Legislature(1997 - 1998)
04/21/1997 01:48 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 25 CONST. AM: PERM. FUND INCOME & DIVIDEND CHAIRMAN GREEN announced the next item of business was House Joint Resolution No. 25, proposing amendments to the Constitution of the State of Alaska to guarantee the permanent fund dividend, to provide for inflation-proofing, and to require a vote of the people before spending undistributed income from the earnings reserve of the permanent fund; and relating to the permanent fund. Before the committee was CSHJR 25(STA), version 0-LS0659\H. REPRESENTATIVE ALAN AUSTERMAN, sponsor, explained that HJR 25 came about following much discussion during his last two campaigns "in reference to the apparent misunderstanding and also phobia out there in reference to what the permanent fund dividend program really is." He said every time he got into a discussion during the campaign or during the interim in reference to the permanent fund itself, he was cut short by people saying, "Don't touch my dividend." REPRESENTATIVE AUSTERMAN noted that the legislature, with approval of the governor, could eliminate the dividend program. However, most of the populace believes it is already protected by the constitution. REPRESENTATIVE AUSTERMAN explained that HJR 25 places the dividend and inflation-proofing in the state constitution so they cannot be removed from the permanent fund program without a vote of the people. The third aspect is interest earnings from the undistributed earnings of the permanent fund itself. REPRESENTATIVE AUSTERMAN discussed the difference between his resolution and the one presented to the Senate; his version allows the undistributed income to be appropriated by the legislature as it is now. In contrast, the Senate resolution puts that undistributed income in the constitution; it can only be spent by a vote of the people or it can go back into the principal of the permanent fund, as has been done the past few years. He stated, "As most of you know, the last two years we put $1.8 billion back into the principal of the permanent fund. REPRESENTATIVE AUSTERMAN expressed concern that with the public perception that all the money must go back into the principal of the permanent fund, they will never use that third part, the interest earnings, to help balance the budget or for anything other than putting it back into the principal. REPRESENTATIVE AUSTERMAN acknowledged concern about changing the current set-up; he was willing to discuss that. Part of the reason for introducing the resolution was to begin an educational process for legislators and the public about what the permanent fund does and is being used for. Number 1495 CHAIRMAN GREEN, noting that this indicates 25 percent will go back into the corpus, asked whether that had not been changed to 50 percent several years ago. He then asked whether this was an amendment to bring it back to 25 percent. REPRESENTATIVE CROFT stated, "It says `at least,' and I thought the current one said `at least' and we changed it by law to 50." CHAIRMAN GREEN said that was what he was asking about. REPRESENTATIVE AUSTERMAN indicated he would check on that. Number 1525 REPRESENTATIVE ROKEBERG stated, "Right now, the statute is 50 percent of fuels that were discovered after `x' date, which is circa about 1982 or '81 or something around in there. For the committee's information, I had some legal research done on this, and right now we're only garnering about $19 million per annum because of the differential. However, this is interesting because with the new string-of-pearl-type fuels that are being developed, the so-called `satellite fuels' and so forth, ... the gross amount of dollars will be going up. And as a result, the percentage of income from the newer fuels will be increasing in the coming years. So, it's a great concern I have right now. But that is a statutory thing and ... not in the constitution." Number 1568 CHAIRMAN GREEN agreed and said this would apply to all fuels, as he understood it. REPRESENTATIVE AUSTERMAN said he would provide an answer. He believed part is covered in statute and part by the constitution. CHAIRMAN GREEN said the 25 percent is constitutional. REPRESENTATIVE AUSTERMAN stated that this is a constitutional amendment that they are asking for. CHAIRMAN GREEN said the question comes back to whether that takes precedent over the statutes that raised it to 50 percent. REPRESENTATIVE AUSTERMAN emphasized that says, "at least." REPRESENTATIVE CROFT asked: Why not constitutionalize the dividend structure as well? He referred to page 2, lines 5 through 7, which says, "an amount of income shall be transferred from the earnings reserve account for distribution as dividends to State residents as provided by law." He noted that the legislature could cut it in half or down to a dollar. Number 1632 REPRESENTATIVE AUSTERMAN explained that the original bill defined how that was to be broken down. After discussing it with the "permanent fund people," they felt that by leaving the formula in statute, it could be adjusted, depending on the world market. Otherwise, there may be a drop in the market, for example, resulting in insufficient money available for dividends or inflation-proofing. "With statute, it could be changed on a rapid basis," he concluded. REPRESENTATIVE CROFT asked: So we really constitutionalize the right to the dividend and the principle of inflation-proofing at an appropriate amount for inflation-proofing but not necessarily the exact formula? REPRESENTATIVE AUSTERMAN agreed that is the objective with the committee substitute. REPRESENTATIVE CROFT referred to a memorandum in committee packets from Ron Lorensen, legal counsel for the Alaska Permanent Fund Corporation, which raises questions about possible tax consequences and potentially having to defend this at some point against a challenge by the Internal Revenue Service (IRS). Representative Croft asked whether Representative Austerman had that document. REPRESENTATIVE AUSTERMAN answered that he had not seen it. Number 1717 REPRESENTATIVE BUNDE said he had similar concerns about the public's perception of the "permanent dividend fund." Specifically, he is concerned that the public confuses the corpus with the dividend. Representative Austerman's description caused him less concern than the Senate version, which he understands to put the amount of dividend in the constitution. He asked: In your discussions with people, if we were to do that, did they understand that that guaranteed they would then be paying taxes in the not- too-distant future? He noted that the state has two sources of revenue: taxes and earnings of the permanent fund. Number 1764 REPRESENTATIVE AUSTERMAN replied that discussions with constituents indicated they would rather receive dividends and pay taxes than to abolish the dividend program. He said whether that is short- sighted on their part is another question. He stated, "I, personally, from my perspective, in talking to my constituents, ... I don't have a problem with re-instituting an income tax." REPRESENTATIVE BUNDE said he was not advocating an income tax. He understood that under the resolution, the principal of the dividend is enshrined but not the amount. Therefore, people could choose to receive $1,000 from the government and then pay it back in taxes, should a tax be imposed, to provide services they feel are appropriate. He mentioned the cost of paying for the bureaucracy to collect a tax and suggested there was no net gain there. REPRESENTATIVE BUNDE said he is less concerned about the resolution if there is that flexibility than if it enshrines procedure and amounts. He requested that the sponsor research the tax question, noting that a guaranteed amount may be viewed differently by the IRS and the state may have to pay taxes on the earnings. Number 1860 CHAIRMAN GREEN referred to the language, "at least 25 percent." He asked whether designations of various fields would be made by the Department of Natural Resources as to what amounts applied to what fields. REPRESENTATIVE AUSTERMAN replied that that is a highly technical question and said he had no idea what future legislators would want to do in statute. He noted that the 50 percent is currently in statute, as he understands it. Number 1930 REPRESENTATIVE ROKEBERG said one of the many concerns he had about the amendment is the calculation of inflation-proofing. He noted there is controversy in the world of economics right now involving numbers used by the bureau of labor statistics to calculate the national Consumer Price Index (CPI) or cost-of-living index. He said there is certainly a debate over which index to use when talking about inflation. He cited examples. He believes at least a slim majority of economists concede that the CPI index is overstated now by as much as 50 percent because of "the lack of the market basket of goods to fully reflect the increases in productivity, the impact of technology, particularly computers, on the workplace, [and] the various other arguments." REPRESENTATIVE ROKEBERG said recommendations have been made to the federal government and the Department of Labor, bureau of labor statistics, to reformulate the cost-of-living index. He noted that as a legislature, they annually appropriate, using that index, a substantial amount of dollars, in the hundreds of millions of dollars. He submitted that they are probably overpaying in "so- called inflation-proofing" right now by $200 to $300 million a year. He said he would be very, very concerned at this point about putting into constitutional language something so controversial and unsettled. REPRESENTATIVE AUSTERMAN agreed. He said that was one reason they had not specified, in the committee substitute, how inflation- proofing is to be calculated. That would be left up to the legislature to do through statute. Even with the current way it is calculated, the statute can be changed to fix whatever problems are perceived to exist. Number 2069 REPRESENTATIVE CROFT referred to the tax question mentioned in Mr. Lorensen's memorandum and stated his understanding that normally, corporations have double taxation; they are taxed, and then dividends come out of the "post-tax." However, a public corporation is not taxed that way. At some level on the continuum, if the permanent fund just generates what corporate law understands as dividends, with no other public function, the IRS will say, "You're a private corporation with the citizens of the state of Alaska as your shareholders, and we're going to double-tax you." REPRESENTATIVE CROFT said he did not know the likelihood of that happening. He proposed that the committee hear testimony in executive session, if necessary because of the legal impact of this, to figure out for themselves how real that concern is. CHAIRMAN GREEN asked whether there was merit in hearing it in a joint executive session with the House Finance Committee. REPRESENTATIVE CROFT said there might well be. REPRESENTATIVE AUSTERMAN said he could not remember all of the discussion in reference to the tax issue, but it had arisen on several occasions. He stated that the original concept of the bill brought up that discussion in reference to taxes. He said, "The CS that we passed, we passed on March 21. This memo is dated March 10. So, if I remember correctly, part of the tax question was eliminated when we took out all the formulas ... and just put in the fact that it's a dividend program. But I'll research it again just to make sure that that's the right answer." Number 2164 REPRESENTATIVE PORTER stated, "Notwithstanding that, I would appreciate a briefing from the Department of Revenue, at least, on this point. And I concur that it should be an executive session because it probably could have one of the bigger effects on the state's finances that we could imagine." REPRESENTATIVE PORTER said considering what the House Finance Committee was currently up against, it perhaps would not be duplicative for this committee to obtain information and then share it individually with those members. REPRESENTATIVE AUSTERMAN suggested it may turn out an executive session is unnecessary "because they may say that it has no bearing at all anymore." However, he would check that to make sure. REPRESENTATIVE ROKEBERG cautioned about rocking the boat. REPRESENTATIVE CROFT, noting that Mr. Lorensen is from a Juneau law firm, suggested it would be relatively easy for him to appear before the committee. CHAIRMAN GREEN advised the sponsor that the committee would await information from him. (HJR 25 was held over.)
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