Legislature(2001 - 2002)
04/12/2001 08:14 AM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 17 - CAPITAL PROJ/DISTRIB. OF PERM FUND INC Number 0097 CHAIR COGHILL announced that the first order of business would be HOUSE BILL NO. 17, "An Act relating to the capital projects fund, to distribution of money in the earnings reserve account of the Alaska permanent fund to the capital projects fund and to the dividend fund at the end of fiscal year 2001, and to increasing the amount of permanent fund dividends for calendar year 2001; and providing for an effective date." Number 0133 LORI BACKES, Staff to Representative Whitaker, Alaska State Legislature, came forward to testify on behalf of Representative Jim Whitaker, sponsor of HB 17. She noted that the audio-visual presentation on HB 17 that Representative Whitaker gave at the last committee meeting was available in both hard copy and on disk. She pointed out a correction needed on the slide titled "Capital Projects Fund." The figure on the second line, $160,712,500, should be changed to $211,500,000 to match the other updated amounts shown throughout, she explained. MS. BACKES said that HB 17 does not take the money from the earnings reserve account itself. "This takes the earnings from the earnings reserve account," she said. "The permanent fund has its own earnings, and the earnings reserve account is invested a little bit differently; and this takes the earnings for one year from the earnings reserve account." Number 0339 CHAIR COGHILL noted for the record that Representative Crawford had joined the meeting. He then asked how one determines the parameters of the earnings of the earnings reserve. MS. BACKES said she could not help much with financial explanations, but knew that the earnings reserve account is the money left over after the permanent fund has been inflation- proofed and after the dividend has been paid. The remainder goes into a separate earnings reserve account. That money is invested separately from the permanent fund, and so generates its own income. "That's the income we're talking about," she said. "It has nothing to do with the direct income of the permanent fund." Number 0433 CHAIR COGHILL asked if he understood correctly that under HB 17, the earnings part of the earnings reserve would be divided in half. MS. BACKES said that is what would be done for one year. As HB 17 is written, half of that money would go to the capital projects fund and the other half would be paid out as a supplement to the permanent fund dividend. She said the amount of that supplement would be about $360 per dividend. MS. BACKES added that some legislators have suggested using the money for a municipal dividend instead of supplementing the dividend, she said. That would require amending HB 17 so that half of the money [the earnings of the earnings reserve] would go into the capital projects fund and the other half would be dispersed to communities based on their population. CHAIR COGHILL supposed that would be similar to the plan proposed in HB 20. MS. BACKES said what is being discussed was similar in concept, but that she did not know the particulars. CHAIR COGHILL asked how much would be provided per capita. MS. BACKES said she did not know how the money would be divided per capita if it were given out as a municipal dividend. "If it's a supplement to the dividend payout, it would be $360 per person," she said. CHAIR COGHILL asked if that was the amount anticipated in this year only. MS. BACKES said that was correct, emphasizing that HB 17 is a one-year bill. Number 0624 CHAIR COGHILL said he wanted the committee to note that "this is a one-time shot at trying it to see how it works." He also noted that Representative Hayes had joined the meeting, and asked him if his bill had passed. REPRESENTATIVE HAYES replied, "Absolutely, Mr. Chair." Number 0666 CHAIR COGHILL observed that on page 1, line 11 of HB 17, "you have up to 35 percent of the balance ... to be appropriated for projects located in a single municipality." He wondered why the bill said "up to 35 percent." MS. BACKES said it was a positive way of putting a limit on how much each community might receive in the form of appropriations for capital projects, and that the legislature has done something similar in the past. Number 0727 CHAIR COGHILL said he was trying to think of the policy call that will have to be made in the House State Affairs Standing Committee. "The earnings reserve has never been used in a manner such as this," he said, "so this would begin a precedent, I think, that would be very significant; something that the legislature's been very reluctant to do in the past. And I guess the [indisc.] from you folks is to try it for one year, see how it goes?" MS. BACKES again pointed out that HB 17 is not using the earnings reserve, but the income from the earnings reserve, "so it's almost two to three times removed from ... getting anywhere near the permanent fund," she said. Number 0805 JIM KELLY, Director of Communications, Alaska Permanent Fund Corporation, came forward to testify. CHAIR COGHILL explained that he had been asking Ms. Backes about the parameters of the earnings of the earning reserve and how that relates to realized and unrealized gains. "Can you give us a little description on that?" he asked. MR. KELLY explained: There are two parts to the permanent fund, there's the principal and there's everything else. Anything above the amount of money that you have appropriated to the principal -- which is the constitutionally dedicated oil revenues, the little piece of additionally statutorily appropriated oil revenues, inflation- proofing, and then the special appropriations that the legislature has made I think seven times over the years -- that's $20.2 billion. Everything in the fund that you see that's over $20.2 billion is in the earnings reserve account. It is income. Some of it is realized; some of it is unrealized. But all of the money that we make every day flows into the earnings reserve account, whether it's an interest payment that we receive from the federal government or whether its a dividend that we receive from one of the holdings of the 4,000 companies that you own around the world, whether it's cash flow from an apartment building that the fund owns in Miami, Florida, or whether it's the appreciation in -- or the depreciation in -- the value of any of those assets from any given date, that all shows up in the accounting for the earnings reserve account. Number 0925 So if the fund is $25.2 billion today, which I think it's pretty close to that, that means that there's about $5 billion in the earnings reserve account. We project in the future that the earnings reserve account will earn 8 percent, 8.25 percent return. So when we did the analysis of HB 17, we calculated an 8.25 [percent] return on the earnings reserve account and then followed the prescription of the bill and split it the two ways and paid it out. One thing that's interesting to note is that ... the [Permanent Fund Corporation] board has a proposal for a 5 percent payout limitation, a constitutional amendment, which is really intended to inflation-proof the fund permanently, but also to provide a sustainable income stream to the state. And if you look [at] that over a 20-year period, the numbers turn out to be just about the same as they do with HB 17, and I'll get into that. But basically what I'm saying is that the amount of money that's being talked about is pretty consistent with being able to maintain the purchasing power of the fund. Over 20 years, under HB 17, you'd end up with a fund that was about $51 billion, twice the size that it is today. Meanwhile, you will have produced over that period of time something like $57 billion worth of total investment return. Number 1036 It's going to take $20 billion of that to keep the fund whole against inflation, just as in the past it's taken $7 billion to keep the fund whole to today. So that leaves $36 billion, which is about how much HB 17 envisions being available. Number 1060 Of that, the dividend program status quo will take approximately $28 billion, so that leaves ... $8 billion or something like that for other uses. This particular proposal shifts some of that into the dividend fund and it provides some of it for capital projects. But the long and the short of it is that it does leave the fund basically in a whole position over a period of time and it has provided for billions of dollars of new permanent fund income to be used for the benefit of the Alaskan economy without sacrificing the fund or the real and the nominal growth in the dividend. Number 1121 REPRESENTATIVE WILSON asked, "So if we look at HB 17 and look at what we're doing now?" MR. KELLY said the difference is that ... if one did nothing with the income besides the dividends and inflation-proofing, the fund would grow to $64 billion, with $14 billion in the earnings reserve account. REPRESENTATIVE WILSON added, "I meant as we keep taking some of it away." MR. KELLY asked what she meant by "taking it away." REPRESENTATIVE WILSON asked, "Don't we take some of this each time ...?" MR. KELLY responded, "Oh, you mean for HB 17?" REPRESENTATIVE WILSON realized, "Oh, it's the CBR (Constitutional Budget Reserve) that we keep taking ...; OK." Number 1181 REPRESENTATIVE FATE said, "I'm a little confused here, Jim, because you're mixing [HB] 17 with what you were trying to achieve before, which is a constitutional amendment. I'd like to stick to this bill and ... what will happen, or whether we should even give ... back to the dividend, or whether ... it should go to the communities..., and whether or not these figures ... that have been projected are ... valid figures." Number 1248 MR. KELLY said HB 17 pays out money in excess of what statutory inflation proofing requires. There is additional money. The Permanent Fund Corporation estimates that there will be $175 million to $300 million a year available, and that number will grow as the market value of the fund grows. MR. KELLY said the way that money ought to be spent is not something the trustees [of the Permanent Fund Corporation] would ever get involved with deciding. "We're only interested in producing the money...," he said. REPRESENTATIVE FATE said what he wanted had to know was that the $423 million from which the other figures derive is a good figure for the income from the earnings reserve account. MR. KELLY confirmed that it was, [depending on what happens in the current, final quarter of the fiscal year]. Number 1324 REPRESENTATIVE FATE asked about the projected earning of about 8 percent on the earnings reserve account: "In light of the ... 'bear market' that we're having now, is that still a valid figure?" MR. KELLY said it was, and explained how it is calculated. Number 1401 CHAIR COGHILL asked if, in light of the bad market year, the HB 17 proposal is a valid one to be discussing right now. MR. KELLY said the projected earnings are based on December 31 [of 2000] numbers, and he thinks they are as good as anything the Permanent Fund Corporation could produce. Number 1448 REPRESENTATIVE JAMES asked a question related to a presentation the Permanent Fund Corporation had made at a Rotary Club meeting. There was a chart that showed the ups and downs [of the stock market] over the last 75 years, and Representative James understood that 8-8.5 percent is the historical amount of growth that can be expected from a fund over the long term. MR. KELLY said it is about 8 percent, including 3 percent for inflation and 5 percent for payout. REPRESENTATIVE JAMES asked if that was how the Permanent Fund Corporation came up with the 5 percent payout, "because you assume that the average is going to be 3 percent on inflation and that's going to keep it ... inflation-proofed over the long period of time?" MR. KELLY said that was correct, based on the asset allocation the fund has now. Number 1570 REPRESENTATIVE JAMES recalled that in the early 1990's, the rate of inflation was so high that legislators worried that if they first inflation-proofed, there would be nothing left for dividends, and might not even be enough for inflation proofing. "Could we get there again?" she asked. Number 1656 MR. KELLY said yes, and that is why the board is suggesting that statutory inflation proofing isn't the best way to go because it moves that money from the earnings reserve account, where it is available for appropriation, and puts it into the principal, where it's not. And in a year like this one, in which the Permanent Fund has lost $2 billion of money, that's not a problem because there is still $5 billion in the earnings reserve account. "But you have a year like this again and another year like that again, then you're into a situation where you do not have the ability to make a dividend payment, much less the payment that's envisioned in an HB 17," he said. Number 1690 CHAIR COGHILL asked, "Is this going to be problematic with regard to that? ... If we're going to make a policy call, we need to make sure that as we proceed in this, that they're not going to be in competition, but that they could work together." MR. KELLY replied, "It's really a public policy call. ... All of the money in the earnings reserve account is available for the legislature to spend. If you're going to continue the current system, ... the best protection you have against bad markets is a lot of money in the earnings reserve account. Anything you do to take money out of that reserve account, whether it's putting it into the principal for inflation proofing or whether it's paying it out for purposes of state government, diminishes that and increases the risk down the road.... That's sort of a flaw that the trustees are trying to overcome." Number 1760 REPRESENTATIVE FATE said he would really like to try to focus on HB 17. "It looks to me like we're not going to really diminish the earnings reserve," he said. "We're taking the earnings off of it, unless you account for a small amount of that that might go back into the earnings reserve." He noted that HB 17 is a "one-time deal" that provides much-needed funds for capital projects. How to divide the other portion of that revenue from the earnings reserve account, "whether it's going to go to the municipalities or whether it's going to go back into the dividend, is something that ... perhaps should be wrestled with a little bit" [in the State Affairs Committee]. From the public policy standpoint, he thinks HB 17 has a lot of merit and that it would be better to let the finance committee go through the number crunching. Number 1836 CHAIR COGHILL said he think the policy call that the committee wants to make is, "Shall we use the earnings of the earnings reserve?" Number 1847 REPRESENTATIVE WILSON requested clarification. "With this bill, we take the earning from the earnings reserve...," she observed. "Does the bill inflation-proof the earnings reserve account before we do that?" MS. BACKES said it does not. REPRESENTATIVE WILSON asked if she knew what difference it would make if we did that. MS. BACKES said it would, of course, depend on the level of inflation proofing that was decided upon, but beyond that, she didn't know the effect it would have. "I think that it certainly would be a policy call if the legislature is interested in inflation-proofing the earnings reserve when the permanent fund is inflation-proofed." REPRESENTATIVE WILSON mentioned that the earning of the earnings reserve would be a changing number all the time. CHAIR COGHILL said he thought the question she was raising was whether to inflation-proof the earnings reserve rather than the corpus of the fund, which is a policy question HB 17 does not address. Number 1957 REPRESENTATIVE JAMES commented that HB 17 is a one-time thing, and it appears to her that the same amount that HB 17 would put into the capital projects fund [$211,500,000] could be appropriated today without this piece of legislation. "We don't need, this," she said, "if ... we are willing as a legislature to take money from the earnings reserve...." She said the calculation is important and the presentation shows that the money would not come from the earnings reserve, but from its earnings, and only use half of that. The same money could be appropriated by a simple majority vote. REPRESENTATIVE JAMES added that she thinks the 5 percent payout makes a lot of financial sense over the long term. "But ... I don't want to deal with that until we deal with everything else," she said; "because it's all an integral part of a long- term plan, and I'm not willing to set aside 5 percent of the market value without doing something with the dividend program, which would take at least 80 percent of that and ... [leave very little left to use] in balancing our budget over the long term." Number 2099 REPRESENTATIVE COGHILL asked Ms. Backes to explain why the bill is being introduced. He said it would be his guess that the sponsor intends to bring about a policy debate about whether the legislature should use the permanent fund, the earnings, or the earnings of the earnings. MS. BACKES said the impetus for HB 17 comes from the mandate in Article 9, Section 16 of the state Constitution. That mandate was put there by amendment in the early 1980s, when the state was getting a lot of money and there was concern that it was being spent without a great deal of self-restraint. The amendment set an appropriation limit, which the legislature has never come near reaching. However, within this limit, it also states that at least one-third of the money the legislature appropriates shall be reserved for capital projects and loan appropriations. The legislature has never come close to designating one-third of its appropriations for capital projects, she said. In 1983, the state attorney general issued an opinion saying he thought the amendment was ambiguous and that the courts wouldn't hold the legislature to the provisions of the amendment. There is a second opinion from Legislative Legal Services that directly contradicts the attorney general's opinion, which has never been challenged in court. "Representative Whitaker believes that we ought to challenge it in some fashion because the legislature does have a mandate within the constitution to appropriate one-third," Ms. Backes said. "This bill doesn't appropriate one-third, but it does bring us a little bit closer." Number 2234 REPRESENTATIVE FATE said he agreed with Representative James about the legislature being able by majority vote to use the earning of the earnings reserve, "That, to me, is basically what this does," he said. He has seen the presentation and thinks it is the right step "because, as everybody knows, we're in the process right now of trying to formulate some fiscal policy for the State of Alaska," he said. "Also, as everybody knows, we are way behind on capital improvement including deferred maintenance.... So this, to me, is a first and valid step in trying to address the capital problems that we have in the state." As for the other part, the other half of the revenues from the earnings reserve account, he said he was undecided about whether that should be used as a dividend or to provide revenue to communities. He said he hopes that HB 17 will get a majority vote that will start the process of capital improvement once more. REPRESENTATIVE JAMES addressed the constitutional amendment and the attorney general's opinion. She said she agrees with the attorney general that the bill is very convoluted and could be challenged. She said the constitutional budget reserve was another convoluted constitutional amendment that ended up being challenged in court. The decision was that the amendment was, indeed, convoluted, and that the purpose of the constitutional budget reserve was to allow the legislature, if it had less money available in the current year than in the previous year's budget, to tap the constitutional budget reserve account with a majority vote. For any other reason that the legislature wanted to spend money from that account, a three-fourths vote was needed. And regardless of how the expenditure was approved or the money used, at the end of the following year, whatever is left for appropriation is swept into the constitutional reserve to pay it back. "Pulling all the money out of the bank to pay back the constitutional budget reserve at the end of a fiscal year is absurd," she said. REPRESENTATIVE JAMES said the court also ruled that when the legislature determines that the money available for appropriation is less that what was spent in the last year, "you ... count the earnings of the permanent fund reserve because it's available for appropriation. But when it comes to June 30 and time to sweep all the money back in to pay it back, you don't count the earnings reserve of the permanent fund. That and other things about the constitutional amendment need fixing, she said. She thinks the legislature needs to do that as part of a long-term fiscal plan and also to have a spending limit. An attorney general's opinion is the law until someone challenges it in court, and only the court can make that final decision, she said. Number 2533 CHAIR COGHILL asked Ms. Backes "how far down the road this goes to a challenge on that." MS. BACKES was not sure she understood the question. CHAIR COGHILL asked, "Does this go over the one-third? Does it stay under the one-third? Are we even going to come up to what the attorney general's opinion is on this?" MS. BACKES said HB 17 does not appropriate one-third, but "brings us a little bit closer." She further explained: The attorney general's opinion doesn't deal so much with how appropriate it is to set the appropriations limit through this amendment, and it really doesn't deal with the constitutional budget reserve. The question that Representative Whitaker has in the attorney general's opinion deals with just the sentence that says, "Within this limit, at least one- third shall be reserved for capital projects and loan appropriations." The attorney general believed that the statement within this limit was ambiguous enough to state in his opinion that if the legislature never reached that appropriation limit. That, by the way, I think would have been $6.1 billion last year for the legislature to appropriate.... If we never reach that limit, we don't have to appropriate a third for capital projects. That was his interpretation of this amendment, and that is the part of his opinion that Representative Whitaker disagrees with as well as in our legal opinion from Tam Cook. Number 2623 CHAIR COGHILL said he wanted to be very clear that HB 17 is asserting that the legislature should get as close to one-third as it can, and that it is not going to challenge the attorney general's opinion because it does not appropriate more than one- third. MS. BACKES said she did not see and certainly hasn't heard anything from the attorney general's office to indicate that there would be a challenge on HB 17 based on the attorney general's opinion. Number 2660 REPRESENTATIVE CRAWFORD commented that he had heard some really interesting conversation here this morning and would really like to discuss it over pizza some night, but he thinks the discussion is getting fairly far afield from HB 17. "What this seems to do is it uses some of the earnings from the permanent fund. Even though it comes from the earnings of the earnings ... of the reserve account, it's still money from the permanent fund," he said. As he was going door-to-door campaigning, he heard repeatedly that people do not want to see the budget gap filled with earnings from the permanent fund without a comprehensive fiscal plan, and he agreed with that. Number 2725 REPRESENTATIVE FATE moved to report HB 17 out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, HB 17 was reported from the House State Affairs Standing Committee.