Legislature(2003 - 2004)
02/27/2004 08:00 AM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CHAIR RALPH SEEKINS called the Senate Judiciary Standing
Committee meeting to order at 8:03 a.m. All members were
present. Chair Seekins announced that he planned to review all
four resolutions before taking any action of them today and that
SJR 24 would be heard first.
SJR 24-CONST AM: GUARANTEE PERM FUND DIVIDEND
SENATOR OGAN, prime sponsor of SJR 24, told members he decided
to introduce this legislation because of his sincere belief that
the voters will not allow any other use of the permanent fund
until the permanent fund dividend program is protected in the
Alaska Constitution. SJR 24 contains a provision that delays its
effective date until the voters approve a constitutional
amendment related to an appropriation limit. He explained:
I feel if - even with constitutionally protecting the
permanent fund dividend that if it was protected,
let's say tomorrow, that a lot of legislators would
perceive that the rest of the money is available for
appropriation and there would be a feeding frenzy. I
have a personal belief that government generally grows
in direct proportion to the amount of money available
to spend and so I think we should protect the
dividend, put a spending cap in place and then, and
only then, discuss some of the excess earnings to be
used for some of the critical needs that we have as a
government.
As we all know, oil prices have been high but
production will continue to decline in the near and
far term and, even with the gas pipeline, we are not
going to have adequate revenues to balance the budget
in a few short years. I think this is an important
first step.
He explained that SJR 24 essentially enshrines the permanent
fund dividend program, as it exists in current statute.
SENATOR FRENCH asked if SJR 24 would put the entire earnings
reserve account inside the permanent fund itself, instead of
leaving it as a separate account.
SENATOR OGAN said it would.
SENATOR FRENCH asked if the distribution methodology for
dividends would remain the same, that being 21 percent of the
net income for the last five years.
SENATOR OGAN said it would and explained that Section 3 of SJR
24 enshrines the existing dividend formula. He said at the end
of the day, if the percent of market value (POMV) plan is
adopted, SJR 24 would have to be amended to use that approach.
He said he does not believe the POMV is a bad thing on its face,
but if it is adopted he believes the dividend should still be
protected.
SENATOR FRENCH asked how inflation proofing would work under SJR
24.
SENATOR OGAN deferred to Mr. Storer for an answer.
MR. ROBERT STORER, Executive Director of the Alaska Permanent
Fund Corporation (APFC), told members as he reads SJR 24,
inflation proofing would remain by statute. Currently, the
dividend formula takes precedence over inflation proofing,
although both are appropriated annually. He said if the existing
statute were memorialized in the Constitution, the dividend
would again take precedence over inflation proofing.
SENATOR FRENCH asked if SJR 24 requires that 50 percent of the
income available for distribution be transferred from the
earnings reserve account and used for the dividend program.
SENATOR OGAN said that is correct.
SENATOR FRENCH asked how that compares with the current dividend
program.
MR. STORER said they are the same.
SENATOR OGAN explained that SJR 24 would put the existing
statute in the Constitution, verbatim.
CHAIR SEEKINS announced that he would take testimony on all four
resolutions before the committee simultaneously. He then asked
for a motion to adopt version H [SJR 24] as the working document
before the committee.
SENATOR OGAN so moved.
CHAIR SEEKINS announced the motion carried without objection;
therefore Version H was before the committee. He then designated
a proposed amendment distributed to members as Amendment 1.
SENATOR OGAN moved to adopt Amendment 1 [for the purpose of
discussion], which reads as follows.
23-LS1543\H.1
Cook
8/19/04
A M E N D M E N T 1
OFFERED IN THE SENATE
TO: SJR 24
Page 2, lines 14 - 15:
Delete "a new section"
Insert "new sections"
Page 2, following line 18:
Insert
"Section 31. Suspension and Repeal of amendments. (a)
Notwithstanding Section 1 of Article XIII, the 2004
amendments to Section 15 of Article IX are suspended on the
date of an initial determination by the Internal Revenue
Service that all or a portion of the permanent fund is
subject to federal taxation. The suspension is terminated
on the date the amendments are repealed under (b) of this
section or one hundred eighty days after the date of a
final, nonappealable judgment or order by a federal court
deciding that no portion of the permanent fund would be
subject to federal taxation as a result of the amendments.
During the period of suspension under this subsection,
Section 15 of Article IX shall apply as it read on
January 1, 2003.
(b) Notwithstanding Section 1 of Article XIII, the
2004 amendments to Section 15 of Article IX are repealed
one hundred eighty days after the date of a final,
nonappealable judgment or order by a federal court deciding
that all or a portion of the permanent fund is subject to
federal taxation. Upon repeal of the 2004 amendments under
this subsection, Section 15 of Article IX is amended to
read as it read on January 1, 2003."
CHAIR SEEKINS noted without objection, Amendment 1 was before
the committee.
SENATOR TOM WAGONER told members that he has had great concerns
about enshrining the permanent fund dividend in the Constitution
since before he took office because of the differing opinions on
whether or not doing so would enable the IRS to tax the
permanent fund. People knowledgeable about tax law say if the
permanent fund dividend is enshrined in the Constitution, the
IRS's ability to tax the permanent fund becomes tenuous because
that money would no longer be available for government services.
Amendment 1 contains a safety valve so that if the IRS attempts
to tax the permanent fund, the dividend would revert to a
statutory mandate, not a constitutional mandate. He said he
believes Amendment 1 should be attached to any permanent fund
dividend bill because it gives the legislature final control.
SENATOR THERRIAULT felt adopting Amendment 1 would be prudent
because the IRS will not guarantee that any interpretation of
the tax code and case history is correct. He noted, however,
that SJR 24 is structured so that the earnings reserve is still
maintained and can be used for a public purpose, which probably
mitigates the threat of taxation by the IRS.
SENATOR ELLIS raised a point of order and asked Chair Seekins to
clarify whether the motion involving Amendment 1 was to
introduce it for discussion.
CHAIR SEEKINS clarified it was to adopt Amendment 1 for the
purpose of discussion and not to incorporate it into SJR 24.
SENATOR ELLIS noted it is atypical to ask if there is objection
to introducing an amendment for discussion and wanted to affirm
that the committee did not adopt the amendment. He then asked
Senator Wagoner if he has read the legal opinion that Attorney
General Renkes solicited on the taxation issue and, if so, asked
him to comment on it. He maintained that the legislature has
spent some money to get to the heart of the taxation issue
because it has been a point of debate for years. Senator Green
introduced a bill years ago to enshrine the permanent fund
dividend but it received a lot of criticism that it would
trigger unfavorable IRS action toward the State of Alaska. He
asked if Senator Wagoner has read those materials but did not
find those opinions definitive.
SENATOR WAGONER said he has read a couple of opinions that
contradict each other or take different approaches toward what
the IRS can and cannot do. He said Amendment 1 provides him with
a higher comfort level than any of the opinions he has read.
CHAIR SEEKINS asked if the IRS has ever been constrained by the
opinion of a state attorney general.
SENATOR WAGONER said the only entity that can restrain the IRS
is Congress.
SENATOR ELLIS requested that Attorney General Renkes provide a
position on the need for Amendment 1. He said the attorney
general went through the time and expense of soliciting an
opinion from a Washington, D.C. law firm so he would appreciate
hearing his opinion.
SENATOR WAGONER said he didn't think what the attorney general
said would matter because Amendment 1 provides a comfort level
that he wants anyway for himself and a lot of other people who
distrust the IRS. He said he feels it would be a waste of
Attorney General Renkes' time.
CHAIR SEEKINS asked if Attorney General Renkes' opinion was in
writing.
SENATOR WAGONER said if it is, he would get a copy for committee
members. He repeated that he feels Amendment 1 is a prudent
safety valve.
SENATOR OGAN noted the only opinion that really counts is of
"the guys that wear the robes in the U.S. Supreme Court so
everybody else has got an opinion about it." He agreed that
Amendment 1 is a circuit breaker if an adversarial opinion kicks
in and removes the dividend program from the Constitution.
SENATOR THERRIAULT pointed out that the language contained in
Amendment 1 is identical to Section 3 of SJR 19 that Senator
Ellis cosponsored.
SENATOR ELLIS told members he was not arguing against the
inclusion of Amendment 1. He maintained, "I was asking about the
attorney general - the time and expense we went to as a state
and that might be a legitimate part of the committee record. I'd
hate for Senator Therriault to mischaracterize my...."
CHAIR SEEKINS asked Senator Wagoner to get a copy of the written
opinion to insert in the record.
SENATOR WAGONER offered to do so today.
SENATOR OGAN said one reason he introduced SJR 24 was because of
a lengthy discussion he had with constituents in the Mat-Su
Valley during the interim about the fact that the founding
fathers of Alaska decided the state should retain the subsurface
rights to land in Alaska. All residents collectively own the
subsurface mineral estate, with the exception of the lands owned
by Native corporations and lands patented before statehood.
Additionally, the Alaska Constitution declares the subsurface
rights as dominant so that a surface owner must allow access to
the subsurface. That is also included in the Statehood Compact.
According to Section (6)(i) of that Compact, the U.S. attorney
general is specifically instructed to litigate in the U.S.
district court to procure those subsurface rights for the
federal government if the state conveys the subsurface rights to
anyone else. He feels very strongly that the dividend program
needs to be protected because it represents the people's share
of the collectively owned subsurface mineral rights.
CHAIR SEEKINS announced that with no further objection,
Amendment 1 was adopted.
SENATOR FRENCH said he is curious about the language in the
appropriation limit that is currently working its way through
the legislature.
SENATOR OGAN said no one knows whether the legislature will have
an appropriation limit at the end of the day, and how it will
work, but SJR 24 will not take effect without one. He said he
believes they should all be linked. He added:
And then we get into the discussion of whether or not
it's a revision and I gotta put that on the record. I
mean - and it's a little risky, and at the end of the
day we might wish to just take that out and let it fly
on its own. It could be viewed as a revision and we
have to be honest with people that's a possibility. Of
course they may view this as a revision because this
effective date affects more than one section of the
Constitution and I think the best case to address that
and - so the committee needs to be cognizant of that.
I don't want to try to hide it from anybody.
CHAIR SEEKINS pointed out, under Bess v. Ulmer, any section of
the Constitution that affects too many other sections is no
longer an amendment; it would be a revision.
SENATOR OGAN said he is unsure whether a constitutional
amendment with an effective date contingent upon another
[constitutional amendment] has ever been put before the voters
so it is an untested section of law.
CHAIR SEEKINS noted that according to Bess v. Ulmer, an
amendment to the Constitution is a clarification; a major change
is a revision.
SENATOR ELLIS asked whether the governor has taken a position on
SJR 24.
SENATOR OGAN said he has not had a discussion with the
administration about it.
SENATOR ELLIS asked if he plans to do so.
SENATOR OGAN replied, "I don't think it's a function of the
executive branch to - it's nice when they support your work but,
frankly, the separation of powers, I think it's something we
should - it'd be nice to have but isn't required to have to
consider an amendment."
SENATOR ELLIS agreed but said the majority frequently solicits
the governor's position, as it is important to the way the
majority views various pieces of legislation.
CHAIR SEEKINS asked Senator Ellis to restrict his comments to
his own conversations with the governor. He expressed concern
that the term "you all" is inclusive and other people are not
available to defend their positions.
SENATOR ELLIS asked the chair why he wanted to restrain his
right to speak on the issue. He then clarified that he was
referring to the Republican Majority when he said "you all."
CHAIR SEEKINS said the Republican Majority was not present and
he did not want Senator Ogan to answer for him.
SENATOR ELLIS said he would ask the chair separately and was
only interested in Senator Ogan's position.
SENATOR OGAN repeated that he has not discussed SJR 24 with
anyone in the governor's office.
SENATOR THERRIAULT pointed out that SJR 24 prioritizes dividends
over inflation proofing. He cautioned that the state could pay
dividends during a down market and give the next generation a
diminished asset. He views the permanent fund as a mechanism for
taking a one-time asset and making it multi-generational so that
possibility weighs heavy on his mind.
CHAIR SEEKINS noted that with no further discussion on SJR 24,
he would set it aside until the end of the meeting.
SJR 32- CONST AM: PERM FUND INCOME FOR DIVIDENDS
SENATOR KIM ELTON, sponsor of SJR 32, described the measure as
"if POMV, then SJR 32." The intent of SJR 32 is to codify one
of the recommendations of the Conference of Alaskans: to
constitutionally protect the permanent fund dividend. He said in
response to Senator Therriault's concern about prioritizing
inflation proofing over dividends, SJR 32 follows the POMV
method, which does just that. SJR 32 also provides that 80
percent of the earnings from the POMV would be used for
dividends. He stated:
It would probably be fair to point out that the
sharpest minds at the [Alaska] Permanent Fund
Corporation have, when they look out ahead and
they compare this recipe to the existing recipe
that's in statute, they would suggest that...a
return that would probably most equal the
existing statutory dividend would be in the
neighborhood of about 60-40 - 60 percent for
dividends, 40 percent for other purposes to be
determined by the legislature. But, Mr. Chair, if
you look back to 1990 and you take a
retrospective look, the formula, if we had been
operating under a POMV, the formula that most
closely would replicate the existing statutory
language would be in the neighborhood of about
76-24 so this errs just slightly to the benefit
of the dividend program, 80-20 does.
SENATOR ELTON said he firmly believes the legislature has
been able to protect the growing pool of the permanent fund
because of the nexus between the permanent fund and the
dividend program. He repeated that SJR 32 is written so
that its enactment is contingent upon legislative and voter
approval of the POMV methodology.
SENATOR OGAN moved to adopt Version H of SJR 32 as the
working document before the committee.
CHAIR SEEKINS announced that without objection, the motion
carried.
SENATOR FRENCH said his greatest concern is inflation
proofing and that is protected fairly well under the POMV
scheme. He said he tries to work backwards from the
election in November to figure out a plan that will gain
favor with the public to provide a dividend and allow some
earnings to be used for essential government services. He
believes SJR 32 goes a long way toward doing that. He asked
Senator Elton if he has received feedback about how the
public will receive this resolution.
SENATOR ELTON said one reason he introduced SJR 32 was to
make sure the legislature had all of the pieces necessary
to accomplish the goals of the Conference of Alaskans. The
one piece he found missing was a mechanism that provides a
fairly simple and easily understood division of the earning
stream for dividends and government services. He has had a
considerable amount of discussion with people in his
district and also with people at the conference. He noted
one way to accomplish policy, especially when a revision of
the Constitution is required, is to include a market
component. The legislature must structure the
constitutional amendment so that people can understand its
benefits. He believes the POMV approach will be adopted if
the citizens understand its effect on the permanent fund
dividend.
CHAIR SEEKINS asked Senator Elton if he has any letters of
support or e-mail messages showing support that could be
inserted into the record.
SENATOR ELTON said that SJR 32 closely reflects the
Conference of Alaskans' recommendations.
CHAIR SEEKINS asked Senator Elton to show a nexus. He said
he read the Conference of Alaskans' report but the
recommendations were not supported by enough of a majority
that the legislature would have passed them as a proposed
constitutional amendment.
SENATOR ELTON said it is unusual that a bill he introduces
is heard within 10 days so he does not have letters of
support.
CHAIR SEEKINS asked how many bills he has had referred to
the Senate Judiciary Committee.
SENATOR ELTON said none. He then indicated the suggestions
from the Conference of Alaskans were not supported
unanimously but 37 of the 55 delegates suggested enshrining
the dividend in the Constitution.
CHAIR SEEKINS said he is not aware of anything in the
conference report that suggested an 80/20 split.
SENATOR ELTON said the Conference of Alaskans did not
identify an appropriate split for earnings and dividends
but SJR 32 comes closest to matching what the existing
program has provided over the last 15 years. He repeated
that despite the fact that this recommendation was not
approved unanimously by the conferees, 37 out of 55
delegates did suggest the dividend be protected in the
Constitution. He pointed out that kind of a margin in a
legislative race would be considered as overwhelming.
CHAIR SEEKINS repeated [that margin] would not suffice for
a constitutional amendment to come from the legislature.
SENATOR ELTON argued that would if the threshold is
considered to be what it would take to pass on the general
election ballot in November.
CHAIR SEEKINS asked if he believes the 55 conference
delegates were representative of the people of the state.
SENATOR ELTON said he does not. The conferees were from a
much higher socio-economic stratum than the average
Alaskan. He added that two-thirds of the conferees
indicated they earned over $100,000 per year.
SENATOR FRENCH commented that the various proposals before
the committee represent a struggle between the government
and the people for the earnings of the permanent fund. The
people have repeatedly expressed their will to get their
share of the fund's earnings. SJR 32 embodies that will
most closely.
CHAIR SEEKINS asked Senator Elton if he recalled what top
two funding sources the conferees suggested the legislature
look at.
SENATOR ELTON replied a unique voting system was applied at
the Conference. When the conferees were able to vote
anonymously, there was a weighted average. The conferees
were asked to decide on their top three revenue
enhancements. The weighted average showed an income tax was
the preferred method, by a very slight margin, over the
earnings of the permanent fund, which had a relatively
small margin over natural resource taxes. He said he would
characterize the top two as a virtual dead heat between the
income tax and the permanent fund earnings.
CHAIR SEEKINS responded, "All of which are the people's
money, correct?"
SENATOR ELTON agreed.
SENATOR THERRIAULT asked Senator Elton why he chose an
80/20 split rather than a ratio that is closer to the
status quo.
SENATOR ELTON repeated that the sharpest minds at the
Alaska Permanent Fund Corporation (APFC) did projections to
the year 2010 and suggested that to best replicate the
statutory dividend formula, 60 percent of the earnings
stream would be necessary. Because many variables could
occur in that timeframe, he personally took a retrospective
look to 1990, had the POMV methodology been in place. The
split of earnings would have been about 76 percent for
dividends and 24 percent for government. He said he picked
an 80/20 split in favor of the dividend.
SENATOR THERRIAULT said if the POMV methodology is
established, the earnings reserve will no longer be in
existence. He asked Senator Elton to elaborate on how the
20 percent would be used.
SENATOR ELTON said the 20 percent is unallocated and would
be available for government spending, which would be
codified by the legislature and the budget process.
SENATOR THERRIAULT noted that under POMV, 80 percent of up
to 5 percent would be used for dividends. If the
legislature uses 3 percent instead of 5, 80 percent of that
amount will be used for dividends.
SENATOR ELTON explained that SJR 32 is based on a 5 percent
return from POMV. If the return is less, the 80/20 ratio
remains the same but a lower amount would be available for
each.
SENATOR THERRIAULT asked Senator Elton:
Even though it doesn't say it here, the use of
the other 20 percent, it's your intent that it be
available for appropriation and, in fact, you say
here at least 80 percent of the amount
appropriated so that 20 percent has to be
appropriated for something. You have appropriated
it from the earnings and whatever you have
appropriated out, 80 percent shall go to a
dividend but you have appropriated that other 20
percent too and you can't get to the dividend
unless you appropriate that 20 percent.
SENATOR ELTON said he thinks all legislators would view
this as a revenue source in the same way that an income tax
or additional resource taxes would provide an income stream
available for appropriation. This constitutional amendment
provides that 80 percent of this revenue stream would be
preserved for the dividend program. The other 20 percent
would be available for government spending.
SENATOR ELTON said he appreciates the fact that SJR 32 is
linked with the POMV. He believes there is a growing
realization that the POMV truly is the best way to make the
permanent fund permanent.
TAPE 04-10, SIDE B
SENATOR FRENCH maintained, regarding what split more
accurately reflects the current system, there is no bright
consensus. The APFC board has said a 60/40 split produces
the current dividend. However, Sharman Haley, from the
Institute of Social and Economic Research at UAA, recently
wrote an article [in the Anchorage Daily News] in which she
said the appropriate split is 70/30. He indicated that
trying to replicate what is basically an earnings driven
system under the current value driven system is like
comparing apples to oranges. He commended Senator Elton for
erring on the side of caution.
CHAIR SEEKINS indicated the discussion is not about whether
the POMV system is a good one but about how much would be
given to whom.
SENATOR ELTON agreed and pointed out that during his tenure
in the legislature, the asset management of the fund was
changed. He added:
All of those changes, what happens in the
marketplace, all of these things make it very
difficult to say with any kind of real authority
it is 61.3 percent to most closely replicate - I
mean you can't do that. We can trust the best
minds that we have down at the permanent fund,
and I do trust them but it's kind of a rolling
target that could change next year also.
SENATOR OGAN asked Senator Elton how much new money would
be available to spend on government services with an 80/20
split.
SENATOR ELTON estimated about $260 million, based on a 20
percent of the 5 percent return from the POMV, which would
be $1.3 billion this year.
SENATOR OGAN said he believes offering 80 percent for
dividends is very generous, but his concern is that a new
$275 million funding source for government services will
cause government to grow and the state will be in the same
situation that it's in today in five years. He noted he
wants to see a constitutional spending limit enacted first.
SENATOR ELTON commented that the legislature has acted in
an extremely responsible way regarding the use of the
permanent fund earnings. Regarding Senator Ogan's concern
about new money being available for appropriation, he sees
any new revenue stream as backfilling deficit spending that
will allow the legislature to draw down the budget reserve
at a slower rate.
CHAIR SEEKINS asked if all of the earnings of the permanent
fund have been available to the legislature for spending
since the beginning of the dividend program.
SENATOR ELTON said they have and because the program is
statutory and not constitutional, it only requires a simple
majority vote.
SENATOR OGAN expressed concern that SJR 32 means to him
that the remaining budget gap will have to be filled with
an income or sales tax to lock in the 80/20 split.
SENATOR ELTON agreed but noted that additional spending
cuts are possible. He said the discussion is moving toward
a philosophical one and his view is that SJR 32 is not a
fiscal plan. It could be one component of a fiscal plan.
CHAIR SEEKINS asked Senator Elton if he believes in the
need for an income tax before looking at spending the
permanent fund earnings.
SENATOR ELTON said his position is most closely reflected
by that of the fiscal policy caucus, a group made up of 28
members of the legislature. Its package included a cruise
ship tax, alcohol tax, oil industry tax and a small income
tax. He pointed out that none of the 28 members believed
that plan was a perfect one, however they agreed it was as
close as they could come to one. On an individual basis,
they all preferred a different plan.
CHAIR SEEKINS announced a recess.
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