Legislature(2003 - 2004)
03/09/2004 08:01 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
HJR 31-CONST AM: PERMANENT FUND [Contains brief mention of HB 514.] Number 2354 CHAIR WEYHRAUCH announced that the next order of business was HOUSE JOINT RESOLUTION NO. 31, Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund and to payments to certain state residents from the Alaska permanent fund; and providing for an effective date for the amendments. Number 2292 JOHN MALLONEE, Acting Director, Central Office, Child Support Enforcement Division (CSED), Department of Revenue, in response to a question from Chair Weyhrauch asking why the department has an interest in [HJR 31], offered the following: With the distribution of $20,000 in this payout, child support would collect ... - if everyone who was eligible filed for their dividend - about $240 million in child support. Of that $240 million, about $180 million of it would go to custodial parents and children in the state of Alaska, and then a sixty additional million would be reimbursement for past welfare payments: $30 million, which would be retained by the State of Alaska, and about $30 million, which would go to the federal government. CHAIR WEYHRAUCH asked if the money would go to the federal government anyway, or if it would go simply because of the large amount of the payout. MR. MALLONEE answered it would go to the federal government regardless of how [the division] collected it. He explained that since the government pays a portion of public assistance, when money is collected to reimburse public assistance, that money is split between the state and the federal government. CHAIR WEYHRAUCH asked if the large amount of money Mr. Mallonee previously referred to is a result of there being "that much arrearage in child support payments by ... residents of the state." MR. MALLONEE answered that's correct. He stated that there currently is approximately $583 million in child support owed in the state of Alaska. In response to a follow-up question from Chair Weyhrauch, he confirmed that that amount is owed by noncustodial parents in Alaska. CHAIR WEYHRAUCH asked what the long-term implication would be from no permanent fund dividend (PFD) being paid out on an annual basis. MR. MALLONEE replied that the smaller amount of the checks would be approximately $1.7 million that the state would lose, or about $3.4 million that it would lose from collections that would reimburse public assistance. Approximately another $6 million would be lost to the custodial parents of the state. He noted that CSED has collected "right at a little more than $9 million in permanent fund since October." Number 2156 REPRESENTATIVE GRUENBERG turned to the committee substitute (CS) for HJR 31, Version 23-LS1282\W. He offered his understanding that the payments would end after fiscal year (FY) 2010. He asked if that would make the collection of child support after that date more problematic in some cases. MR. MALLONEE responded that it [would] make child support "somewhat more problematic to collect" if there is no permanent fund. He said, "We do, in fact, receive quite a bit of money on cases that we would not otherwise receive during the year. [For] many of the cases [for] which there's a minimum $50 order, the entire order gets paid for the entire year out of the permanent fund." REPRESENTATIVE GRUENBERG stated his recollection that there is a provision in HB 514 that would allow CSED to access people's PFDs, "even if they are reluctant or refuse to apply for them themselves." MR. MALLONEE confirmed that is true. REPRESENTATIVE GRUENBERG said that, in some cases, [the PFD] is the only source of child support payments. He remarked that sometimes people are reluctant to apply because they are embittered, for example, and don't want to support their children. He asked, "So, this may, in fact, after 2010 make it impossible to get child support from these people, right?" MR. MALLONEE answered that's correct. He stated that there is a possibility that if there were no annual permanent fund payouts, "there would be some cases of which we would not get payments." Number 2069 REPRESENTATIVE HOLM, on that point, asked how many people that would affect. MR. MALLONEE responded, "We usually get approximately 10,000 to 12,000 PFDs in a year." He estimated that, of that number, perhaps as much as 30 percent of those are "cases of which we get no other payment during the year." REPRESENTATIVE HOLM responded that he would "take issue with that," unless Mr. Mallonee can give the committee some empirical data. He suggested the percentage could vary greatly. MR. MALLONEE told Representative Holm that he is correct. Furthermore, he said he doesn't have empirical data with him; however, in response to Chair Weyhrauch, he said he would supply that data as soon as possible. Number 2020 REPRESENTATIVE SEATON asked when the one-time payout to individuals occurs. In response to a question by Representative Holm, he clarified that he was referring to page 2, line 23 through page 3, line 6, which read as follows: (c) Section 15 of Article IX as it read on June 30, 2004, applies to appropriations for fiscal year 2005. Notwithstanding Section 15(b) of Article IX, appropriations from the permanent fund may not exceed the following amounts for the following fiscal years: (1) fiscal year 2006 - five percent of the market value of the fund on June 30, 2005; (2) fiscal year 2007 - five percent of the average of the market values of the fund on June 30, 2005, and June 30, 2006; (3) fiscal year 2008 - five percent of the average of the market values of the fund on June 30, 2004, June 30, 2006, and June 30, 2007; (4) fiscal year 2009 - five percent of the average of the market values of the fund on June 30, 2005, June 30, 2006, June 30, 2007, and June 30, 2008. (5) fiscal year 2010 - five percent of the average of the market values of the fund on June 30, 2005, June 30, 2006, June 30, 2007, June 30, 2008, and June 30, 2009. REPRESENTATIVE HOLM explained, "Those are in reference to the percent of market value [POMV] (indisc. - coughing) of the fund after it's been split." In response to a follow-up question from Representative Seaton, he clarified that there would be a one-time payout and, in addition to that, there also would be a payout for the year 2004. Number 1962 REPRESENTATIVE LYNN reminded the committee that at a previous meeting he had asked for information on how "this" would affect eligibility for public assistance programs, in terms of welfare, Medicaid, and low income housing, for example. He asked if there had been a response to that request. REPRESENTATIVE WEYHRAUCH asked if Mr. Mallonee could address that question. MR. MALLONEE said no, but suggested the question could be deferred to someone from the Division of Public Assistance. REPRESENTATIVE LYNN clarified that he wants information regarding any program where a person's yearly income might effect the benefit he/she might get. He explained that a person's getting "all this money at one time" would change that person's yearly income, obviously. Number 1914 REPRESENTATIVE HOLM noted that if "the PFD folks go away," that would save $5.2 million a year in dissolving that department. The cost of managing what would then be a slightly smaller fund would be reduced by $8.2 million a year. Child support would get approximately $240 million in additional revenue, while student loan arrears would be paid "to the tune of about $50 million," he stated. He said there would be positive outcomes to the state's budget. REPRESENTATIVE LYNN stated that he thinks the [resolution] is a good concept that needs consideration. He said he is anxious to see [HJR 31] move forward. Number 1791 REPRESENTATIVE GRUENBERG recalled that there is case law from the supreme court that allows judges in certain child support cases to require that part of a fund [from a large payout, such as an inheritance] be sequestered and set aside in a trust fund to ensure that the child would be supported. MR. MALLONEE noted that on several occasions where there has been a history of poor payments and an individual has come into a large sum of money, the court has taken that money "through the majority of the child" and placed it in trust. He added, "In a couple of those cases, we've actually handled the trust account for it." Number 1812 REPRESENTATIVE GRUENBERG said that, if this constitutional amendment is put before the voters and ratified, virtually everyone in the state will be receiving a large sum of money, including people who have poor histories of child support payments. He asked if the CSED would plan to vigorously implement a program to sequester those funds in appropriate cases before the large payouts are received. MR. MALLONEE responded that "we" have discussed the issue with the attorney general's office, and he indicated that [if] the payout takes place, "we" would attempt to see if the court would allow [CSED] to sequester the money through the majority of the child. REPRESENTATIVE GRUENBERG asked if [CSED] has the necessary statutes in place "to do that now on a large scale." He clarified that he is concerned that if the issue is put before the voters later this year, "these people" could get the money before [CSED] could get the program in place. MR. MALLONEE replied that he is not certain that there currently is a statute in place that would cover a program "that would do this." He said he thinks it would have to be "made as an individual case by case, based on that poor payment." REPRESENTATIVE GRUENBERG asked Mr. Mallonee to consider the issue, in order to avoid an opportunity being lost to children forever. Number 1703 CHAIR WEYHRAUCH asked if [CSED] has the ability to adopt regulations on an emergency basis to handle an outflow of funds "like this." MR. MALLONEE said he would have to check with the attorney general's office on that. He clarified, "We can, obviously, make emergency regulations, as can any agency under certain circumstances; I'm just not sure under what statute that would fall ...." Number 1665 REPRESENTATIVE SEATON asked Mr. Mallonee if he is aware of any other programs, other than the state student loan program and child support enforcement, that would be recouping money "if someone's circumstance changed because they came into a large amount of money." MR. MALLONEE said he doesn't have that information. REPRESENTATIVE GRUENBERG noted that a certain percentage of the funding for the Violent Crimes Compensation board comes from the PFDs of felons. He indicated that there might be state, federal, and private creditors that would "really have first goal on this money." REPRESENTATIVE SEATON said he thinks the committee needs to consider this issue further. Number 1575 MR. MALLONEE, in response to a question from Representative Gruenberg, confirmed that [the CSED] is allowed to collect spousal support, but only in connection with a child support order. REPRESENTATIVE GRUENBERG added to his previous request and asked Mr. Mallonee to also include [instances where spousal support is collected]. Number 1515 CHAIR WEYHRAUCH opined that the current discussion "goes to the impact of this resolution." Number 1499 REPRESENTATIVE LYNN indicated that this is a policy matter. He said he knows many people who really suffer because child support has not been paid. He also stated that he thinks [the $20,000 payout] would be a good thing for seniors who would not otherwise live long enough to accrue the whole amount. Number 1458 REPRESENTATIVE GRUENBERG opined that there needs to be consideration of legislation to ensure that "this can't be used on a massive scale to defraud a lot of creditors." Number 1422 DONALD ANDERSON told the committee that although he is the manager of the Software North Company, he is testifying on behalf of himself to address the federal income tax effects of the PFD and the proposed $20,000 distribution. He said he has been a computer programmer for 39 years and his specialty is the development of computer models to simulate "real world events." He stated his intent today is to comment on the effect of the federal income tax on the PFD, and its effect on the extraordinary distribution, such as the $20,000 proposed in HJR 31. The simulations, he explained, involve a [Microsoft] Excel spreadsheet and a program such as TurboTax. He said the Internal Revenue Service (IRS) only releases tax income statistics as an overall state average and in 12 categories of income; however, he explained that this uncertainty is not large enough to change the general effect of what he is currently reporting to the committee. MR. ANDERSON stated that he believes everyone who prepares federal tax returns for a PFD recipient is familiar with line 21 of form 1040, which is the "other income" line. He said it feeds, without modification, into each taxpayers adjusted gross income. Thus, for anyone above the standard or itemized deduction, it directly affects the tax paid. Mr. Anderson noted that the most recent tax year for which the IRS summary sheets are available for Alaska taxpayers is 2001. He said he calculated the effects of the $1,850 PFD paid in that year, for that year's recipient, and he simulated the effect of a $20,000 payout. MR. ANDERSON stated that, in 2001, Alaskans paid about $186 million in federal taxes on their PFDs, which was 17 percent of the total amount distributed. Had a $20,000 payout been in effect that year, Alaskans would have paid about $2.9 billion extra in federal taxes - approximately 23 percent of the amount paid out. MR. ANDERSON explained that this is important when considering enacting a state sales tax or income tax to provide a portion of the funding for state government. He continued to read his testimony [included in the committee packet] as follows: If the state, on one hand, distributes money on which our citizens pay a hefty federal income tax, and then charges those citizens an equivalent tax to support state government, the big winner is the federal government. The state and its citizens are impoverished to the tune of as much as $186 million a year for the PFD and would have to endure the departure of $2.9 billion more if this extraordinary payment were to occur. I've rerun this simulation with the lower tax rates in effect for the 2003 tax year and have found that Alaskans would lose about 15 percent of any "tax back" - up to $115 million - if the entire $1,108 PFD was pulled back to the state by taxation. If the $20,000 payout had been attempted in 2003, about 23 percent would depart in federal taxes. Any part of this that was taxed back to the state in future years would unnecessarily suffer from this 23 percent shrinkage. The foregoing comments apply directly to former Governor Hammond's new PFD and tax plan - but that's another topic. Attempting to bribe our citizens into relinquishing the PFD by subsidizing the federal treasury is a poor strategy. Using the minimum PFD earnings necessary to fund state government is the only viable, long-term strategy producing minimum damage to the state. MR. ANDERSON - with apologies to Representative Holm, whom he said has benefited the state greatly by focusing serious attention "on this area" - stated his belief that HJR 31 should be retitled the "IRS enrichment resolution of 2004." He encouraged the committee to give the [resolution] a "do not pass" recommendation. MR. ANDERSON supplied the committee with his e-mail address and offered to send his Excel spreadsheet [included in the committee packet]. In response to a request made by Representative Gruenberg, he agreed to send his updated testimony, not only to the House State Affairs Standing Committee, but also to the House Special Committee on Ways and Means [included in the committee packet]. Number 1095 CHAIR WEYHRAUCH announced that HJR 31 was heard and held.
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