Legislature(1999 - 2000)
03/28/2000 08:07 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 411-DISTRIBUTION OF PERMANENT FUND INCOME [Also contains discussion of HB 124.] Number 1638 CHAIR JAMES announced the next order of business is HOUSE BILL NO. 411, "An Act relating to the market value of the permanent fund and to distribution of income of the permanent fund; and providing for an effective date." Number 1667 REPRESENTATIVE HUDSON said there is a proposed CS "M" version to HB 411 that needs to be adopted as a work draft. REPRESENTATIVE KERTTULA made a motion to adopt the proposed CS for HB 411, version 1-LS1443\M, Cook, 3/23/00, as a work draft. There being no objection, proposed CSHB 137 was before the committee. Number 1763 REPRESENTATIVE HUDSON said that he believes that HB 411 is timely and an essential part of the puzzle properly put before the legislature this year. He explained that the proposed CS was introduced to give the PF strength, security and stability far into the future. The proposed CS allows for distributing income from the PF as a percent of market value rather than the current realized rate of return. In 1995 the long-range financial planning commission recommended the market value approach for long-term investment strategy, and Commonwealth North has also recommended this blueprint for strengthening the fund. He mentioned that the PF Board supports the percent of market value approach and though it does not take a position on this or any other bill, it believes distribution of assets of the fund is entirely up to the legislature. He indicated that percent-of- market value produces a distribution program that is more level and is one of the reasons why the PF Board supports it. He informed the committee that percent-of-market value protects principal of the PF and maximizes predictability of annual distributions, which he believes is good for the public as well as the general fund. He emphasized that the proposed CS preserves and grows the PF through statutorily required inflation proofing which would be the first part of the assets that remain in the fund and maintains the PFD at status quo or very nearly status quo over the next ten years of its projected growth. REPRESENTATIVE HUDSON remarked that the proposed CS allocates 75 percent of its income to the PFD and 25 percent by statute to the general fund for the very first time. He said that he believes that the proposed CS will produce stability in fund management and afford a first ever contribution for the payment of what he calls essential services. He did not specify services as in HB 137, rather he believes that, like any other undedicated asset to the state, it is up to each and every legislature from here on out. However, the proposed CS does do what he thinks he heard from the September 14, 1999 vote in that the proposed CS holds the dividend harmless. REPRESENTATIVE HUDSON stated that the market-value approach is something that has been used in many other major fund investments. There are people from both the Division of Finance, Department of Administration and the PF who can talk about whether or not the terminology in the proposed CS does what it is supposed to do. He had looked at the proposed CS from an overall basis as part of a long-range fiscal plan, and the proposed CS is only one essential element of the plan. REPRESENTATIVE HUDSON said that before he ever presented a final draft of the proposed CS, he had asked Jay Hammond if he would come to Juneau to spend time to discuss where the state was, how the proposed CS might fit into the overall equation, and what other assets and changes were required ultimately to come up with a balanced budget. He noted that a balanced budget is required by law in statute, and the governor must present a budget with revenues that cover the expenditures of that budget. He explained that a balanced budget requirement is also placed upon the legislature so both the governor and the legislature have the responsibility statutorily, and he believes constitutionally, to provide to the public a balanced budget on an annual basis. He commented that the legislature has always accepted that and for the last seven years, the legislature has funded the budget for the most part out of unallocated income largely from oil, other assets of the state and the constitutional budget reserve (CBR). He mentioned that the CBR has shrunk from what it would have been, which is approximately $5.5 billion today, had the legislature not been nibbling away at it on an annual basis for the last seven years down to about $2.8 billion in 2001. REPRESENTATIVE HUDSON indicated that in order to reach [understandable figures], he took anticipated general fund (GF) expenditures over the next ten years and figured anticipated unrestricted (GF) revenue. He informed the committee that anticipated unrestricted GF revenue was subtracted from GF expenditures to arrive at an estimated fiscal shortfall, and that is the fiscal gap that many have spoken about over the years. The first target of the proposed CS is the estimated fiscal gap, and he applied the proposed CS to the fiscal shortfall. He went to both the PF and fiscal "beancounters," and they gave the figures as seen on the sheet labeled "Model Output for HB 411." He said that the $759 million fiscal gap predicted for fiscal year (FY) 2001 is not filled, but a part of the fiscal gap is filled. If the legislature did business as usual, it would simply take $759 million out of the CBR and continue to do that until the CBR is gone. He reiterated that at that point in time, the beginning of the end for the PFD would start because the only other source of funding after the CBR is exhausted would either be insupportable taxes and/or use of some of the assets of the PF. He said that in FY 2001, the proposed CS would produce about $390 million to offset the $759 million deficit. REPRESENTATIVE HUDSON noted he had some other concepts to discuss such as additional taxes or using the income of the CBR as opposed to the principal. He explained that up to this point in time it has been the practice of the legislature to use the principal of the CBR, and he fears this will be the legislature's practice this year. He commented that if the proposed CS and tax mechanisms were adopted in order to help offset the fiscal gap, the CBR balance would be preserved. In FY 2001, the PF principal in unrealized earnings is $23.8 billion and in ten years goes to $25.9 billion and the CBR balance, about which the legislature is worried, would grow from $3.5 to $8.9 billion. He indicated that the PF people had told him that they believe that this would be the flow. Number 2252 REPRESENTATIVE HUDSON informed the committee that the proposed CS seeks to preserve the CBR, and just income from the CBR over a ten year period will rise from $2.8 to $3.3 billion. The proposed CS maintains a cushion where enough income is created. There are people who say there is no constraint on government growth, but he answers there is a 30-vote constraint on the House of Representatives, so there will always be future Finance Committees before whom legislators will have to make a case to obtain super-majority vote. REPRESENTATIVE HUDSON asked what the proposed CS does to dividends. His primary goal with the proposed CS is to maintain the PFD at its current level more or less, however, the status quo cannot be maintained for the PFD because the CBR is being eaten up. Once the CBR is gone, the next revenue source to be attacked will be the PF earnings reserve. He said that in FY 2004 the PFD would be totally at risk, so the proposed CS preserves the PFD. In FY 2001, the projected individual PFD is $1,964 compared to $1,982, and in FY 2001, there is an $18 reduction, and in FY 2002, it is $33 per person. After that, the individual PFD actually grows so people get more money (about $211) with the proposed CS over a ten-year span. REPRESENTATIVE HUDSON said he asked fiscal people for an idea of how the dividend flow would go for ten years, and the result is the chart entitled "Estimated Permanent Fund Dividend per Capita- -HB 411 vs Status Quo." The dotted line on the chart exceeds in value over the long term an asset to the average Alaskan. He needed to also make certain that assets themselves (the PF) were preserved, so he asked his fiscal people to graph out both the CBR and the earnings reserve. He reminded the committee that the greater the earnings reserve, the more stability there is in the dividend pool and in fluctuations in investment earnings of the PF. He has shared this formula with the Fiscal Policy Council of Alaska, and it has written a statement which is in legislator packets. Number 2503 REPRESENTATIVE HUDSON said he is not talking about taxes in HB 411. He noted that HB 411 only talks about one form of contribution that will preserve dividends and assets. He commented that he thinks HB 411 ought to be done now because if nothing is done now, the legislature will spend a minimum of $700 million between now and July of next year money out of the CBR or the earnings reserve account. He mentioned that he believes that if HB 411 is passed, $390 million would cover some of the $700 million owed and decrease the amount of money that would have to come out of the CBR. He acknowledged that legislators are hesitant to eat into the earnings reserve account. When the legislature starts taking hundreds of millions of dollars from the earnings reserve account, the legislature is in fact beginning to see the decline of the assets that predicate the PFD. If the PFD is to be preserved, assets preserved, the fiscal gap filled, and the amount of money reduced that ultimately must come from somewhere, Alaskans will have to consider some form of across-the-board-statewide increased revenues, and it can only be called taxes. He remarked that some legislators have not been fearful in saying the word "taxes," although most legislators are jumping ship. Number 2656 REPRESENTATIVE ALAN AUSTERMAN said he is a co-sponsor of HB 411 so he would like to say something in support of it. He noted that all legislators have recognized over time that the State of Alaska has not had a very strong long-term fiscal plan, but the legislature has tried to hold size of government down. Whether just looking at cutting the budget or actually looking at trying to find new revenues, a search is on for a long-term solution to the state's budget woes. He commented that he feels that HB 411 is really an outgrowth of the September 14, 1999 vote. He acknowledged Representative Ogan's feeling that the September vote was an absolute "no" on anything involving the PF, but there are other legislators who feel that the "no" vote said "refiguring" needed to be done. He mentioned that he thinks the legislature is at the point of refiguring and has come forward with a plan that has some basis of restructuring what people said "no" to. He indicated that he thinks that HB 411 brings different options for people to look at. Whether legislators feel that taxes are the right thing to do and what form of taxes might be used, is a debate that both this committee and the Finance Committee on the House and Senate side need to have. He added that he thinks that the long-term planning process that the legislature goes through needs to be started this year even though it may not be completed. He said he supports the concept of the proposed CS and asked the committee to move it forward to the Finance Committee. Number 2807 REPRESENTATIVE GREEN said that though he may have some problems with the proposed CS, he thinks it is the right thing to do. He explained that the great thing is to have plans, and he has strongly proposed that fiscal plans should be done in the Finance Committee. He asked Representative Hudson if he had run any "what if" cases. Representative Green commented that he is thinking what if the legislature had not been rather conservative for the last eight years, what would have been the result to the budget. For example, what would happen if there were a three-to- six-year period of significantly increased spending, or what would have happened if, in the especially critical early years, the value of the plan had dropped five or ten percent. He is not asking for those numbers, but he is just wondering when the proposed CS gets to the Finance Committee, will "what if" cases be available for review. Number 2885 REPRESENTATIVE HUDSON replied that this plan is a computer model and there have been numerous runs already of different types of scenarios. He had asked the people who are managing the PF what could be anticipated over a long term. They had answered that for a long-term basis they had figured eight percent, but that does not matter too much because the percentage is going to change over time. Future legislators will have to adjust for change. All the information is on the computer and available when the proposed CS gets to the Finance Committee. If a person from the public has a different idea, data is fed into the computer model; the computer can crank out a different scenario stating what the impact will be. He had ordered numerous computer runs, and the one he is showing today is the latest information and has had been cross checked more than any of the others. As far as future growth is concerned, he does not think that extraordinary growth will happen because of the fact that the legislature must continue to rely on some assets of the CBR. As long as the 30-vote requirement remains on the CBR, whether the "Ds" or the "Rs" are involved in government, he thinks that checks and balances will exist. Extraordinary growth that was seen back when Alaska had extraordinary income from two million barrels of oil a day is not going to happen again. Number 2963 REPRESENTATIVE GREEN said he is wondering if the proposed CS is the most logical prognostication. REPRESENTATIVE HUDSON answered in the affirmative. REPRESENTATIVE GREEN noted he certainly subscribes to the proposed CS but he thinks that along the way the legislature should also have "what ifs." He asked if those "what ifs" would be available for Finance Committee review. He asked what if something went wrong with the prognostication then how bad would it get. TAPE 00-24, SIDE B Number 2988 REPRESENTATIVE HUDSON answered that all of that information and figures are available. REPRESENTATIVE AUSTERMAN said that the assumptions around which anything is built are very key to any discussion. As Representative Hudson had said, the model is available and all that has to be done is ask questions of the model. He did query the computer model several occasions and asked what happens if the market crashes in the year 2002. He noted that with the market-value approach of this proposed CS, it shows the difference between not having a market-value approach and having status quo. He explained that status quo results in a rapid crash whereas market value holds its value for two or three more years after a market crash before a reaction is observable. Number 2919 REPRESENTATIVE HUDSON said that he has a model that shows status quo, and the legislature saw that last year. Last year the legislature put out a plan that did everything possible to avoid any new income taxes, sales taxes or major new wallet assets from the average Alaskan person. The legislature had tried to do a plan that was almost entirely from the PF, and that is why people faulted the plan. He had spoken with Jay Hammond and Jay Hammond felt that was the fault with the plan. Representative Hudson mentioned that he thought that originally the PF was intended to be a crutch when the traditional revenue stream was down to such an extent that there was not enough money to pay for general government. He indicated that the proposed CS, which is just one element of a plan, does not preclude income taxes and so that comports to what Jay Hammond has suggested as another essential element. He is not pushing the whole plan, even though he has been bold enough to present the whole plan, because he recognizes that establishing major new tax mechanisms is an element where the public really has to weigh in. He suggested that over the interim the legislature should review, through the Ways and Means Committee structure, the whole plan because the proposed CS is just an element as is CSHB 137. He emphasized that the proposed CS is just one little element that will attack a problem and reduce the misery. Number 2816 CHAIR JAMES stated that she was violently opposed to putting the last issue out for vote [September 14, 1999 PFD issue vote], and she had a hard time even voting on the plan itself. She reiterated that every time she gets an opportunity to have a dialogue with people, she asks their opinion about the September vote. She said that the problem with that plan was two-fold. Number one, it assumed that there would be no new taxes. Number two, in the 20-year projection of the money that was going to be spent, it assumed that most of the budget was going to remain flat. Her concern about getting to a plan starts with the budget, and she has not seen anyone come forward to say how much the legislature should be spending. She indicated that how much the legislature should be spending is critical. She agreed that the legislature could go back over the issues that are not being funded right now and ascertain if those are critical. She acknowledged that the legislature has been putting off many things that are not being done because of lack of funds. She remarked that the minute the legislature takes away legislative discipline to cut a certain amount of general fund spending out of the budget, growth could just spring up like an India rubber ball if there is no control. CHAIR JAMES reminded the committee that the budget really has not been cut that much. General fund spending has been reduced, and she agrees with Representative Green that how much growth was not allowed to get to a negative use of general funds can be ascertained. However, the legislature filled up those issues with money from other sources so the budget itself has been growing and will continue to grow, even though $1 billion of spending is the PFD. Her willingness to go forward with the plan is based on determining how to project budget growth over the next 20 years by population, cost of living, and paying for things that absolutely need to be addressed that the legislature is not funding now. No one has reviewed what spending is going to be; rather everyone is looking at the amount of revenue that covers the existing spending level. She is not convinced that the existing spending level is too high or too low or whatever because she simply does not know what it is. The language in the statutory budget reserve, which only allows the budget to grow by a certain percentage each year, calculated by population growth and inflation, is an absolutely necessary part of any plan. CHAIR JAMES noted that she supports the theory of management based on market value as opposed to income and thinks that is critical. Assuming that the public will only accept the current level of dividends is also a problem because she believes that in time the public could be convinced. If some people do not want any government, then they can go live where there is no government and no rules. By contrast, those who want to live in society must have organization of how society works. The organization should not be overly intrusive in personal lives but should be as intrusive as it needs to be to ensure that each person's rights are protected, and that costs money. Each person needs a job, therefore, economic issues are important, so the legislature has to remember that need. She agreed that legislators have a role to play as leaders. She emphasized that if it takes the legislature several years, probably three or four years before the CBR is exhausted, to get the public to come along on a plan that the public can accept, then she is willing to do that. CHAIR JAMES remarked that the proposed CS is the biggest public policy issue that the legislature will ever face in the very near future, and the House State Affairs Standing Committee is the place to address it. She recognized that the proposed CS is a policy issue, not just a money issue, in trying to figure how the legislature should go forward. The issue is how do legislative decisions affect people back home and people's attitude toward government. She stated that it is an attitude issue that the legislature has to address, consequently, that is why she thinks all discussion in this committee is well worth it. She is embarrassed that she has only two people on teleconference who want to talk about the proposed CS. She has asked her people back home about HB 411, and she has not heard anything. The fact that the legislature has not heard anything means the public is not even paying any attention to what the legislature is doing. She explained that the public is just moving in its own world, but it needs to weigh in on this issue because it is very important; if the legislature passes anything without the public weighing in, repercussions will be unrealistic. What the legislature does must be accepted by the public because that is who the legislature serves, yet at the same time, the legislature must show leadership. Number 2501 CHAIR JAMES mentioned that the 3/4 vote required for use of the CBR does not always cut spending because she has seen when it raised spending. The 3/4 vote is a very political hot button. She believes that no matter who is in power, Republicans, Democrats or some independent, the whole budget process is very cumbersome -- going through subcommittees to open public hearings to the Finance Committee and then going to the floor for the vote. Historically, a bill cannot be amended on the floor unless it is an absolute oversight. Therefore, she thinks the 3/4 vote to get money approved for every budget the legislature passes is absurd. She envisioned establishing a fund with spending limits; but if for some good reason, like an emergency or a special project, the spending limit was exceeded, then, and only then, call for the 3/4 vote. She indicated that that kind of fund could be written into the proposed CS. CHAIR JAMES informed the committee that the above-mentioned thoughts are some of the things needed in an overall plan. She would even be willing to vote on the House floor on just the first part of the proposed CS, which puts the market value eight percent into a fund and makes it effective another year down the line when the legislature can have time to fill in the blanks. However, she cannot support something that goes as far as the proposed CS and still does not go far enough in reviewing the overall state spending plan. Number 2429 REPRESENTATIVE GREEN agrees that the proposed CS is a policy decision, and this committee is a policy-making body. He explained that policy is decided in this committee and detail is decided in the Finance Committee. He is concerned that this plan is only effective year-by-year because it is a bill that can be redone by the next legislative session and asked if the proposed CS needs stability if it is to succeed. To be effective, the proposed CS needs to stay in effect. His concern is why go this way rather than a constitutional change. He asked if the thought behind the present choice was because the public is just not ready for a constitutional change. Number 2381 REPRESENTATIVE HUDSON replied that the proposed CS does not deal with constitutionality or a constitutionally dedicated fund. He had read that there was some concern about the tax implications of constitutionally mandating a PFD because the federal government could conceivably tax the assets or the income of the PF on an annual basis. Therefore, there might be a possibility of six, seven or eight million dollars going to the Internal Revenue Service (IRS) if the legislature did something like that, and the described taxation possibility is not in the proposed CS. The proposed CS is only one piece, and the policy is that if someone believes that the legislature is going to have to use some of the earnings of the PF, the proposed CS is one way to do it. He added that from a policy perspective, ultimately people will have to pay taxes and use some of the assets of the PF. The proposed CS provides a vehicle for discussion and public open discussion regarding use of some of the PF assets. Number 2185 REPRESENTATIVE HUDSON asked why the public has not weighed in on this subject and answered the question himself by saying that the legislature has not been serious. He reiterated that the legislature has dragged its feet and has not given the public any feeling of confidence that the legislature is prepared to step up and try to resolve this subject. He said that the proposed CS is just one piece, and HB 137, which the committee just passed, is another little piece. He noted that HB 137 also affects the PFD and asked if the committee was afraid of that bill. He commented that the committee cannot be afraid because legislators are elected to try to put good ideas out before the public and have open discussion. He explained that open discussion is where everybody weighs in on the mechanics of the proposed CS. Then the proposed CS goes on to the Finance Committee where estimated costs and estimated assets that will be derived from it are discussed. Number 2185 REPRESENTATIVE HUDSON said that the proposed CS is one piece that everybody says has to happen, but it is not the end all and it does not preclude income taxes. In fact, he is showing a very conservative estimate of what is needed for spending over the next ten years. Here on a very conservative basis is what anticipated revenues will be for the next ten years. He explained that the next step is to subtract one from the other and the resulting figure is the deficit. He envisioned the proposed CS as producing according to how the stock market produces. He recognized that the proposed CS is not a referendum on income taxes, sales taxes or increased oil taxes. He and co- sponsors have been bold enough to say that they believe that there is $350 million in arrears even using some of the earnings as discussed in the proposed CS and some of the earnings from the CBR. He said that the legislature does know one thing: continuing to do what the legislature is doing from year to year because it is politically expedient will cost the people their PFD, and the legislature better be prepared to say that. Number 2162 REPRESENTATIVE AUSTERMAN noted that he would never support anything that would take away the legislature's ability to budget for the State of Alaska and place that ability in the Constitution of the State of Alaska. He does not want the public to micro manage how the legislature does things. If the legislature were to put the proposed CS into the constitution, every year the legislature would have to go to the vote of the people (depending upon what oil did or what the gas pipeline might do), and it really needs to be tied all together as far as budgeting is concerned. CHAIR JAMES mentioned that according to her calculations, as long as the legislature is balancing the budget out of the CBR as opposed to the earnings of the fund, the legislature is using cheaper money. The state does not make the same amount of income off of the CBR as it does off of the earnings of the fund. She is not fearful of continuing to balance the budget out of the CBR until the legislature has a solution. She thinks the only way the legislature could gain is if the CBR were put in the PF itself. She is willing to do that and believes that it needs to be done as part of the budget solution process. She is not even past agreeing to put 100 percent of resource revenues into the PF if the legislature has a plan that works over the long term and balances the budget. If more money can be managed by the fund, more income will be generated, and the better off the state will be in the long run. Number 2058 REPRESENTATIVE KERTTULA acknowledged that putting all revenue together and having a steady income stream is one sure way to not only protect the money but assure that money is available. She explained her understanding as to how the proposed CS works as follows: the proposed CS starts with the PF principal, the PF earnings reserve, and the CBR; then the proposed CS leaves money in the earnings reserve to continue to generate income; next the proposed CS takes 5.3 percent of the market value of the PF; and finally the proposed CS puts 75 percent of that 5.3 percent into the PFD and 25 percent into the general fund. She remarked that the more she thinks about this the more she likes it because income will continue to be generated in the earnings reserve, so that there will be a continual stream, and that is why the PFD works. She concluded that not only is the dividend protected, which people are absolutely adamant about, but the proposed CS gives a solid income stream, and that is the other reason why the fund has a more stable flow. The proposed CS is similar to putting all of the money into one place, but the proposed CS does this in the earnings reserve account. Number 1974 CHAIR JAMES asked if there is a provision in the proposed CS that allows the PF earnings reserve account to be put back into the PF itself when the PF earnings reserve account reaches a certain amount. She also asked if the proposed CS refers to eight percent of the entire PF and PF earnings, not just PF earnings. REPRESENTATIVE HUDSON answered in the affirmative. CHAIR JAMES said she feels a little nervous about letting the earnings reserve get to $8 billion or whatever because it seems to her that there ought to be a limit in that part of the proposed CS. She explained that when there is a certain of money it should revert back to the PF itself because there is an advantage in investments. Number 1910 REPRESENTATIVE AUSTERMAN noted that he had this discussion with PF people, and they do have those figures of what would be in the earnings reserve account (ERA) at all times to take care of any major fluctuations. REPRESENTATIVE HUDSON said that the ERA is always available to the legislature. He explained that he had brought along a graph that explains the billions of dollars that have been put into the PF by legislatures since 1992. Just a few years back, the legislature put $1 billion 200 million into the corpus of the PF, and once that is done the legislature cannot take it out. He mentioned that the only money the legislature can get out of the PF corpus is income and that goes into the ERA. He does not even profess to believe that the proposed CS is the absolute perfect or even ideal thing. He asked the committee if it believed that the legislature needs to use some of the earnings of the PF, that the tap that provides the contribution to the general fund ought to preserve and hold harmless the PFD, and that it ought to provide for the growth of the PF and all of its assets. He informed the committee that if it believes in those things, then the proposed CS is the bill, though not in perfect form. Number 1760 REPRESENTATIVE OGAN emphasized that he respectfully disagrees with the sponsors of the proposed CS because he has a different philosophy and different constituency. He stated that he believes that the proposed CS hot wires PF money directly into the general fund. He reminded the committee that the legislature has the ability right now to spend the ERA with 21 votes in the House and 11 in the Senate. He acknowledged that he is not opposed to using the ERA at some point and thinks that the legislature is going to have to do that but does not think that the legislature is there yet. He remarked that he thinks the legislature should wait because there is a presidential election coming up and one of the candidates has openly endorsed opening the Arctic National Wildlife Refuge (ANWR). Also, the price of oil is high and the Organization of Petroleum Exporting Countries (OPEC) is meeting now. He observed that ANWR is going to become a national campaign issue and the scenarios that the sponsors are pointing out, for example, scenarios representing that people will lose their PFDs, is based on the assumption that Alaska will not get ANWR, develop gas to liquids or have a gas pipeline. REPRESENTATIVE OGAN stated that if the PF and the ERA are considered similar to a retirement account, the proposed CS seems to be at the stage where the retiree decides it is time to start to live off of the income. However, he said that he thinks that Alaska is a young state and in "state years" is like a teenager. He noted that Alaska has a bright future, and he thinks it is a little bit too early to get jumpy. REPRESENTATIVE OGAN explained that what this issue boils down to is trust and the people just do not trust the legislature to use any earnings of the PF right now. He commented that the majority of people do not understand the difference between the PF corpus and the ERA and how those earnings are divided. He mentioned that most people do not even know that the ERA is available right now for the legislature to spend as general fund dollars. He reiterated that until the legislature constitutionally protects the PFD program and people have confidence that the PFD program is safe, then and only then will they put their "holy water," so to speak, on use of the earnings. REPRESENTATIVE OGAN quoted a letter dated March 23, 2000 from Michael and Rose Marie Citti at their request as follows: Good Morning: We are writing in strongest opposition to your latest tax proposal. The people of Alaska voted overwhelmingly last year against such a proposal. The people of Alaska wish to see state spending reduced, not increased or kept at the status quo. Your proposal goes against the wishes of the vast majority of the Alaskan people. Perhaps this is why Representative Hudson is against a public vote. We find it interesting that this proposal comes so late in the legislative session. Perhaps it cannot stand the light of day and needs to be pushed as fast as possible. We suggest that it be put off until the next legislative session as there is no pressing need for funds this year. With study the legislature will come to the same conclusion as the voters of Alaska and Representative Scott Ogan; there is no need for new taxes, we just need to re-prioritize state government back to basics. Why is it that government funding seems to be given a higher priority than private enterprise and taxpayer dollars. Why are the people of Alaska asked to pay more so government can continue to spend? Has anyone asked the people of the state of Alaska what they will be forced to give up to pay these new taxes? Perhaps all members of the legislature should stop and ask why they were sent to Juneau and if they cannot do what the voters want done, resign. Number 1341 CHAIR JAMES replied to the quote by saying that she realizes that every legislator comes from a different part of the state. She noted that there are 40 different districts in the state and they all have different interests, needs and situations. She explained that a leader in this state has to address things that the people in his/her district believe, but she also believes that the representative must have discussions with people and give them information that the representative has regarding issues because many people do not have information. She commented that state legislators have a responsibility to be sure that everyone in the state is treated fairly and equally. She mentioned that the budget process is one of those places where the legislator addresses issues. She is convinced that the legislature has been cutting muscle from the budget. Also she is convinced that there is still fat in the budget, but she does not believe she can get there because most decisions are administrative, and until the administration is willing to review where things could be done more efficiently, no meaningful cuts will happen. If she were governor, the first thing she would do is hire an expert to do an efficiency evaluation of how the state does things because she is sure there are ways the state can be more efficient than at present. She agreed that it does cost money to change systems and nothing is cheap. She emphasized that it is difficult to make long term goals achievable when working with a spending plan made for one year at a time. She acknowledged that the legislature has to do the best that it can. Number 1181 CHERYL FRASCA, Fiscal Policy Council of Alaska, testified via teleconference from Anchorage and read her testimony as follows: My name is Cheryl Frasca and I am here on behalf of the Fiscal Policy Council of Alaska. The Council, created in late 1998, is a nonpartisan, nonprofit organization dedicated to promoting long-term fiscal certainty for the state through research and objective information about Alaska's finances. The Council believes that an important criterion for any long-term fiscal proposal is whether it sustains the real value of the state's financial assets because these assets will be the primary source of revenues to the state for the foreseeable future. To that end, we applaud the work of Representative Hudson and the co- sponsors of HB 411 for their willingness to step forward and advance changes that will enhance the Permanent Fund's long-term role in securing Alaska fiscal future. With regard to HB 411, the central question for the Council is whether Alaskans can expect that the real value of the Permanent Fund to be the same or greater in the future. In analyzing HB 411, we find that the answer to this question is yes. The results of this analysis are included in a copy of FISCAL SENSE, which I hope is in your bill file. Our analysis is based on a model developed for the Council by Dr. Scott Goldsmith of the University of Alaska's Institute of Social and Economic Research. The Fiscal Policy Council has several other comments that are included in a letter to Representative Hudson, which is in your bill file. Briefly, these are: 1. Changing the payout method so the Permanent Fund is treated as a trust in which there is an annual draw will enhance stability in the level of earnings annually available for public purposes; 2. An annual payout rate that exceeds 5 percent increases the chance of diminishing the Fund's value over time. A higher payout relies on an aggressive rate of return for the Fund's investments and leaves little room for downside error. In some years the Fund may not earn enough to keep up with inflation. As a result, in other future years, higher returns will be necessary to get back on track to protect the Permanent Fund's value. A higher payout rate raises that bar while a more conservative payout rate reduces this risk. 3. Using a five-year average of the market value to calculate the payout rate reduces the impact of annual fluctuations on the Fund's market value. There are several other comments in the letter that pertain to elements of an overall fiscal plan that are not addressed in HB 411, so I won't go into these at this time. Number 0932 MARY GRISWOLD, testified via teleconference from Homer as follows: I strongly favor HB 411 as a better approach to long term financial planning than SJR 33/HJR 47 or SJR 35/HJR 49. SJR 33 violates a purpose of the Permanent Fund to provide for present AND future Alaskans, causes problems for food stamp recipients and those needing housing assistance, hinders orderly economic stimulation, and results in a large federal income tax bite for buy out recipients. SJR 35 preserves the methodology of the Permanent Fund earnings distribution but not the value of the annual dividend because the undistributed income and unrealized gains in the Earnings Reserve Account remain subject to Legislative appropriation which could dramatically reduce the principal upon which the earning potential depends. HB 411 moves the distribution of Permanent Fund earnings to a percentage of market value approach which protects the Permanent Fund principal, maximizes the stability of annual distributions, promotes a long term investment strategy allowing our equity investments to reach their full potential, maintains the value of the dividend program, and provides funding for essential government services. Combined with reasonable taxes, this bill will balance our budget and provide the framework for a successful long term financial plan. I strongly urge you to keep the payout at 5 percent. This is commonly accepted as reasonable by most of the country's large endowments. It is better to err on the side of protecting the Permanent Fund's principal than on the side of increased spending. I also urge the legislature to start research on tax options at the earliest moment, to come up with a reasonable combination of sales and income taxes that most fairly shares the burden for funding public services among all those who benefit, including out of state workers and tourists. Number 0712 REPRESENTATIVE WHITAKER acknowledged that the legislature does have a budget out of balance and from the beginning, it has become very clear that there are a number of choices. He reminded the committee that the budget can be cut -- or as some people call it cost control. He remarked that he prefers the term "cost control" because cost control can be used to achieve efficiency whereas cutting may not achieve it. Nevertheless, cutting the budget has been tried, and it has not resulted in what Alaska needs. He recognized that another choice is to utilize some earnings of the PF; the legislature tried that last year as a complete fix, but it did not work because the people said no. Obviously another choice is some form of taxation, and the legislature should try that, recognizing that taxation is part of the mix. He said that the fourth component is economic growth. It is ironic that in a state as wealthy as Alaska that the legislature refuses to recognize the wealth. Those four things he has cited are increments to a plan, and he restated them as follows: cost control, utilization of PF earnings, some form of taxation, and economic growth. He explained that the proposed CS plans to use PF earnings, and he supports it since he thinks the proposed CS is reasonable and necessary. Number 0538 CHAIR JAMES reiterated that it costs money to revise the way things are done. She said that as long as the legislature is in a cost containment and budget-cutting mode, discouragement will be seen in economic development because there may not be people to do permitting or to manage resources. Any real economic development will not be observable until the legislature gets its budget under control. Another issue is that as long as additional tax on business looms as a potential to folks, people will not be willing to go into business in this state. In the whole scheme of things, the legislature must project long-term stability in how the state deals with business people, not only in regulations but also in taxing and other costs of doing business in the state. She reiterated that the final responsibility of making decisions belongs to the legislature, and legislators were elected to make decisions. She emphasized that the issues need to be studied thoroughly because the issues are so multi-faceted. Number 0389 REPRESENTATIVE WHITAKER made a motion to move CSHB 411, version 1-LS1443\M, Cook, 3/23/00, from committee with the attached zero fiscal note. REPRESENTATIVE OGAN objected. He said he will not support any new taxes or any use of the PF until he sees that the legislature has done all it can do to reduce the size of government at an affordable level. He stated that he does not believe that the legislature is there yet. CHAIR JAMES stated that she will not vote for anything either for the same reasons, with exception to HB 137, because HB 137 frees up $46.9 million of general funds. A roll call vote was taken. Representatives Green, Hudson, Kerttula, Smalley, Whitaker, and James voted in favor of moving the bill. Representative Ogan voted against it. Therefore, CSHB 411(STA) moved from the House State Affairs Standing Committee by a vote of 6-1. Number 0219 REPRESENTATIVE AUSTERMAN thanked the committee for moving the bill forward because it will give the legislature an opportunity to have continued discussion and bring it before the public so that during the interim the legislature will be able to put together some type of long range plan. He urged Chair James to bring forward her income tax bill (HB 124) also. CHAIR JAMES said the only reason she had presented HB 124 was to start discussing taxation. She explained that she is totally opposed to a graduated net income tax because she does not think people should work harder and longer to make a smaller dollar. She does not approve of piggybacking on the federal government tax because it is flawed. The other thing that she wants to say about HB 124 is that she is not going to forward it. Her interest in having a tax plan that works is to have as little administrative responsibility as possible. She mentioned that her tax plan almost totally eliminates any requirement of audit, so that saves in administrative costs. [End of discussion on HB 411 and HB 124.]
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