Legislature(2003 - 2004)
02/09/2004 08:12 AM Senate JUD
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
[The following is a verbatim transcript.]
SJR 19-CONST. AM: PERMANENT FUND INCOME
MR. MARK STOPHA: Good morning. For the record, my name's Mark
Stopha, staff for Senator Georgiana Lincoln. She's not able to
be here today. She's attending a funeral for Chief John in
Copper Center and for approval of the committee chair,
Representative Croft will present SJR 19 and answer any
questions.
REPRESENTATIVE ERIC CROFT: And this is Representative Eric Croft
from Spenard and I'm the author of the House companion of this
measure, so Senator Lincoln asked me to be here to answer any
questions. I've learned enough from observing the Senate over
the last 8 years that sometimes the Senate wants to act and
sometimes it wants to talk and I'll do whichever the Chairman
wants this morning.
CHAIR SEEKINS: Mr. Croft, why don't you do what you think is
best for your position at the moment and we'll hear and then
we'll ask questions.
REPRESENTATIVE CROFT: Okay. The bill before you, SJR 19,
protects the permanent fund dividend. It protects the inflation
proofing of the fund and it provides that the earnings may not
be used. It's hard to talk about this in a vacuum and
particularly in light of the discussion we've just had about
percent of market value. We introduced it - the House bill over
on my side and Senator Lincoln, the Senate bill, as an effort to
reassure Alaskans that their dividend would always be there,
and, in particular that the current fiscal structure - the
current dividend structure that reflects the market performance
of the fund in the dividend, we thought then and continue to
think is appropriate. In addition, I think inflation proofing,
and possibly we just disagree Mr. Chairman, is the most
important aspect of the fund, that it provides that my children
have the same buying power of the fund, have the same choices
available to them that we have today. To inflation proof at less
than the actual rate of inflation I believe steals from my
children those very choices. I want this debate to be happening
10 years and 50 years from now on what's the proper use for the
permanent fund earnings and have them have that same debate with
the same effective real buying power. So, possibly we're at a
situation of sort of core fundamental disagreement. This would
protect a structure that has served well to provide dividends
for Alaskan citizens and protect an inflation proofing that
protects the actual real value of the fund and protects it by
inflation proofing at the real observed actual inflation rate,
not a rate we can assume.
Percent of market value, while it has certain aspects that are
in its favor, certain aspects that are positive, assumes that we
can guess what is going to happen over the next 100 years,
assumes from the last 100 years of market performance and
inflation performance, that over the average it has been 3
percent inflation over the last long extended period of time.
And over that same period of time, the market has been able to
perform at about 8 percent, that therefore we can, over the next
100 years, take the difference, take 5 percent. I don't know
that. I think if I knew what the market performance would be
over the next 100 years and knew what inflation would be over
the next 100 years, that I'd be making a lot more money than I
am today. I think there are a lot of people who, if I could say
I know absolutely what that will be, who'd be very interested in
that number. We don't know. We're talking about a period of time
that was the Dow Jones Industrial Average where it was largely
an American phenomenon in a pre-industrial and industrial
setting. I don't know what a global DOW - as the stock markets,
ours and the worlds, become more global as the economy becomes
more global and becomes more high technology, I don't know
whether those 8 percent returns are going to continue to exist -
be lower or higher. I don't want to bet the real earning power
of the fund on that experience. I don't think we know enough to
do that. I'm much more comfortable inflation proofing every year
by the actual inflation that we saw. Mr. Storer, when he was up,
talked about we hope we don't see the '70s again. I hope we
don't either but if we take - I mean if we're going to take the
percent of market value construction, that we can look back over
the last 100, 80, 50 years, and say that is going to repeat
itself, then we have to assume that things like the Great
Depression and the '70s recession are going to happen. And when
those things do happen, and you have 8 or 10 percent inflation,
you continue under percent of market value to pretend that
inflation was 3 percent. We have had those periods before. I
think we have to assume that we will again and under a percent
of market value formulation, we would be eating into the
principal.
I listened to the discussion up here. I looked at yesterday the
earnings reserve balance of the permanent fund. It's around $900
million. The great $4.5 billion you're talking about is in
unrealized gains. According to the most recent AG opinion from
Attorney General Renkes, that should be put into the principal.
I'm not sure whether that's the right legal opinion but it is
the legal opinion that the permanent fund is operating on.
CHAIR SEEKINS: I don't agree with your interpretation but we'll
put it on the record for you.
REPRESENTATIVE CROFT: Okay. Individuals, I guess, can disagree
on that. I've read that opinion a number of times. I disagree
with whether the opinion is right legally but I believe that's
what it says.
CHAIR SEEKINS: I think it's counted into principal but it
doesn't require that it be deposited into principal. I mean it's
counted in terms of the calculation, that's how I would portray
it.
REPRESENTATIVE CROFT: You might have a brilliant career forward
in the legal profession, Mr. Chairman, because that distinction
evades even me.
CHAIR SEEKINS: Well, I can understand how. Please, I'm being
facetious, just having some fun there.
REPRESENTATIVE CROFT: The fundamental aspect of the percent of
market value that disturbs me is that presupposing what we know
what inflation will be and pretending that it's that and,
frankly, the portion, and you've referred to it in some of the
testimony before, that deletes the word 'principal' from our
Constitution. We put it in there in the '70s. We're going to
take it out. I think it would be better and a sounder fiscal
policy to start by reassuring people that their dividend won't
be touched, reassuring people that real inflation proofing,
inflation proofing at the rate that actually occurred, will
happen and that's what the bill before you does. I can see that
the....
CHAIR SEEKINS: Senator Therriault has a question and if you
don't object, as we go along, we like to ask questions while
they're fresh in the minds of our members. Senator Therriault.
SENATOR THERRIAULT: I don't think you can guarantee those two
things that you just said you want to guarantee. I believe that
I tend to agree probably more - fall on the side of the spectrum
with - that you're on, as far as the importance of inflation
proofing. But we've just heard from Mr. Storer that we can have
a situation in a down equity market but continue real estate
earnings that come in that have to be paid out as a dividend
that could in fact erode the principal of the permanent fund if
we didn't have that buffer that we talked about. So you're
desiring to have absolutely guaranteed two things that under the
current situation, I don't think you can.
CHAIR SEEKINS: Please go right ahead.
REPRESENTATIVE CROFT: I listened to the entire testimony for
that reason. What Mr. Storer said was that you could reach a
situation where you couldn't pay out dividends and you couldn't
inflation proof because you'd gotten to the bottom of the
barrel. At that point, and because of market performance after
that, you could have a book value of less than principal - it
could be negative for a while. All that is true and what you do
in that situation is you stop spending. That's the appropriate
response when you've hit the bottom of your savings account and
that's not what happens in percent of market value - you keep
spending, in fact you keep spending at 5 percent assuming that
things are happening that are not happening in the real world.
CHAIR SEEKINS: You mean the bottom of your savings account or
this line below, which you should not participate. The bottom of
the savings account means it's all gone to me. How did you mean
that?
REPRESENTATIVE CROFT: The bottom of the checking account and
maybe you still have savings that you declared you're not going
to get into yet.
SENATOR THERRIAULT: It seems to me if you get down to a poor
market situation, in fact we almost got to a point where we
didn't have money to pay a dividend within the last year and
there were bills that were introduced to pay it out of the
regular state treasury because it got so close. But I think that
one of the things that Mr. Storer was alluding to is you still
would have real estate earnings coming in so you have income
that goes into the calculation of your dividend but you have no
money. The first money to go is the inflation proofing. The very
thing that you said should be paramount. I agree if the
permanent fund is the mechanism is to be a mechanism of taking a
one-time revenue stream and making it truly multi-generational,
you should put inflation proofing as your number one goal. It
should be paramount to everything else but with what you're
proposing here when you get into a bad situation, the first
thing to go is the inflation proofing.
REPRESENTATIVE CROFT: This constitutional amendment protects
inflation proofing and....
SENATOR THERRIAULT: I don't see inflation proofing in here.
REPRESENTATIVE CROFT: The statutes that we put into the
Constitution that we say - AS 37.13.140, .145, and 23.025 -
13.145 is the inflation proofing statute and then when we add
Section 2 that says that you can't amend them as they were
effective on 2002, that says dividend....
SENATOR THERRIAULT: What happens when we get into a situation
where we don't have the money under the current system to pay
them both. Which one gets paid?
REPRESENTATIVE CROFT: What you should do when you reach the end
of your principal and you get down - and principal just means a
number below which we don't want to fall, below which we want to
stop doing business as usual, and in this system you do stop. I
mean I can't protect....
CHAIR SEEKINS: In which system - the 19?
REPRESENTATIVE CROFT: The current system protected
constitutionally as SJR 19 would do. I can't guarantee you
market performance that will always allow us a dividend and
inflation proofing. Nobody can. I can, though, write a system
that says we will do that each year and when we hit the
principal number that we don't want to fall below, we've got to
stop. You have no question in my opinion, and you wait for the
markets to rebound. And then when you do, you pay those back.
You start paying dividends again and you pay back the inflation
at the real amount. Percent of market value would continue
through that entire time, pretending we could pay out 5 percent,
eroding principal and continuing to operate as though there was
something normal about that.
CHAIR SEEKINS: Percent of market value does not mandate a 5
percent payout. It limits it to 5 percent based on the fiscal
responsibility of the legislature. Senator Therriault?
SENATOR THERRIAULT: Thank you Mr. Chairman and I think language
can be, as we discussed earlier, developed that would prevent
that from happening. But you say we've got the current dividend
payout system and we've got inflation proofing. When money gets
tight, which one gets paid? Is it prorated between the two? If
you only got enough money to pay a portion, which one gets paid
- inflation proofing or a dividend under this language? Which
one takes precedent?
REPRESENTATIVE CROFT: Right. Under the current structure and
under the structure we incorporate here in SJR 19, if you get
down to that point, you keep dividends. It's a calculation that
you and I have been through.
SENATOR THERRIAULT: Right - you keep dividends. So inflation
proofing, the very thing that you said to be paramount, is now
secondary.
REPRESENTATIVE CROFT: It's secondary to dividends and superior
to everything else.
SENATOR THERRIAULT: It's secondary to dividends and, for myself,
that's a problem. Another question. In addition, Section 2 on
page 2, lines 5 through 8, you talk about an allowance for an
appropriation, above and beyond B and C sections, that I guess
would just be a majority vote of the legislature and then
ratification of the state voters and that would come out of the
earnings reserve. So you are allowing for spending here in
addition to the dividends and the inflation proofing.
REPRESENTATIVE CROFT: Well, through the chair, Senator
Therriault, we saw that as a protection. Of course they could
spend now but this would require that the people approve any
spending out of the earnings reserve.
SENATOR THERRIAULT: The people that year. So with pressure on
the budget, and the public demand for dividends, where do you
think the dollars are going to go? Is it going to go to
inflation proofing?
REPRESENTATIVE CROFT: Well, and that became the final sort of
point in the discussion here before, the idea that we, the
people or we, the legislature, would fail in our commitment on
inflation proofing. I happen to think inflation proofing is very
popular publicly and I think it should be. I hope it still is in
this legislature. I think keeping the earning power for our
future generations will win politically but the provision you're
talking about doesn't have to do with either. It has to do with
putting another protection against getting into the earnings
reserve and that government use of the earnings reserve is, in
the long run, as big a threat to inflation proofing as dividends
as the market - government getting in and taking substantial
amounts of the earnings reserve is what drives you to the very
situations you were talking about, of having no money and how do
we choose between dividend and inflation proofing. We wanted to
set one more protection to make sure that earnings reserve
stayed healthy and it wasn't used for government. If the people
say that they want to, that's their choice but we not do it
ourselves.
CHAIR SEEKINS: Go ahead, Senator Therriault.
SENATOR THERRIAULT: Mr. Chairman, this mechanism by just
enshrining the statutes, which we've also had testimony that
says we're 27 years down the track. We've changed our investment
strategy and now we're trying to freeze these statutes that
haven't kept pace with the means by which we generate revenue.
It just seems that to suggest that this is a better way, when
clearly you get into a situation where you don't have enough
money so you're going to have to pick between dividends and
inflation proofing, you could have an appropriation because of
budgetary pressure that could also take precedence over
inflation proofing, leaving nothing for inflation proofing. I
think with a segment of the state population, the inflation
proofing is very important, but we've also got a transient
section of the state population that carrying forward the
purchasing value for the next generation, they don't care a bit.
I've heard from - I have one constituent that I just had to
agree to disagree with and he said you know nobody looked out
for my generation so let the next generation look out for
themselves. I completely disagree with that and I think that
truly we should go toward something that really does guarantee
that we preserve the purchasing power. And although POMV might
not be 100 percent, it sure seems like it's a whole lot better
than what we've currently got.
CHAIR SEEKINS: And we'll go to Senator French next but
purchasing power that doesn't meet needs is useless.
REPRESENTATIVE CROFT: Doesn't meet? Sorry Mr. Chairman?
CHAIR SEEKINS: Purchasing power that doesn't meet any need is
useless. What are we trying to preserve purchasing power for
future generations if we can't feed our kids today and that's
where you and I probably basically philosophically disagree. I'd
feed my kids before I'd inflation proof my savings account. So
that's not a hard decision for me in that case. When I look at
projected shortfalls in general fund versus expenditures, you
know, we're shooting for a number around $400 million and we're
going to put $500 million first into inflation proofing. How do
people want to spend their money? Do they want to spend it to
inflation proof and then we tax them and take it away from them?
There are a lot of questions there that become very debatable
when the reality hits the pocketbook and so I'm not so sure how
people would react. I know how my wife would react if I said
baby, we're going to put the money in our savings account and
you don't have anything to go buy groceries to feed the kids and
grandkids. There'd be a revolution in the house. So, sometimes
the legislature has to live up to its fiscal responsibility
without undue restraint and I think they've got a good track
record of doing that. I haven't been here as long as you, but
the track record has been good. It's been admirable and I think
to some respect anything that we do that unduly limits the
ability for the legislature to act in a fiscally responsible
manner in the face of uncertainties, as you mentioned are surely
going to come, puts us in a position where if we don't know, why
do we want to eliminate the ability for the legislature to
respond appropriately? That's where I get into problems. Senator
French?
9:37 a.m.
SENATOR FRENCH: I think one of the remarkable things about the
current set of statutes is the degree to which the public kind
of gets how the system works. When the dividend went from $1,900
just a few years ago down to $1,000 this year, none of my
constituents were squealing about, you know, some kind of
terrible inequity in the system. They understood that it was
just a down market year and I think that's one of the
difficulties with POMV that proponents haven't quite come to
grips with that somehow POMV implies stability, that you will
have this money paid out every year irrespective of the market's
performance and yet there's sort of that little language that
says you can go up to 5 percent as if there were going to be
years when we wouldn't do that.
CHAIR SEEKINS: Well we did that in 1996, Senator French.
SENATOR FRENCH: I was almost finished.
CHAIR SEEKINS: Go ahead.
SENATOR FRENCH: So I guess the point I was trying to make was
that there's some real good value in maintaining something very
much like the current statutes because of the degree to which
the public understands that sometimes there [are] going to be
years when you just don't get a dividend because the market just
didn't provide one. So I think that's - I just think that's
worthy of making note of.
CHAIR SEEKINS: I have no problem with that but we did - in our
current system, we did, I would call it, hyper-inflate the
dividend in 1996. The decision was made by the Board of Trustees
that the current generation should, this was the rationale, the
current generation needed to get more from the permanent fund
than it was getting through the regular distribution system, the
dividend system. So, investment management companies were told
to go sell stocks to bring in realized income to be able to put
more cash into the dividend for the current generation. Now
whether that was the real reason or not is debatable, but that
was the rationale that was used. It was done. We had additional
income that came in that peaked and then went right back in
terms of realized income and so, sometimes, it isn't just market
variability that affects the dividend under the current system,
Senator French, it's also political variability. Senator
Therriault?
SENATOR THERRIAULT: Mr. Chairman, I need to disagree with
earlier comments here about people understanding the current
system and the value of that. Certainly last year when there was
the real potential that there would be no dividend, there was
enough of a concern in this building of, number one, the shock
to the citizen, the shock to the economy that there were
proposals to pay it out of the general state treasury. So I
don't think the general public has any level of understanding
that really, in the current system, that there's the chance that
there is a zero dividend year. And certainly for those of us
that know the potential impact to the state treasury, that's not
something that we would invite so I'm not going to - I guess I
can't agree with that line of thinking when there are other
alternatives that make sure that that stream of cash that goes
out into the Alaska economy is smooth and you get the by-product
of guaranteeing that inflation proofing of some degree is made
automatically independent of action of the legislature. I don't
think that the general public understands that they can get a
zero dividend year in the current system.
CHAIR SEEKINS: Right. I think that's true, too. When I was on
the Board of Trustees it didn't take me very long to figure out
that the Board of Trustees can play God with the permanent fund
and what the dividend's going to be. And in a year where the
earnings reserve was very low and you're faced with the
possibility of not having the cash to inflation proof or pay a
dividend, there will certainly be a tremendous amount of
political pressure to maybe pick some fruit that isn't quite
ripe yet in order to get the cash from realized earnings to put
into the earnings reserve account when a more disciplined
investment strategy would say it's not time to pick this fruit
yet but we need the money. So, you know, I can see how the
current system lends itself to all kinds of abuse. Senator
Therriault?
SENATOR THERRIAULT: The section, for either one of the
gentlemen, that allows for an appropriation for other than
inflation proofing and dividends - was that language
specifically left or put in here so that you could answer the
legal question of whether you've still got a public purpose?
REPRESENTATIVE CROFT: Through the Chair, Senator Therriault, no,
my purpose for putting it in, and I believe Senator Lincoln's
was to provide another check on government getting into the
earnings reserve. I think that the legal matter of whether we're
a tax free status has been at least in my mind fairly well
settled. The recent opinion by Attorney General Renkes that
constitutionally protecting the dividend didn't threaten the
tax-exempt status of the fund - in effect, if it was a public
purpose when you did it statutorily, it's a public purpose when
you do it constitutionally. And a lot of the case law that has
come down over the last five years that buttresses that
agreement or that understanding, particularly in the areas of
educational trusts, where private money comes in and the state
holds it and gives it out to go to the state university, those
sorts of cases have really taken that from what was a question
mark and a worry for a long time - nothing is certain in life
but much more of a certainty that that's not a serious question.
SENATOR THERRIAULT: Okay, well I just know from the debate over
the years, it seems like if you can still point to something
where there is a general public access, you have some protection
from the federal court because they can say well, you're not
using the money for that purpose right now but there's that
possibility so it gives you a little bit of extra protection so
I just wondered if that was part of the reason that you put that
in there because you've got this whole Section 3 here that talks
about oops, if there's an adverse tax consequence, we want this
whole thing to go away. So you must feel like there is some
possibility of that, otherwise you wouldn't have Section 3.
REPRESENTATIVE CROFT: True enough. And through the Chair,
Senator Therriault, the House version we took it out over the
last couple of months, after those opinions came down. When I
talked to Senator Lincoln about it, she said that that would be
a perfect question for the Judiciary Committee and up to you
guys to decide. I do think the case law has come down much
cleaner on the point that it is not needed. If the Judiciary
Committee felt like that was their opinion, they could take it
out. If they still wanted the protection, they could leave it
in.
SENATOR THERRIAULT: Do you yourself think that would be prudent?
I mean with the uncertainty of getting a tax ruling out of the
federal courts and then us being stuck with language in the
Constitution and we know it's a high hurdle to change it, would
it be prudent not - to go without this protection?
REPRESENTATIVE CROFT: I was convinced enough that in my version
of the bill I was comfortable pulling it out but it is a low
risk, but a risk, and I really do feel like you guys can decide.
As for me, after reading and re-reading the cases, not just the
memo that was sent to Attorney General Renkes, but the
underlying cases, I felt very confident that it was a public
purpose and would not be taxable. But, we had it in there to fit
your comfort level.
SENATOR THERRIAULT: Thank you.
CHAIR SEEKINS: Other questions? Senator French, did you have
anything? Senator Therriault? Thank you gentlemen, if you'll
stand by I do have one person who has indicated on-line that
he'd like to testify and, if you don't mind, if you can just
hang tough where you are so we can go into this. Is Mr. Gay -
Roger Gay, at the Mat-Su LIO - Mr. Gay, are you on-line? Do we
have him on-line still?
MR. ROGER GAY: Hello. Can you hear me?
CHAIR SEEKINS: Please, if you'll identify yourself for the
record? Welcome to the Judiciary Committee and please proceed
with your testimony.
MR. GAY: My name is Roger Gay. I live in Big Lake and I'd like
to say a little something about inflation proofing. In my
opinion, inflation proofing does not protect the value of the
fund. It merely subjects more money to the ravages of inflation.
Inflation is the result of the devaluation of our money. Every
year our money is worth less, and that is why the price of goods
goes up. A loaf of bread is a loaf of bread. A gallon of gas is
a gallon of gas. We can make bread and gas cheaper now than at
any point in history. Only the money has become less valuable.
Because of the Federal Reserve System and the way our money is
handled, our money has no intrinsic value. When you have a huge
permanent fund being subjected to I don't know how much of a
loss due to inflation, if you take that amount and dump it back
into the fund, that amount then becomes subject to inflation.
I'm not suggesting that we spend everything today at today's
prices, which would be the best way to get the full value of our
money. But the idea of taking money that has been hit by
inflation and fooling yourselves into thinking that you can
protect it by dumping more money into it to be ravaged by
inflation just doesn't make sense. You know we're losing a lot
of money to inflation because our money is not stable and if you
want to inflation proof, you have to work at stabilizing the
value of our money.
CHAIR SEEKINS: Senator Therriault?
SENATOR THERRIAULT: I understand your point. However, to
stabilize the value of our money is a national economic issue
that I don't know that the State of Alaska has the power to
control. But if that's a given, then that's something that's
largely outside of our individual legislative control. [END OF
TAPE.]
TAPE 04-5, SIDE A
SENATOR THERRIAULT: So should we not do that?
MR. GAY: You're not having any effect on inflation by taking
more money out of the hands of whoever, whether it's the state
or the people. You're not having any affect whatsoever on
inflation by throwing more money into the fund under the name of
inflation proofing. Inflation proofing is an oxymoron.
SENATOR THERRIAULT: Thank you.
CHAIR SEEKINS: Other questions? Seeing none, thank you Mr. Gay
for being with us this morning and providing your testimony. Is
anyone else on line that wishes to testify this morning? No one
else? Anyone in the audience that wishes to testify on this
matter this morning?
MR. GAY: I have a friend of mine that would like to make a brief
comment and his name is Gary Hanthorn.
CHAIR SEEKINS: Is Gary there?
MR. GAY: Yes he is and he has a mental disability but he'd like
to say a short word.
CHAIR SEEKINS: If he'll identify himself for the record, we'll
be pleased to take his testimony and Mr. Hanthorn, welcome to
the Judiciary Committee.
MR. HANTHORN: I'm Gary. Could you leave my permanent fund alone?
It's mine.
CHAIR SEEKINS: Thank you very much, Gary. Any questions?
MR. HANTHORN: Could you tell Mr. Kohring to give me a letter
because [indisc.] and he's supposed to get back to me for
something about my permanent fund being left alone.
CHAIR SEEKINS: Well we can't answer for Mr. Kohring here, but
you're certainly welcome to call his office. They have the
number there in the LIO and I would encourage you to do that.
MR. HANTHORN: Thank you.
CHAIR SEEKINS: Thank you for testifying this morning. With that,
hearing no one wishing to testify, we're going to close public
testimony on SJR 19. Are there any discussion points with
members of the committee? None? Seeing none, we'll hold this
over for a time when the entire committee can be here for
discussion. I want to thank you gentlemen for being with us this
morning. We appreciate your testimony and the lively discussion
and look forward to getting in this in the next - sometime soon.
With that, we have no other business before the Judiciary
Committee this morning and so we'll adjourn the Judiciary
Committee at this time [9:51 a.m.].
| Document Name | Date/Time | Subjects |
|---|