Legislature(1993 - 1994)
02/02/1994 01:15 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HJR 48 - RESTRUCTURING THE PERMANENT FUND Number 584 ROGER CREMO, an Anchorage attorney whose proposal led to the introduction of HJR 48, testified via teleconference from Anchorage regarding the plan. Mr. Cremo said the purpose of the amendment was to avoid the consequences of unsustainable budgets. He said HJR 48 provides a system that is designed for a government that uses its wealth rather than its broad taxing power to finance operations and capital improvements. Mr. Cremo pointed out that current funding practices can't continue because of fluctuating oil prices, and the amendment would change that by putting all natural resource revenues that have accumulated in various reserves into the permanent fund. MR. CREMO said the amendment defines a maximum sustainable level of six percent of the market value of the fund, and there has to be a transitional period in the amendment that gradually lowers the percentage to six over a period of years. MR. CREMO continued with several points supporting HJR 48, including the fact that all resource derived monies would be placed in the permanent fund, thereby increasing its wealth; the money must be invested and reinvested; and the income of the fund be retained in the fund, which would prevent the money from being spent. He then said he was available for questions. Number 785 REP. NORDLUND questioned the use of the word "geometrically" and asked why it was used and what it means. Number 790 MR. CREMO replied that he looked for a mathematical progression, which would be arithmetic or geometric. He explained that using a geometrical progression would cause much larger jumps as the progression approaches six percent, and levels and smooths off until the year 2006, the end of the period of the plan, unless the legislature changes it. Number 830 REP. NORDLUND asked if there was any possibility of ambiguity using the term geometrical, and if it could be defined in the legislation. Number 835 MR. CREMO responded that neither the legislature or the courts would find any ambiguity in the definition, but it would not be a problem to define it in the bill. Number 842 REP. GREEN said he thought a definition might tend to confuse the public and suggested using a table to show the percentages over the ten years. Number 850 MR. CREMO reflected that it was a reasonable suggestion, but wondered if it would open it up to the legislature to change the numbers. Number 860 REP. PORTER said that if he understood Rep. Green's suggestion, it wasn't necessarily putting it into the constitution, but putting it into the document from which the public would be voting on this proposal. Number 865 MR. CREMO asked the chairman if the legislature could control the document that is used to make the explanation to the public. Number 869 REP. PORTER responded that he believed the legislature would have some input on who writes the explanation, and he believed that selection would be made carefully and would probably be someone from the House or Senate Finance Committee. TAPE 94-15, SIDE B Number 000 REP. PORTER asked if there were any other questions for Mr. Cremo. Hearing that there would be questions in the future, he asked Mr. Cremo if he would be available at a later date to do so. Mr. Cremo responded that he would be available. Number 087 REP. PHILLIPS asked if there was opposition to the plan and if the committee could hear that side. Number 096 REP. PORTER replied that if anyone knows who the opponents are, invite them to the table. Number 121 REP. MARK HANLEY, Vice Chair of the House Finance Committee, testified regarding the House Finance version of HJR 48 and suggested that after Finance reviews the bill that it come back to House Judiciary to make a final review of the constitutional and judicial aspects of the bill. He said what he wanted to do was give an explanation of the approach Finance is looking at, and he thought it needed serious considerations as a long term plan. REP. HANLEY said under the proposal all oil and resource revenues would go into the permanent fund first, and out of the fund would come a set percentage, which is where the geometrical plan comes in, taking 20 percent in the first year of an average of over about five years of the earnings. He explained that the withdrawal, plus nonresource revenues, would be what's available to pay for all things, the operating budget, capital budget and the permanent fund dividend program. REP. HANLEY discussed the spreadsheet and how the figures were arrived at and answered questions from the committee about the figures. Number 506 REP. HANLEY said there was one question about the plan in the case of a disaster, which was, will we have a pot of money available for the emergency? Number 520 REP. HANLEY stressed that in his opinion if the residents of Alaska feel this plan will eliminate the permanent fund dividend (PFD), they won't support the legislation. He also stressed that it is not the intent of the plan to eliminate the PFD. Number 549 REP. G. PHILLIPS stated some concerns and gave an example of being six years down the line and we are at a position where only six percent is going into the budget. She said her concern relates to entitlement growth, population growth, and everything that will cause this side of the budget to be so unbalanced, and to the side that would put money into natural resource development and keep the whole thing going. Rep. Phillips said one of the great fears she has is that as we cut down to that certain level, we're going to have so much of the whole program tied up in entitlement funding that we will not have money to continue resource development. Number 569 REP. HANLEY said that was a concern of a lot of people, and the plan shifts money to build up the principal of the permanent fund, but under any scenario the cash available would be about the same; however, up to this point, the Cremo plan was growing faster than the traditional method. He said those problems would always be there, but under current spending we will eventually face a large deficient, and then what will we do. Number 598 REP. GREEN commented that the plan doesn't make or lose money, and forces the legislature to do what they have to do, and will generate more money in the long run. Number 625 REP. JAMES said this plan assumes we are not going to do anymore than is already being done in resource development. Number 636 REP. HANLEY disagreed, saying there is no limit on development and we are only limited in spending. Number 662 REP. NORDLUND said he felt it was a minimalist proposal, and if adopted, doesn't necessarily mean we have to cut spending. And under either the traditional plan or the Cremo plan the legislature will be faced with a hard decision in either case. Number 672 DARREL REXWINKEL, Commissioner, Department of Revenue, expressed that it is good news that the legislature is talking about the problem; however, he was not there to speak for or against the proposal. He cautioned that there is a lot of financial information floating around based on various revenue forecasts that differ. He discussed various other observations and expressed concern that the six percent payout could cause the permanent fund balance to drop. REP. PORTER said that not all investments would be made in common stock. Number 740 COMMISSIONER REXWINKEL responded that they have a diversified portfolio, and cited various estimates on expected returns on investments. Number 795 REP. NORDLUND asked Commissioner Rexwinkel if he would put more faith in return on market investments versus the value of the price of oil in future years. Number 800 COMMISSIONER REXWINKEL replied that there is a lot of uncertainty with both the market and oil. Number 849 JIM KELLY, Permanent Fund Dividend Corporation, testified and referred the committee to a paper he prepared entitled "20 Questions and Answers on the Cremo Plan." Mr. Kelly said it is very clear that this plan will stabilize revenues, and there will be much more stability if the budget is based on five years, or in this case a three year plan, and it would increase the permanent fund under any circumstances; however, the legislature will have less money to spend under the plan. MR. KELLY discussed the assumptions used and said there are all kinds of things that could happen in either direction, and the fund has kept up with inflation and growth. TAPE 94-16, SIDE A Number 000 MR. KELLY said if the conservative estimates turn out to be the case, you will end up with significantly less money. He discussed inflation, and if you are paying out more, then you are not protecting the fund, but with less you are. He discussed the impact on PFD's and said they would rise dramatically because the principal is going to rise dramatically, which will produce less money for the legislature unless the statute is changed. MR. KELLY agreed with Rep. Hanley that if residents don't know what's going to happen to PFD's, no one will support HJR 48. He said there is no doubt that the plan will get the legislature where they want to go, but it could take 15 to 20 years. Number 220 REP. PORTER asked if PFD's could be capped at a certain amount. Number 232 MR. KELLY stated that he thought people would want to know what's going to happen to the PFD or they won't vote for the plan. MR. KELLY recommended changing the section that calls for a seven member board, and said he thought the six member board was working fine now. Mr. Kelly said the real suggestion he wanted to make was on the six percent withdrawal rate. He said it gives the legislature no assurance you are protecting the permanent fund because in bad years with inflation you are very likely going to be eating it up. He suggested a possible change of using a different number, dropping six to four, which would still provide less money. He said, however, that a better solution would be to say the amount withdrawn every year is not to exceed the real growth of the fund, defined as all the new money that comes in, subtracting inflation, and that's what you would have. MR. KELLY endorsed the concept of the proposal and concluded his testimony. Number 392 REP. GREEN asked, if we don't have any kind of cap, what happens in a high inflation year? Number 408 MR. KELLY replied that actually it would be significant inflation over a five year period, and that's a lot of inflation and could probably minimize that problem by the feature of averaging it out. Number 422 Discussion continued about growth of the fund, inflation proofing, PFD's and the percentage of growth in real dollar terms. REP. PORTER concluded the hearing on HJR 48 and held the resolution for further hearings. ADJOURNMENT CHAIRMAN PORTER adjourned the hearing at 3:35 p.m.
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