Legislature(2001 - 2002)
04/02/2001 01:12 PM House JUD
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HB 3 - DEPOSITS TO THE PERMANENT FUND Number 0068 CHAIR ROKEBERG announced that the first order of business would be HOUSE BILL NO. 3, "An Act relating to deposits to the Alaska permanent fund from mineral lease rentals, royalties, royalty sale proceeds, net profit shares under AS 38.05.180(f) and (g), federal mineral revenue sharing payments received by the state from mineral leases, and bonuses received by the state from mineral leases, and limiting deposits from those sources to the 25 percent required under art. IX, sec. 15, Constitution of the State of Alaska; and providing for an effective date." CHAIR ROKEBERG, as the sponsor, explained that current statute provides that revenues from mineral leases, bonuses, and federal leases entered into after January 1980 be deposited into the corpus of the permanent fund at a 50 percent level versus the constitutionally mandated level of 25 percent. He said that HB 3 simply reverts to the 25 percent constitutional mandate. He also explained that the general fund (GF) budget in fiscal year (FY) 1980 was in excess of $4.07 billion, which he said is almost twice the present amount. He said that although the current statute was appropriately enacted at the time to direct a greater amount of mineral royalties from newer leases into the permanent fund, it is now time to repeal that statute because of the diminishing amount of GF revenue and the increased pressure to draw on the Constitutional Budget Reserve (CBR) in order to balance the budget. He added that fields such as Alpine, Badami, Northstar, Meltwater [Participation Area], Tarn, Liberty, and others - as well as any new future developments - currently all fall under the 50 percent allocation scheme. CHAIR ROKEBERG mentioned that the handouts from Legislative Research illustrate revenue changes, and he also remarked that based on the "fall forecast," the fiscal note from the Department of Revenue (DOR) reflects an increase of $40 million for FY 2002, $43.7 million for FY 2003, $40.2 million for FY 2004, $38.6 for FY 2005, $27.2 million for FY 2006, [and $24.9 million for FY 2007]. He also mentioned that the DOR has submitted charts showing historic and projected income and production information. He surmised from one of the charts that although production from the older fields is declining, production from the new fields is allowing the total production levels to stay relatively the same through the year 2009. CHAIR ROKEBERG mentioned again that HB 3 would replace the current 50 percent allocation level with a 25 percent allocation level. He also noted that the Alaska State Chamber of Commerce has submitted a letter of support of HB 3. He offered that HB 3 is the first step in any long-range financial plan that the state develops. He added that the impact of HB 3 on the permanent fund dividend (PFD) is de minimis because of the "five-year averaging," and will not be felt until 2006, according to a analysis by the Alaska Permanent Fund Corporation; at that time there will only be a $10 decrease. He also pointed out that the PFD is estimated to go up in future years [beginning in 2007], which suggests that the vagaries of the market are more important than any potential impact of HB 3. He estimated that with the adoption of HB 3, the state, over the next five years, will be able refrain from drawing between $175 million and $200 million in additional funds from the CBR to balance the budget. He also offered that HB 3 will enable [the legislature] to avoid any future taxation for the aforementioned amount. Number 0632 REPRESENTATIVE BERKOWITZ offered the criticism that [the legislature] can already do what is proposed in HB 3; the legislature can appropriate money from the "earnings reserve" with a 21-member vote. On the more generic question of what is the best overall approach to managing "our" assets, he said that money in the permanent fund "does better" than money in the GF. He reported that money in the permanent fund has approximately an 8 percent return, if not more, as compared to 4 percent while in the GF. By looking at this income as fungible money, there is a difference between whether it's "parked" in the GF or it's parked in the earnings reserve. He said that there is a good argument that [the legislature] could simply appropriate this extra 25 percent from the earnings reserve of the permanent fund, now, and that there is no need to divert that "stream" from the permanent fund to the general fund. He added that although the aforementioned was a good academic argument, there are political realities to consider regarding the objective of HB 3. CHAIR ROKEBERG offered the rejoinder that current statute requires that the additional monies be deposited into the corpus, or principal, of the permanent fund, instead of the earnings reserve. He opined that Representative Berkowitz's theory presupposes generation of earnings, which historically has occurred, but current market fluctuations make results more suspect for the coming year[s]. But for the amounts from the larger bond and real estate portfolio, [the legislature] is in the situation of realizing substantially less growth in those earnings. He remarked again that statute dictates additional monies go to the principal, and that because neither the legislature nor the people have agreed upon the expenditure of any funds for GF purposes from the earnings reserve, on a cash- flow basis, that money is "dead money." REPRESENTATIVE BERKOWITZ countered that according to his recollection, the money does not go straight to the corpus; [the legislature] appropriates it to the corpus. CHAIR ROKEBERG responded that the money goes straight to the corpus. Number 0818 REPRESENTATIVE JAMES agreed that the money goes directly into the corpus of the permanent fund. Although she understood Representative Berkowitz's presentation, she said that there is a difference between having money available and having only the interest income of the money available. She said that the same argument could be given that [the legislature], with 21 votes, could take the estimated $40 million and use it in the budget now; in fact, with 21 votes, [the legislature] could take enough money out of the earnings reserve to avoid taking any money at all out of the CBR. The legislature has not decided to do this, however, because it does not have a long-term plan. She added that all of these decisions - how "we" deal with the earnings reserve, deal with the PFD, deal with the CBR, and get enough money to keep from having less income than is spent - is part of a long-range plan. REPRESENTATIVE JAMES explained that she has often said that she would not be voting for a part [of the plan] until she sees the whole thing; however, she added, HB 3 is the one exception because it makes a lot of sense to her. She also said that another item to carefully consider with regard to the long-term plan is how government spending is tending to far exceed income, and she voiced the concern that at the current rate of growth, the state may not be able to maintain a PFD for its citizens nor be able to tax its citizens enough to pay for needed services. She said again that HB 3 makes sense, particularly now that the state doesn't have enough money; although it was a good idea when the state had extra money, the extra [25 percent should no longer be placed into the corpus of the permanent fund]. She concluded by saying that she supported HB 3. REPRESENTATIVE COGHILL said that [excessive] government spending is one of the reasons he voted not to report HB 3 out of the House State Affairs Standing Committee. He did, however, acknowledge that the money would probably gain more if it were in the permanent fund, and that having it in the permanent fund was perhaps a better way of making use of that money. He also said that there is no doubt that [the GF] budget is "hungry" for more money because of all the federal mandates and social programs that are being created but not scrutinized. He opined that another $40 million is not going to satisfy those needs. He said that although he is not in favor of HB 3, he will not vote to stop it. Number 1025 CHAIR ROKEBERG said that although he understood some of Representative Coghill's concerns, he did not understand all of them, even though he considered himself to be extremely fiscally conservative and to be a major voice for the private sector. He said he believes that maintaining a higher balance in the CBR, by funding over 50 percent of the $75 million increase in the FY 2002 GF budget, is responsible cash-flow management. He said that HB 3 is a prudent and immediate step that the legislature can take and which [could] be in effect by July 1. He added that funds from any future fields that come online at a 50 percent level would not replace the diminution of funds from current fields that are at the 25 percent level. He suggested that "all we're doing, is replacing [them] on a cash-flow basis." REPRESENTATIVE COGHILL said that is one of the reasons why he will not hold HB 3 up, but he added that he thinks there has to be continuing discussion on the fact that "we are a lot bigger than we can afford." REPRESENTATIVE JAMES said: In the whole scheme of economics, I think we do need a lesson on this issue ... that the only way that we can ever pay for our needs in this state is to have more economic activity. And the only way we're going to get some more economic activity is to spend some money in the areas where you can create some. We, as a state, own everything in this state; so that means that it's not out there for the picking without us spending some money to get it picked. [The Department of Natural Resources (DNR), Department of Environmental Conservation (DEC), and Department of Fish and Game (ADF&G)] are some of the areas that we're being pretty skimpy on right now, and so we're discouraging any kind of economic activity. The second reason why we're discouraging economic activity is because we have a hole in our budget: we're spending more money than we're taking in. And until we change that, people are going to be hesitant to bring money into this state because they know that if we are going to tax anybody, we're going to tax the business, because we have a society who wants to pay nothing for anything - they just want things but don't want to pay. So, I agree with the representative from my neighboring district that we certainly have to be cautious, and I am very distressed about the amount of money that we're spending this year because we haven't got any overall plan as to how we're going to get there; it doesn't even do us any good to get some new economic activity if we don't have some way of tapping into that with, like, a broad-based tax that will help us to fund schools, and roads, and police, and all those kinds of things that we'll need more of when we have more people. So I think that we really do need to have a lesson in economics, and maybe I could put on a workshop one of these days on this, Mr. Chairman, so that we can understand how we're going to get there - to be prudent and still make enough money to survive over the long term. Number 1231 REPRESENTATIVE JAMES moved to report HB 3 out of committee with individual recommendations and the accompanying fiscal note. There being no objection, HB 3 was reported from the House Judiciary Standing Committee. REPRESENTATIVE JAMES further commented that the only way to really cut the budget, with regard to the way [Representative Coghill] wishes, is to be sure that every able-bodied person in this state has a good-paying job, and then there will not be a need for all of those social services that [the legislature] is paying for. REPRESENTATIVE BERKOWITZ noted that [the legislature] has been cutting the budget and scrutinizing programs for a long stretch. In response to a question, he said that he has sat through plenty of budget debates, and he did not notice anyone coming forward with amendments to eliminate programs in their entirety; he did not notice those discussions as really being part of the conversation. He said he has heard a lot of people say that [the state] has too many programs; that there are a lot of things going on that folks really don't want; and that if [the legislature] looked just a little bit more closely, it would find items in the budget it could do away with. He said, however, that he was still waiting for people to be more concrete with those proposals. REPRESENTATIVE COGHILL said he appreciated those comments because he has spent a lot of time looking in order to come up with some proposals. He added that there are a lot of federal dollars driving many budget items, and that it is going to take some fortitude to deal with them. REPRESENTATIVE BERKOWITZ remarked that "when those federal dollars dry up ... in the next couple of years, we're going to see what kind of hole we're really in." CHAIR ROKEBERG commented that at the [Fiscal Policy Caucus], Commissioner Condon gave a presentation of the fall forecast. He said the presentation reflected a potential for a shrinkage of the state's domestic product - or the overall economy - if the state were to use various forms of taxation as opposed to using money from the earnings reserve account, which is currently in portfolios outside the state. He added that the irony of this is that [the legislature] is much better off using earnings reserve moneys rather than taxing, which is a fiscal policy that has a negative impact on the economy. He said that HB 3 avoids the issues surrounding taxation and the use of the earnings reserve, and is one small step towards saving money. REPRESENTATIVE JAMES added that [adopting HB 3] is the prudent thing to do. [HB 3 was reported from the House Judiciary Standing Committee.]
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