the general fund and moving it over for management
by the permanent fund. Mr. Slotnick responded that it was
debateable. Not everyone agrees with his legal
interpretation of whether the assets in the permanent fund
are in total outside the general fund. Mr. Slotnick said
that the legislature does have that authority. Mr. Baldwin
stated that it is the Legal Department's opinion that the
legislature has the power to create certain funds that are
outside the general fund. Senator Rieger asked, "without a
constitutional amendment?" Mr. Baldwin noted that the
legislature has done that by creating public corporations.
Mr. Slotnick commented that the administration is opposed to
SB 84. It makes access to the budget reserve easier which
could lead to smaller dividends upsetting the inflation-
proofing process. Another valid concern is the State's bond
rate. It could cause it to undergo scrutiny, possibly
leading to a down-grading. It also takes away the insurance
policy, it takes away options, and it undercuts the work of
the long-range fiscal commission. No one has identified to
the administration's satisfaction the need for this bill.
Transferring the earnings reserve will not increase the
dividends, because the earnings from the earnings reserve
are already accounted for in the formula that calculates the
dividends. The bill is not necessary to protect the
earnings reserve account from sweep. It is not eligible for
sweep, back into the constitutional budget reserve, and it
is not necessarily to protect the earnings reserve from
spending as there is no spending proposal.
Co-chair Halford stated that the committee has dealt with
the question of permanent fund dividends and under existing
projections it would have done nothing. He said that there
is an interest to deal with any impact on the constitutional
budget reserve availability. Mr. Slotnick stated he was
speaking to SB 84, not the committee substitutes. His
largest concern is, access to the budget reserve. It's not
clear that the CS's have solved that problem because the
formula compares the amount appropriated in one year with
the amount available for appropriation. If there is a
smaller balance in the earnings reserve, then access to the
budget reserve under a simple majority is more likely.
Senator Phillips stated that this fund of over $1 billion,
is subject to legislative appropriation. He stressed there
is a mistrust of this legislature to spend the money
correctly, which is why it is wanted in the permanent fund.
Mr. Slotnick's response to that statement is, "if they don't
spend it, it stays in the earnings reserve where in fact it
is serving a purpose. The purposes are to keep our
financial picture healthy.
Senator Phillips interjected that it is always subject to
legislative appropriation, and the fear is the legislature
can appropriate that money for any purpose. The legislature
has that authority. He felt that it is good public policy
to have that distrust of the legislature. He feels it should
be in the permanent fund so that it cannot be spent. Senator
Phillips wanted the public policy statement announced for
his constituents.
Co-chair Halford asked if there was anyone in the room who
believed that if the other $1.2 billion had not been
deposited to the principal of the permanent fund, that it
would not have gone into the budget gap of the mid-eighties?
There was no response.
Mr. Baldwin stated that he wasn't sure which CS the
committee was considering or how the committee was proposing
solving the problem with the constitutional budget reserve
for FY95. He felt that if the amount of $250 million was
left in the account, it might help solve the problem this
year. Assuming that you appropriate $700 million from the
earnings reserve account into the permanent fund, we have a
big problem next year. This would occur because the
appropriation level for FY96 just jumped up $700 million.
The amount available for appropriation is going to be lower
next year. This means, in an election year, access in CBR is
very easy by the majority vote.
Co-chair Halford said that the solution is to combine the
CBR and the permanent fund principal with earnings reserve
account.
Mr. Baldwin pointed out that Mr. Greany's illustration
addresses the problem for one year only, it doesn't show
what happens the next year based on a large appropriation
this year, which means the appropriation level is much
higher than the amount that is available for appropriation
in the succeeding year.
Senator Sharp stated that it was difficult to accept the
transfer of funds being called an appropriation.
Mr. Baldwin said that if you are sending it from the
earnings reserve to the principal that would be an
appropriation.
Senator Sharp indicated that the debate during the election
was the appropriations of funds available to meet the needs
of the operation of the governor, not transferring funds
instead of retaining.
Mr. Baldwin stated the court did try to argue a portion of
this issue in a supreme court case, but the supreme court
has come down and spoken on this question. It is the
decision that governs.
Co-chair Halford stated, that if there were no more
questions on this bill, it would be taken up at the next
meeting. and the two
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