Legislature(1997 - 1998)
06/14/1997 02:00 PM Senate JUD
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
SJR 18 - CONST. AM: PERM. FUND INCOME & DIVIDEND
CHAIRMAN ROBIN TAYLOR called the Senate Judiciary Committee meeting
to order at 2:00 p.m. and announced SJR 18 to be up for
consideration.
SENATOR GREEN, sponsor of SJR 18, said there is a fear among people
that something is going to be done to the Permanent Dividend Fund
that people haven't had input on or that the legislature might at
some point use the Permanent Fund for something other than what
they think it's intended. Most people already think that nothing
can be done with the Permanent Fund without their vote, but that
isn't the case. SJR 18 corrects that and makes sure that the
people are consulted before anything is done with the Permanent
Fund.
MR. TUCKERMAN BABCOCK, former staff to Senator Green, explained
that SJR 18 does not propose a change to the existing management of
the earnings of the Permanent Fund, except for the statutory basis
which now can be changed any time by 11 senators, 21
representatives and a signature of the Governor. SJR 18 changes it
to a constitutional basis requiring 14 senators, 27
representatives, and a vote of the people before any changes could
be made to the Permanent Fund.
The effect of this change would be to take the spending of
dividends and the spending of inflation-proofing off the table
unless the voters approve changing it. It also adds the
requirement that left-over money (undistributed income) can only be
spent if the voters approve it.
SJR 18 is good public policy, he said, because for the last 18
years fear has been a big part of the process and it would
eliminate the confusion about what to do with the undistributed
income and how that might affect the dividend. There is no change
to the status, definition or earnings. It only makes it a
constitutional basis instead of a statutory basis.
MR. BABCOCK suggested that the Committee might want to add findings
to SJR 18 clearly describing the public purposes behind the
dividend, inflation proofing, and undistributed income.
MR. JIM KELLY, Director, Communications, Alaska Permanent Fund
Dividend Corporation, cautioned the Committee that this legislation
might weaken the State's long-standing position that fund income is
not subject to federal taxation. Secondly, he said, that in the
future legislators might wish to move away from a distribution
policy tied to fund earnings to something other like market value
which a lot of endowments do now. The Investment Policy Options
Committee is in the process of doing extensive review on that very
topic, but hasn't made a recommendation yet.
He also noted that the Permanent Fund is made up of two parts, the
principal, which is protected by the Constitution, and the income,
all of which is subject to appropriation by the legislature every
year.
MR. RON LORENSON, Private Attorney, said he was concerned that the
income would be subject to federal income tax. They have always
taken the position that it isn't, but there is no guarantee that
that will continue to be the case. A real concern is that a change
in the purpose of the fund could increase arguments in favor of its
being taxable right now.
There are a couple of issues in question. One is whether or not
the income accrues to the State or does the legislature have access
to that income which it does under the present arrangement. Under
the proposed constitutional amendment, a significant portion of
that income would be taken off of the legislature's plate which
disqualifies it as income accruing to the State.
Another way to approach this question as to whether the income from
a governmental fund accrues to the State is to analyze whether or
not any part of that income is subject to any private interests.
Now there are no private interests that have any right to any part
of the income of the fund.
SENATOR GREEN asked for clarification.
MR. LORENSON explained that the dividend is created by statute so
the legislature has the ability to modify the dividend and having
that ability defeats the argument that there's a private interest.
SENATOR GREEN asked what is a private interest.
MR. LORENSON explained that a private interest belongs to someone
who is not part of government, like a private individual or
corporation. If the Permanent Fund dividend is established by the
constitution as an absolute right of every resident of the State,
you would substantially strengthen the argument that you have
created a private interest in that income. These two things
certainly enhance the potential for the argument that the income of
the fund would be taxable under federal law.
The other approach that's used by the courts and the IRS in looking
at whether or not income of a government is taxable is if the
entity provides official governmental services or functions.
Changing the constitution would at least weaken our argument that
the purpose of the Permanent Fund is to provide some sort of
essential governmental functions or services. Right now all of
the income is available to the legislature for appropriation for
those purposes with the intent that the legislature determines
what is necessary.
CHAIRMAN TAYLOR asked what type of tax structure we would be
looking at if the people decided to vote for more protection for
the Permanent Fund.
MR. LORENSON replied that he hasn't tried to study that and he is
not a tax expert, although he has assumed it would be the corporate
rate.
CHAIRMAN TAYLOR asked him to check on that for the committee.
SENATOR GREEN asked if there is an annual review by the federal
government of the Board and the vulnerability of that status.
MR. LORENSON replied that he wasn't aware of any.
SENATOR GREEN asked what was the difference between declaring the
dividend and declaring it in advance.
MR. LORENSON explained that the important difference was who has
control over whether there will be a dividend and what it will be.
Right now the legislature retains the control each year. Under the
constitution, the ability to make those decisions will be taken
away from the legislature.
SENATOR TAYLOR explained that income from a revokable trust, for
instance, is taxable. An irrevocable trust is not taxable. Part
of his concern is that the dividend is less than 50% of the income
that comes in because of five-year averaging and the inflation
proofing and the undistributed income account. Vesting this right
to every individual citizen might very well make this thing
taxable. If we did, the IRS would tax the Permanent Fund for the
full amount of income, about $700 million. He thought they should
really look at this.
MR. LORENSON concurred with his comment. He said he didn't really
have a solution to this problem.
SENATOR TAYLOR asked if anyone has requested an advisory opinion
from the IRS.
MR. LORENSON replied that no one had done that because of wanting
to stay low on the IRS radar scope.
MR. DWAIN R. CARNEY said he thought this legislation was stupid.
He said they elect legislators to spend some money sometimes. To
have an election every time they want to spend some extra money
would be expensive and time consuming. He also thought we ought to
spend some of the money for prevention, maintenance, and
infrastructure instead of saving it.
SENATOR TAYLOR said he thought that there was a lot to be said for
the original purposes for which the fund was set up which was to
provide for what everyone believed would occur, the down turn of
the oil economy in Alaska and to have a fund available for the
rainy day. And that's exactly what's happening.
MR. CARNEY said he didn't see where all the fear was that it was
going to get spent.
MR. CARL CONDOR, SR. said they should make every effort to make any
issue perfectly clear to the people who are going to vote on it.
Right now the packet they have is not enough, especially if what
Mr. Lorenson says is true. He thought protecting the dividend and
inflation proofing was a good idea. He thought the legislature
should have some leeway. He felt if they just did something with
public safety with what's left over, they will have accomplished
something and lived up to the voters. Public safety is the number
one item under any government.
MS. HOLLY GERLACK testified that what bothers her according to what
Mr. Lorenson said is that the government is somehow separate from
us, the people. She asked if Senator Green introduced the
legislation because the legislature wasn't doing its job. Why
introduce this law if the legislators are listening to the people?
TAPE 97-38, SIDE B
Number 001
MS. GERLICK said she was concerned with the assumption that the
money would become private if we, the people, have some say in how
it's spent. She also wanted to know why the proceedings with the
Permanent Fund are kept confidential.
SENATOR TAYLOR said he didn't really know, but imagined there were
some situations where an investment might affect the price of a
stock if it were public information, as in insider trading. He
noted that the FTC closely monitored information that was let out.
He also said that the legislature had never appropriated any of
those monies for any purpose other than to put them back into the
Fund. The money has never been used for a special project.
MR. JOHN MURPHY said he understood that by 2018 there would be
enough money in the Permanent Fund to perpetuate for eternity. He
preferred to take his chances for better or worse for what the
dividend turns out to be, but he didn't want the legislature to
control that. He also asked why we have to go to the IRS and ask
them how to run our State. This is not income that we earn.
SENATOR GREEN responded that it's because of the way the Permanent
Fund was set up as a business that operates independently.
CHAIRMAN TAYLOR added that every state and city has an independent
savings account which is invested and taxes aren't paid on those.
MR. MURPHY said he thought the IRS issue was just a scare tactic
that had no founding in fact.
SENATOR GREEN said she wanted to make sure that he didn't construe
this as capping the Fund.
MR. WALTER FERGUS said when the legislature gets to the point where
they can no longer provide the services the State is required to
serve like roads, public safety and education, that's the time to
use the Permanent Fund. He wanted to see the people have a vote
also, but didn't want to have to pay federal taxes.
CHAIRMAN TAYLOR said that Alaskans are in a higher tax bracket than
anyone else in America. He thought we should have to ask those
folks who work if they want taxes increased and if they want it to
come out of the Permanent Fund.
MR. MARVIN B. COOK said he thought the State government had certain
innate functions that must be performed, but it is the mark of
socialism if a government owns the wealth-making properties of a
state or nation. We are not supposed to be a socialist government,
we are supposed to have the freedom of a republic. We don't have
the freedom to own the oil wealth in the State of Alaska, nor the
coal wealth. That is an abomination that should be corrected.
Funding an educational endowment is symptomatic of a socialist
government. He did not want the governor or anyone else
establishing a fixed education trust to pay all the money the
education establishment wants. The State Legislature should
eliminate whatever power they have over the education establishment
of the State and put that power in the hands of the local
communities and let them run it so we can have true education
again.
MR. COOK also said that he supported this year's legislature.
CHAIRMAN TAYLOR said he agreed with his socialist comments because
a government shouldn't own anything but the buildings government
sets in and a DOT warehouse to make sure the road grader is out of
the rain. They don't need to own anything else. Lands in the
original 15 states are owned privately except for land that was
purchased by the government from the state and private people who
owned it. This is why he introduced a bill to give away 103
million acres of land and put it into private ownership.
MR. CHARLIE HUGGINS supported Mr. Cook's testimony. He supported
this year's legislature. He thought there might be a tax
liability, but he thought that could be determined and suggested
calling a tax consultant who could give them just as good an
opinion as an IRS person.
MR. BRUCE KNOWLES supported SJR 18. He thought that legislators
loose touch with their homes when they go to Juneau.
MR. LEO KAYE supported SJR 18. He thought it was good for issues
to go back to the people for a vote. He thought that too often we
don't have the opportunity.
MR. ROY BURKHART said his Board of Directors voted unanimously to
congratulate the legislature on the good job they did last year.
He agreed with Senator Taylor regarding private lands.
MS. JUNE BURKHART said it's exciting to be part of the process
using faxes, computers, telephones and working with people like
Senator Green and Representative Osterman.
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