Legislature(2003 - 2004)
06/22/2004 03:08 PM 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 JOINT RESOLUTION NO. 101
Proposing amendments to the Constitution of the State of
Alaska relating to and limiting appropriations from the Alaska
permanent fund based on an averaged percent of the fund market
value.
SENATE JOINT RESOLUTION NO. 102
Proposing amendments to the Constitution of the State of
Alaska relating to and limiting appropriations from the Alaska
permanent fund based on an averaged percent of the fund market
value and relating to permanent fund dividend payments.
SENATE JOINT RESOLUTION NO. 103
Proposing amendments to the Constitution of the State of
Alaska relating to an appropriation limit.
SENATE BILL NO. 1003
"An Act relating to the income of and appropriations from the
Alaska permanent fund under art. IX, sec. 15(b), Constitution
of the State of Alaska, and making conforming amendments;
relating to permanent fund dividend payments of at least
$1,000; relating to the determination of net income of the
mental health trust fund; and providing for an effective
date."
SENATE BILL NO. 1004
"An Act providing for and relating to the issuance of general
obligation bonds for the purpose of paying the cost of design,
construction, and major maintenance of facilities at the
University of Alaska; and providing for an effective date."
SENATE BILL NO. 1005
"An Act providing for and relating to the issuance of general
obligation bonds for the purpose of paying the cost of state
surface transportation projects; and providing for an
effective date."
This was the first hearing for these bills in the Senate Finance
Committee.
GOVERNOR FRANK MURKOWSKI stressed that this special session was
necessary in order to further efforts to resolve the State's fiscal
dilemma. While there are differing opinions about how to address
the State's fiscal crisis, it could be agreed upon that Alaskans
are looking for and expect a solution from the Legislature. He
recounted that today's Anchorage Daily News newspaper contains an
editorial titled "Let's see some action" as well as an
advertisement from the Conference of Alaskans urging consideration
be given to their recommendations regarding how to remedy the
fiscal situation.
Governor Murkowski stated that one of the "paramount" issues of
this deliberation would be the decision regarding whether or not to
authorize that no more than five-percent of the value of the
Permanent Fund could be spent in support of State government. Were
this Percent of Market Value (POMV) proposal supported, the next
decision would entail how that process should be implemented. The
State has been dealing with its fiscal situation for more than a
decade. He urged that a bipartisan solution be developed.
Governor Murkowski stated that the convening of the Conference of
Alaskans this year was a different approach to addressing the
State's fiscal dilemma. The Conference Delegates recognized that
there is a problem and developed recommendations through which to
address the fiscal issue. In addition, the Legislature listened to
presentations from national bond rating agencies that portrayed
that the State's "bond rating is in jeopardy." The Committee would
be discussing, today, bond proposals amounting to $76 million
dollars for transportation enhancements as well as approximately
$36 million in University of Alaska bond authorizations.
Governor Murkowski reiterated that the State's citizens want a
resolution to the State's fiscal dilemma. In addition to the $410
increase that the Legislature authorized for the Student Foundation
Funding Formula this year, additional monies would be required to
appropriately fund education. The Constitutional Budget Reserve
(CBR), the Permanent Fund's Earnings Reserve Account (ERA) and
other funding sources could be utilized to support education. He
reminded the Committee of his support for establishing a minimum
CBR balance in order to address cash flow needs and to recognize
that the price of crude oil "would eventually go down." In
addition, he cautioned that State communities, especially Rural
communities, would also require assistance, particularly for
expenses such as fuel. He provided a detail sheet titled "Examples
of community dividend distribution:" [copy on file] that depicts
the various components of the allocation distributions proposed in
SJR 102. This proposal would allocate approximately $70 million to
communities by distributing, for example, $25,000 to each small
community plus $87 per resident. Large communities such as
Anchorage would receive $24 million and Fairbanks would receive
seven million dollars.
Governor Murkowski stated that this Special Session was called
because the Legislature did not develop a fiscal solution during
the Twenty-Third Alaska State Legislature. The Conference of
Alaskans adopted recommendations. The House of Representatives
adopted a Percent of Market Value (POMV) proposal and the Senate
did not.
Governor Murkowski stated that his Administration has developed
legislation that would meet the needs of most Alaskans: The terms
proposed in SB 1003 are simple; the State's citizens must be
assured that they would receive a dividend. The proposal would
guarantee a minimum Dividend of $1,000 or 50-percent of the five
percent of the value of the Permanent Fund (PF), whichever is
greater. The dividend would grow with the PF over time. He noted
that when the gas pipeline and other resource developments come to
fruition, the State would not require money from the PF. However,
this "bridge" would be required until those supplemental revenue
sources become available. Forty-five percent of the fifty-percent
balance of the five percent of the value of the PF would be used to
support education and five-percent of the amount would provide
dividends to local governments.
Governor Murkowski also stated that a Constitutional Spending Limit
must be implemented in order to limit or reduce government
spending. In 18 months, State spending was reduced $245 million,
and, even thought the education budget was increased $88 million
this year, the overall FY 05 budget only increased by $17 million.
State government staffing positions have been reduced by
approximately 400 positions. He thanked the Legislators for their
efforts in reducing the rate of State government growth.
Governor Murkowski stated that efforts must be made over the next
decade to increase oil production, construct a gas line, extent the
Alaska Railroad lines, open new mines, grow the economy, and
develop new revenue streams. This is the time frame designated in
SB 1003: the plan would be enacted for 10 years and then terminate.
The dividend component would not be enshrined in the Constitution
and would terminate at the end of ten years. The proposal would be
accommodated by "modernizing the Fund as an endowment and spending
a limited amount of its income." This would guarantee dividends,
guarantee funding for education, and guarantee assistance for local
governments. Through modernizing the Fund's management and spending
five-percent of its income, the Fund would continue to grow. The
Fund earned $4.1 billion dollars the previous year. This 50/45/5
percent split proposal would cost approximately $1.3 billion.
Governor Murkowski declared that a long-term fiscal plan would
assist the State in increasing job opportunities and would assure
the business community that the State is a good place to invest. It
would continue the State's excellent credit rating, and thereby
allow for bonds to be available at good interest rates to support
State projects.
Governor Murkowski urged the Legislators to address these proposals
and allow the State's citizens to vote on them. The alternate
choice would be to raise revenue or deplete the Earnings Reserve
Account after the CBR were depleted. Let the public vote on these
issues and make the decision. Polls reflect that 71-percent of
Alaskans feel they have the right to vote on whether or not to
utilize Permanent Fund earnings. 59-percent of those polled would
support a minimum $1,000 Dividend.
Governor Murkowski remarked that the Administration's proposals are
"just a plan" that was drafted to address Alaskans' concerns. They
could be altered. He urged that through compromise, the issues
could be resolved. In addition to the fiscal proposals he
highlighted, there is also a proposal through which to address
workers' compensation issues that would reduce expenses to small
businesses and a proposal to increase the tobacco tax in order to
address health issues.
Governor Murkowski concluded his remarks.
Senator Dyson expressed concern with the proposal to utilize the
principal of the Permanent Fund even were a ten-year provision
included. In addition, the funding priorities specified in the
proposal appear to place more importance on the specified
components and his concern is that funding for such things as law
enforcement, which is not an identified component, would be
jeopardized.
Governor Murkowski acknowledged the concern, but pointed out that,
the protection of the PFD is paramount to the public's "prevailing
attitude." Education is their second highest priority. Public
health and safety are among the top five public concerns. He noted
that the number of Alaska State Troopers has increased and attempts
have been made to further health care concerns such as prescriptive
medication expenses. The proposal before the Committee would allow
for the amount of the PFD to be declared each year based on a five-
year average of the value of the Fund. The proposal would guarantee
that the Dividend would be paid as supported by the citizens. The
process would be re-evaluated at the end of the ten-year period.
This is an effort to address the public's position in this regard.
He emphasized that rather than abandoning this issue were this
proposal unacceptable, Legislators could approach it differently.
He urged them to address it.
Senator Dyson addressed the comment that, were a spending plan not
adopted, the choices would be to either utilize the CBR and the ERA
or increase taxation. However, a third option, which would be a
further reduction in State spending, was not addressed. Therefore,
he asked what efforts are being taken by the Administration, and in
particular the Department of Health and Social Services, to
streamline operations and further contain spending. Further
reductions in State spending are his top priority. He pointed out
that the fact that the FY 05 overall budget is only $17 million
more than FY 04, even with the $88 million increase for education,
signifies the efforts made by the Legislature to reduce spending.
Further cooperation with the Administration in this regard would be
beneficial. He opined that even were the Administration's Spending
Limit, POMV, and the 50/45/5 proposals adopted, without an increase
in revenues through taxation, funding from the CBR and eventually
the ERA would be required next year. A "disservice" would continue
to be provided to education, as, in order to adequately fund it
were the price of oil to decline, funding from the CBR would be
required. In conclusion, he asked whether further reductions to
State government would be required in order to address the State's
fiscal situation.
Governor Murkowski stated that he would welcome recommendations
from the Legislature in this regard.
Senator Bunde asked the Governor's response were the Legislature to
address these proposals in a Statutory manner rather than to
further them via a statewide ballot proposal process. He warned
that a vote of the people might preclude the Legislature from
utilizing Permanent Fund earnings for an extensive period of time
rather than allowing them to use it.
Governor Murkowski expressed that he is aware that the Legislature
has this authority. That right would not be challenged. However, he
communicated the belief that a vote of the people should be allowed
when a change in the Permanent Fund is being proposed.
Co-Chair Wilken thanked the Governor for his comments.
Co-Chair Wilken announced that Ms. Frasca would be presenting brief
overviews on the bills.
CHERYL FRASCA, Director, Office of Budget and Management, Office of
the Governor, stated that SJR 101 mirrors the HJR 26-CONST. AM:
PERMANENT FUND P.O.M.V legislation that passed the House of
Representatives at the end of the second session of the Twenty-
Third Alaska State Legislature. It proposes that five percent of
the value of the Permanent Fund could be appropriated.
Ms. Frasca stated that SJR 102 is the Constitutional distribution
legislation that would specify that fifty-percent of the five-
percent of Fund Value POMV proposal allotment would support a
minimum $1,000 PFD and the fifty-percent balance of that allotment
would be divvied up with 45-percent going to support education and
five-percent going to support local communities.
Ms. Frasca stated that SB 1003 would mirror SJR 102 with the
exception being that the provisions would be enacted Statutorily
rather than Constitutionally. This approach would address Senator
Bunde and Senator Dyson's concerns.
Ms. Frasca stated that the level of the Permanent Fund, as it is
currently formulated, could be very volatile in the future. Were
SJR 102 enacted, the PFD amount declared in October 2005 would be
$1,000. At status quo, there is a 24-percent chance that it would
be at that level. This would be further addressed in forthcoming
testimony from the Permanent Fund Corporation Executive Director,
Robert Storer.
Ms. Frasca stated that the 45-percent to education proposal would
assist in addressing future Public Employee Retirement System
(PERS) and Teacher Retirement System (TRS) obligation expenses to
school districts. The FY 05 obligation is projected to amount to
$39 million with another $130 million projected for the following
three years. This would be a challenge. The 45-percent to education
proposal would provide a solid funding base through which to
support the K-12 student foundation funding formula and the
University of Alaska. In FY 05, $970 million would be provided to
support the K-12 formula and the University.
Ms. Frasca stated that the five-percent to local governments would
provide funding to State communities. She referenced a Department
of Community and Economic Development handout, titled "Examples of
community dividend distribution" [copy on file] that depicts
various community allocations, but noted that the Legislature would
have the final determination in this allocation. In addition to the
challenge of funding fuel expenses, local communities must also
provide an estimated $22 million in PERS expenses in FY 05 and $61
million over the following three years.
Ms. Frasca clarified that while SJR 102 contains a ten-year
Constitutional termination date, SB 1003 does not, as changes in
Statute could be made by a majority vote.
In response to a question from Senator Bunde, Ms. Frasca stated
that were SJR 102 enacted, its provisions would terminate in ten
years. The Legislature at that time could introduce a new proposal
or ask voters to re-ratify the existing proposal.
Ms. Frasca informed that SJR 103 proposes a Constitutional Spending
Limit this mirrors the legislation adopted by the Senate Finance
Committee this past Session.
Ms. Frasca stated that SB 1005 is a $77 million Transportation Bond
package that addresses congestion issues, primarily in Anchorage.
Other projects that would be addressed by this bond package are
located in Fairbanks, the Mat-Su valley, the Yukon-Kuskokwim
transportation corridor, and other areas.
Ms. Frasca explained that SB 1004 would provide approximately $39
million for the University of Alaska system Statewide.
Ms. Frasca stated that these two bond packages would not transpire
were a fiscal plan not authorized as the goal is to not to further
burden the State's bond rating.
Co-Chair Wilken announced that the bills would now be discussed
individually.
[NOTE: Co-Chair Green chaired this portion of the meeting.]
SENATE JOINT RESOLUTION NO. 101
Proposing amendments to the Constitution of the State of
Alaska relating to and limiting appropriations from the Alaska
permanent fund based on an averaged percent of the fund market
value.
WILLIAM CORBUS, Commissioner, Department of Revenue, reviewed five
reasons that support the adoption of the POMV proposal: 1) "it
would provide a more reliable revenue stream for the future," were
oil companies and others to not make the necessary investments in
the States' resources that would generate the projected next decade
of revenues; 2) it would allow the issuance of State debt needed to
satisfy capital needs, including transportation and education needs
as exampled by the bond packages in SB 1004 and SB 1005; 3) "it
would provide a steady reliable dividend stream" for residents; 4)
it would be a "much better management tool" than that currently in
place through which the Permanent Fund Corporation could manage the
Fund; and 5) it would provide a spending limit on the Permanent
Fund. There is approximately four billion dollars in the Fund "now
that is theoretically available" for Legislative appropriation.
Commissioner Corbus reiterated the Governor's request that the
State's budgetary deficit be addressed now. Regardless of the
favorable oil prices currently being realized, POMV would provide a
solution to the problem until other new revenue sources come to
fruition.
BOB STORER, Executive Director, Alaska Permanent Fund Corporation,
stated that POMV would be a Fund management change that would allow
that no more than five-percent of the five-year average of the
value of the Fund to be utilized to support State government. The
status quo formula is volatile. The Permanent Fund Board of
Trustees has emphasized that POMV is a management tool. One
question asked of the Board regards how the Dividend would be
affected by the POMV proposal. Two levels of information are
produced by the Board in this regard: the most commonly viewed is
the linear model which does not consider market volatility and
simply projects five-percent of the Fund's value into the future,
with steady growth. This model could be quickly and easily
produced. The second model considers market volatility. There is
internal debate as to whether to include market volatility with
other PFD projections including: population estimates; the size of
the Fund; the extrapolations; and the real rate of return. He
provided a chart titled "Volatility in change in FY 10 per person
dividend projection over time" [copy on file] that was developed
encompassing the volatility factor. It reflects that, in a matter
of months, the per capita dividend amount could change "very
quickly," as the result of "the enormous influence" of short-term
market performance.
SFC-04 1st SS #1, Side B
Mr. Storer concluded that this must be considered "when evaluating
what the numbers would look like as we move forward." In the
future, "the disparity would become ever greater from quarter to
quarter, month to month" based on stock market fluctuations.
Co-Chair Green asked for further explanation of the graph.
Mr. Storer replied that the FY 10 dividend projection graph, which
was based on three-month incremental extrapolations of actual stock
market fluctuations from September 1999 through June 2004, reflects
how these market fluctuations would influence the dividend amount.
Senator Bunde stated that a more pessimistic view of the future is
developed upon observing the FY10 Dividend projection graph.
Senator Bunde questioned how the Legislature's decision not to
utilize the four billion dollars in the ERA could have a negative
affect on the State's bond market rating, as is "rumored."
Commissioner Corbus commented that the Standard & Poors Credit
Rating Agency had, during a previous presentation to the Committee,
communicated that the development of a plan and a methodology for
stabilizing the Fund, such as the POMV proposal, would meet desired
criteria. Leaving the money in the Permanent Fund in the status of
being potentially available to the Legislature for appropriation
would not suffice.
Senator Bunde asked whether an actual expenditure of that money,
regardless of any methodology being developed, would satisfy the
bond market's concern, as he pointed out that POMV does not specify
how the funds should be dispersed.
Commissioner Corbus responded that rather than questioning the fact
that the funds are available, they are concerned, for credit
purposes, whether they are "politically accessible."
Senator Bunde understood therefore that the expenditure of
approximately $40 million of Fund money for such things as hold-
harmless and the processing of the Permanent Fund Dividend
applications would not be recognized as an "indication of
accessibility."
Commissioner Corbus responded that the basis of the concern is the
ability to access the Fund to help balance the State's budget's
difference in spending and revenue.
Senator Olson noted that, as depicted on the chart, the Fund
appeared to stabilize after September 11, 2001.
Mr. Storer responded that the financial market began to rally after
September 2001. The quarterly returns since that point have
stabilized.
Senator Hoffman observed that under the status quo dividend system
each Alaskan is projected to receive a total of $16,440 in PFDs for
the FY 05 - FY 15 period, as reflected in the Department of
Revenue's spreadsheet that is attached to fiscal note #2, dated
June 19, 2004. However, the projections indicate that the POMV
proposal payouts for that same period would be approximately $4,000
less. The POMV proposal might be more palatable to voters were the
payouts aligned. Therefore, he calculated that were SJR 102 altered
to reflect a 60-percent payout for Dividends, 35-percent for State
services, and five-percent for local governments, it might be more
acceptable to Alaskans.
Commissioner Corbus stated that the Administration would welcome
alternative proposals in order to further these efforts.
Co-Chair Wilken pointed out that a CBR draw might not be required
in FY 04. Had the POMV proposal been in place, an additional $1.3
billion would have been made available, but would not have required
to fund the budget.
Commissioner Corbus replied that many changes including increasing
needs and decreasing revenues are forecast for the future. He
clarified that only half of the $1.3 billion would have been
available for the State's operating expenses.
Co-Chair Wilken noted that it is important to realize "the
mechanics" associated with the adoption of the POMV program. Were
the FY 05 budget based on $32 per barrel oil prices, a budget
deficit of $387 million dollar was projected. However, due to the
fact that the price of oil has increased to $35 per barrel, no
budget deficit is forecast. Were the POMV plan implemented, the
State would receive five-percent of the value of the Permanent Fund
whether it was needed or not.
Commissioner Corbus reminded that, in addition to the POMV
proposal, there is also a spending limit proposal.
Co-Chair Wilken acknowledged and clarified that his question
relates to the scenario absent a spending limit.
Commissioner Corbus expressed that Co-Chair Wilken's scenario,
looking forward, is based upon there being status quo expenditures.
This would not be the case.
Mr. Storer pointed out that the Permanent Fund Board of Trustees'
interpretation of the POMV plan is that it would specify a limit of
"no more" than five-percent of the value of the Fund. This
currently would allow for "up to" $1.3 billion dollars being
available for appropriation. "X percent" of that amount, whether it
is fifty-percent or sixty-percent, would be dedicated to meet the
Dividend obligation. The usage of the balance would be determined
by the Legislature who might decide not to appropriate it and
thereby allow it to remain in the Fund. The other side of the
equation is that once people get used to spending that money, it
would become habitual. Three options could include: leaving it in
the Fund; moving it to the CBR, or moving it to the General Fund.
Co-Chair Wilken summarized that the Legislature could either spend
it or move it to the General Fund, leave it in the Fund, or move it
to the CBR.
Co-Chair Wilken understood that money left in the Permanent Fund
could not be used as a credit in another fiscal year.
Mr. Storer affirmed. It would be considered as a special
contribution to the Fund that would be compounded and earn money
for the Fund. He reiterated that "the essence of POMV" is that no
more than five-percent of the Fund's balance could be appropriated.
Senator Hoffman understood that the average earnings of POMV are
projected to be eight-percent with three-percent of that to offset
inflation. He asked for clarification of previous POMV testimony in
which it was stated that in some years the earnings might be less
than eight percent.
Mr. Storer expressed that during the development of the POMV plan,
several different scenarios were discussed, with some including a
Statutory guideline utilizing a ten-year moving rate of return
earnings average. He reiterated that different language could be
crafted.
Co-Chair Green understood from the Standard & Poors' presentation
that "their primary objective" was that the State of Alaska develop
a "sustainable new source of revenue" such as an income tax or a
sales tax. This was paramount to being able to access the ERA.
[NOTE: Co-Chair Wilken assumed chair of the meeting.]
Ms. Frasca noted that the volatility of the stock market's affect
on the PFD, as explained earlier by Mr. Storer, supports Senator
Hoffman's concern relating to fluctuating earnings amounts and how
they would influence the amount of the PFD. She stressed that while
the status quo projection for FY 05 through FY 15 might be for
$16,000 in total dividends, this is a projection and might not be
realized.
Senator Hoffman referenced the status quo Dividend projection as
depicted in the spreadsheet accompanying fiscal note #2. The
problem is that voters understand that, were they to not approve
POMV, Legislators would not eliminate the PFD. A re-evaluation of
the POMV dividend program percentage might be required to win voter
approval. He reiterated his suggestion that 60-percent of the
earnings rather than 50-percent be the basis for the PFD.
Mr. Storer responded that, while he could not speak to the
percentage level as that is a policy decision, two components
should be considered in the monetary projections; one being the
volatility of the financial market and the other being "current
Statutes that contemplate less than a five-percent payoff." Were
more than five-percent allocated, the size of the Fund would be
reduced. A smaller Fund would reduce the amount available for
future PFD allocations.
Senator Hoffman pointed out that the aforementioned chart depicts
that under POMV the projected Fund value would be approximately $37
billion in FY 15. The current system, with its higher dividends,
would have a balance that exceeds the projected POMV balance by
eight million dollars.
Ms. Frasca commented that, in regard to the $1.3 billion that would
be available were the POMV plan implemented, this is the reason
that the Administration regards the spending limit legislation, SJR
103, as part of the packet. These are not stand alone issues but
are rather parts of a package. She pointed out that even though the
Legislature currently has the ability to appropriate the money in
the ERA, it does not mean that they do. Therefore, were there a
balanced budget, the fact that the Legislature could access money
through the POMV, would not require that it be spent. Including the
spending limit legislation with the POMV proposal would assure
Alaskans that "government would not grow at the expense of the
Permanent Fund earnings."
Co-Chair Wilken referenced the sheet titled, "Examples of community
dividend distribution" that was provided by the Governor; which
depicts that the community dividend being proposed would provide
the Fairbanks North Slope Borough $4.6 million and the City of
Fairbanks $2.6 million. He understood that rather than this being
new money, it would be a fund source change.
Ms. Frasca clarified that this would be new funding. It would serve
to offset funding that was once available in the form of such
things as revenue sharing and municipal sharing programs. This
sheet depicts a hypothetical methodology developed by the
Department of Community and Economic Development. She stated that
each unincorporated community would receive $25,000, each city
would receive $50,000, and each borough would receive $250,000.
Additional per resident allowances would also be provided.
Senator Hoffman asked whether language should be incorporated into
the ballot measure to specify that were either the POMV or the
spending limit proposal defeated, neither would be enacted.
Ms. Frasca stated that such language could be incorporated. This
had been considered.
Co-Chair Wilken stated that the discussion "blended together"
information relating to both SJR 101 and SJR 102.
Senator B. Stevens declared that, while he appreciates the
discussions, no new information has been presented.
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