Legislature(1999 - 2000)
03/22/2000 09:06 AM Senate FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE JOINT RESOLUTION NO. 35
Proposing amendments to the Constitution of the State
of Alaska to guarantee the permanent fund dividend, to
provide for inflation proofing, and to require a vote
of the people before changing the statutory formula for
distribution that existed on January 1, 2000.
Senator Green testified that she introduced this resolution
for the opposite reason of SJR 33.
Senator Green explained that this plan takes the current
statutory formula for dividend distribution and places it
into the Alaska Constitution as an amendment to Article 9
Section 15.
Senator Green continued that the resolution would guarantee
that the eighteen-year history of earnings distribution was
preserved, the dividend was protected, the current method of
inflation-proofing the corpus of the fund was unchanged and
includes no new taxes.
Senator Green surmised that once Alaskans felt confident
that the dividend program was safe for future generations
and that the integrity of the permanent fund was protected,
the discussions could then begin on what to do with any
excess earnings.
Senator Green thought this resolution was the most important
step the legislature could take to show Alaskans that the
promise would be kept to protect the dividend program,
inflation-proof the corpus and ensure the future of the
permanent fund for generations to come.
Senator Green shared that one of the issues that would be
brought to the Committee's attention regarding this
resolution was the tax question. She avowed that there was
no proof that the U.S. Internal Revenue Service (IRS) would
tax the permanent fund any differently after this amendment
to the constitution was adopted. On the other hand, she
conceded, there was no proof that the taxation would not
change. She disclosed that the IRS had never taxed the
program in the past and that to her knowledge, the Permanent
Fund Corporation has never requested an opinion on the
matter from the IRS.
Senator Green spoke of warnings that the legislature would
lose control over the permanent fund by placing it into the
constitution. She assured that the question of who qualified
and who received the dividends would always remain in the
legislature's perusal. She stressed that this was probably
the sidebar that protects and keeps the dividend program
from being reclassified for the purposes of federal
taxation.
Senator Green declared that she did not believe the IRS
would risk losing the revenues it currently receives from
taxes on dividends. She cited that since the beginning of
the dividend program, $8.9 billion had been distributed as
dividends and at a conservative rate of 15 percent, she
calculated the IRS has received $1.34 billion.
Senator Green continued that the legislature could still
change the dividend program or the method of inflation
proofing through a constitutional amendment approved by a
vote of the people.
Senator Green mentioned SJR 18 offered the previous session
that also proposed to place some of the dividend provisions
into the constitution. She talked about the differences in
the language between this resolution and SJR 35, saying the
resolution before the Committee at this time places only the
current statutes relating to dividends and inflation-
proofing into the constitution. Excess earnings, she added,
are left in statute under the provisions of SJR 35.
Senator Green asserted that this resolution would guarantee
the legislature access to excess earnings in times of need.
She stressed that before any excess earnings could be spent
for government services, the public needs to be assured the
dividend and inflation proofing was protected.
She referred to the booklet, An Alaskan's Guide to the
Permanent Fund, saying she thought it clearly states the
intent of the program when it was established. [Copy on
file] She emphasized the words, "generations to come" as
repeatedly mentioned in the booklet. She cited the reason
for the permanent fund was to "have less state income" and
that it, "reduces the opportunity for excessive state
spending." She told the Committee the legislators needed to
remember this statement explains why the dividend program
exists and why it must continue.
Senator Green then addressed a collection of spreadsheets
that show models and projections of the impact of various
plans on the permanent fund and the dividend program. She
cautioned that many more such spreadsheets would be
presented and that they are all "suspects" because none has
ever proven to be 100 percent correct. She noted this
applied to any scenarios that either confirmed or refuted
the objections of this resolution. She did however reference
the spreadsheets contained in the handout that gave five
scenarios ranging from spending none of the permanent fund
excess earnings to spending all of the earnings for
government services. According to these figures, she
surmised that by the year 2010, the individual dividend
changes by $100. Therefore, she asserted there was stability
built into the permanent fund dividend program that was the
envy of other dividend funds. She concluded that simply
protecting the dividend and inflation proofing and allowing
investments to continue was in the best interest of
Alaskans.
Senator Leman appreciated and shared the sponsor's desire to
keep the fund a permanent fixture. However, he warned that
under the current structure of paying dividends based on
realized gains, there was a high likelihood the dividend
would end in eight or nine years. He asked why the existing
structure was retained in the resolution instead of allowing
a change to calculate dividends based on a percent of the
value of the entire fund.
Senator Green responded that she did not think the fund
would be eliminated under the current practice of
calculating dividends.
Senator Leman relayed his understanding of how the fund
would greatly diminish under the existing methodology. He
qualified that while it has worked for the first 20 years of
the program it had a high risk of failure. The concept of
enshrining this method in the constitution concerned him
because it could backfire.
Co-Chair Torgerson clarified Senator Leman's argument
derived from a model presented by Callan and Associates that
predicted if inflation rose considerably, the scenario of a
depleted dividend could occur.
Senator P. Kelly relayed that Senator Leman's concern was
that if the current structure was placed into the
constitution, then the dividend amount would not be drawn
down. Senator P. Kelly thought those assumptions were based
on the premise that the dividends would be paid first from
excess reserves, then the unrealized gains and finally the
principal of the fund. However he was unsure that would
happen with the program enshrined in the constitution.
Senator Donley thought Senator Leman was right. He spoke to
a memo he had sent to members at the start of the year
regarding this matter laying out that if certain events
occurred, Senator Leman's predictions would occur. Senator
Donley had proposed a solution to a particular caveat in the
dividend calculation formula. His explained his suggestion
would change the calculation in the event of certain
occurrences.
Senator Wilken requested a graphic representation, such as a
pie chart showing the program today and what would occur if
the measure were to pass.
Senator Green said she would comply but noted that the
resolution actually changed nothing from the current system.
Co-Chair Torgerson shared that he wrote a memo to the
executive director of the Permanent Fund Corporation
requesting an official position on this legislation,
specifically as it related to the tax exempt status of the
corporation. He received a response saying the matter would
be taken up at the March 8 Board of Directors Meeting.
RON LORENSEN, Attorney, Simpson, Tillinghast, Sorensen and
Lorensen, Attorneys at Law, serving as outside council to
the Permanent Fund Corporation for five years testified
about a legal opinion obtained by the corporation on the
taxation question.
Mr. Lorensen gave a history of the possible taxation of the
dividend and what could be done to minimize the tax. He
recounted how the corporation sought two outside legal
opinions in 1988, each of which took a different approach to
the question. He said the opinions both advised that the
permanent fund should not be taxable and suggested certain
changes to improve the argument that it should remain tax
exempt. He remarked that most of those suggested changes
were subsequently implemented including a number of changes
made by the legislature in 1994. As a result of the changes,
he stated that it was the general view that an argument
claiming the permanent fund was subject to taxation would be
very weak.
Mr. Lorensen continued sharing that in 1998, a similar
proposal for a constitutional amendment, SJR 18, was
introduced in the legislature. At that time, he said, the
board felt it was advisable to seek an update of the earlier
tax opinions to learn if the changes made had an impact of
minimizing tax concerns and also to assess how the proposed
changes might implicate arguments to make the fund taxable.
That opinion, Mr. Lorensen informed the Committee, updated
the earlier opinions to incorporate the adopted changes to
the fund and also address the impacts of SJR 18. He relayed
that the opinion advised that imbedding the dividend program
into the constitution would create a significant risk of
subjecting the permanent fund income to taxation. He cited
the opinion gave two inter-related reasons, one was called a
"private interest" in funds. He explained that when a
private interest was created in government funds, the funds
lose the governmental tax immunity protection. The other
reason cited in the opinion, he continued was whether or not
the income accrues to the state. He expounded that the
underlying question was whether the state legislature, the
body with the power of appropriation, also has the power of
appropriation with respect to that income. He pointed out
that by imbedding the appropriation of the dividends
permanently into the state constitution, the constitution
takes the appropriation power away from the legislature. As
a result, he asserted the argument strengthens that the
income no longer accrues to the state and becomes a private
interest and subsequently becomes taxable income.
Mr. Lorensen said that the board had been concerned about
the confidentiality of that opinion because of the
conclusions contained, which could come back to harm the
state if the information became public. He told the
Committee that he had communicated to the board, the co-
chair's conviction that this opinion was an important aspect
of the public policy debate.
Mr. Lorensen disclosed that the board has authorized him to
provide a copy of the opinion to the Committee "with no
strings attached." He expressed that it was the board's
preference that the information remains confidential but
that the board offered the opinion to the Committee to use
as it deemed appropriate.
AT EASE 10:26 AM / 10:27 AM
Co-Chair Torgerson relayed that he had a lengthy debate with
the corporation and Mr. Lorensen about whether or not this
opinion should be made public. Co-Chair Torgerson said that
during the break, another Committee member suggested to him
that the opinion should not be accepted if it could
jeopardize the permanent fund. However, he concluded that
the question of whether to enshrine the dividend in the
constitution is a larger public policy question. He said in
order for that question to be considered, Alaskans need to
know the potential consequences.
Co-Chair Torgerson stated that he was opposed to the
Committee having an executive session to review the contents
of the legal opinion only to emerge with a decision made
without any public input or public record.
Co-Chair Torgerson asked the witness whether he thought that
releasing the opinion to the public would jeopardize the
status of the permanent fund.
Mr. Lorensen answered that he did not believe that releasing
the opinion would jeopardize the permanent fund. He added
that the opinion concludes that the arguments are stronger
regarding the tax exemption of the current status of the
fund than if the dividend program were placed in the
constitution.
There was some discussion between Co-Chair Torgerson and Mr.
Lorensen about the need for information provided to the
Committee in a public hearing to be public information
versus information garnered in an executive session. Mr.
Lorensen concluded that while he was not convinced the
opinion needed to be made public, he was prepared to release
the opinion to the Committee to do with it as saw fit.
Senator Phillips asked for specific clarification from the
legal advisor to the corporation, Mr. Lorensen, if the tax
on the permanent fund would greatly increase if the
resolution were adopted. Mr. Lorensen affirmed it would be
substantially greater, "from something well below 50 percent
now to well in excess of 50 percent, I believe."
When asked by Senator Phillips if he was guessing at this
assessment, Mr. Lorensen qualified that "I'm just doing the
best I can. I'm not the court. I'm not the ultimate
decider."
Senator Green said she knew the defining issue on the
vulnerability of taxation was public interest versus private
interest. She asked for a clarification of public interest.
Mr. Lorensen responded that the matter was not a question of
public interest versus private interest, it was a question
of whether or not a private interest was created. He
explained private interest applied to an individual citizen
that was independently enforceable, or could enforce him or
herself. He stated that placing the dividend program into
the constitution would provide that private interest because
it would allow a citizen to make a constitutional claim for
the dividend if he or she did not get one.
Mr. Lorensen continued answering Senator Green's question
saying that the other issue was whether or not the
legislature had the ability to exercise the power of
appropriation over the money.
Senator Green asked about the issue of whether the
determination of who could receive the dividend was subject
to legislative change. She wanted to know if that was
considered when the board was discussing the taxability
question and considering obtaining legal advice. She
suggested the legislature could make eligibility
determinations based on need, senior citizen status, or any
permutation of demographic information. She thought that the
private interest would not be established if the legislature
had the option of redefining eligibility each year.
Mr. Lorensen did not think this specific variable was raised
with the attorneys. However, he stated Senator Green's
suggestion probably did not address the question of whether
or not a private interest existed at any one point in time.
He explained that while who was entitled to the private
interest could change, the fact that an underlying private
interested existed, would not change.
Senator Green commented that even if the constitution were
amended as proposed in this resolution, a future amendment
was possible through the same process. Therefore, she
concluded that the legislature would always have some
involvement in the dividend program through the budget
process unless the corporation decided to distribute the
dividends itself.
Mr. Lorensen said the comments about amending the
constitution were correct but that the legislature would not
have control over the vote of the people, which would be
required to pass an amendment.
Co-Chair Torgerson thought that the Committee would have to
read the opinion to understand the witness's private
interest argument.
Senator Adams worried that the federal tax rules were
"governed by the creator," meaning that the federal
government adopted laws when and how they benefited the
federal government. He asked what amount the dividend would
be using the model presented the previous year.
Mr. Lorensen understood the question but did not know the
answer. He did not know if the corporation had calculated
those figures or not.
Senator Adams restated his question to ask, if the fund lost
tax immunity, what percentage or amount of the interest
would the federal government take from the fund in the form
of taxes.
Mr. Lorensen answered it would be approximately 39 percent
Co-Chair Torgerson asked if the board took a position on
this resolution. Mr. Lorensen replied it had not.
Senator Phillips wanted to know if the board would take a
position if the legislature requested it do so.
Mr. Lorensen could not speak for the board.
ART GRISWOLD testified via teleconference from Delta
Junction that he believed more research should be done on
the tax structure, but once resolved, supported the
resolution.
LYNN BURKHARDT testified via teleconference from Homer that
if the public asked the legislature to not spend the
permanent fund, then it should not be spent. She talked
about the payoffs of the oil industry compared to the
environmental impacts.
RALPH RECTOR testified via teleconference from Kenai asking
why the tax would be so high because it should be calculated
on the number of shareholders. "Keep your hands off of our
money."
JUNE BURKHART testified via teleconference from MatSu in
strong support of the resolution and commended the sponsors.
She believed that the fund was created for the benefits of
all Alaskans forever.
ORAL FREEMAN testified via teleconference from Ketchikan in
agreement with the resolution. He repeated the previous
speaker's comment that the fund was for all Alaska.
CARL WASSILIE testified via teleconference from Anchorage in
favor of SJR 35 saying he thought the tax concerns could be
resolved with further discussion.
Tape: SFC - 00 #58, Side A 10:47 AM
JOHN GLOTFELTY testified via teleconference from Delta
Junction in support of the resolution and questioned why the
tax situation would change.
MARY GRISWOLD testified via teleconference from Homer in
opposition of the resolution although she did support the
concept of protecting the fund. She suggested HB 411 was a
better method. She gave detailed to explain her reasoning.
JAMES SHOWALTER testified via teleconference from Kenai
thanking the sponsors for introducing the bill, which he
favored. He stated that it protects the oil revenues.
SUSAN GIBSON testified via teleconference from Kenai in
support of the resolution. She suggested nonessential
services should be eliminated and that if done so, there
would be enough funds for the budget.
DALE BONDURANT testified via teleconference from Kenai about
his understanding of the purpose of the permanent fund and
his support of the resolution.
LINDA ANDERSON testified via teleconference from MatSu that
she thought the government had not been cut enough.
JESSEE CHANDLER testified via teleconference from MatSu in
favor of SJR 35.
CLIFTON CHANDLER testified via teleconference from MatSu
that he believed this resolution protected the permanent
fund for his and his children's future.
KEITH LIPSE testified via teleconference from MatSu thanking
Senator Green for looking out for the public's interest in
the permanent fund.
WALTER ST JOHN testified via teleconference from Big Delta
that the IRS would love SJR 33 to become adopted.
ORVILLE MCETHY testified via teleconference from Kenai in
support of SJR 35. He commented on the fast ferries in
British Columbia, Canada and noted that Governor Knowles was
planning to purchase two for Alaska.
Co-Chair Torgerson ordered the resolution HELD in Committee.
| Document Name | Date/Time | Subjects |
|---|