Legislature(2003 - 2004)
03/16/2004 09:07 AM Senate FIN
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* first hearing in first committee of referral
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+ teleconferenced
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CS FOR SENATE JOINT RESOLUTION NO. 32(JUD)
Proposing amendments to the Constitution of the State of
Alaska relating to appropriations from the Alaska permanent
fund to be used for a program of dividends for all state
residents and providing a conditional effect and effective
date for the amendment.
This was the first hearing for this resolution in the Senate
Finance Committee.
Co-Chair Wilken stated this resolution, "constitutionally
guarantees that 80 percent of the revenue stream from the Permanent
Fund under a percent of market value approach would go to the
Permanent Fund Dividend. This constitutional amendment will take
place only if the POMV amendment passes the legislature and is
approved by the voters. This constitutional amendment must be
placed before the voters November of 2004."
SENATOR KIM ELTON characterized himself as not a sponsor of this
resolution as much as he is a carrier. He then characterized this
resolution as an "if 'a' then 'b'" stipulation. He explained that
if a constitutional amendment were adopted to implement a Percent
of Market Value (POMV) procedure, this resolution would provide for
a division of the revenue from the POMV approach.
Senator Elton relayed this resolution is a nexus of the Conference
of Alaskans' recommendation that if POMV were adopted in the Alaska
Constitution, the Constitution should also be amended to guarantee
Permanent Fund dividends. He stated this resolution is one method
to accomplish this. He detailed that POMV would provide a "revenue
stream" of approximately five-percent the amount of the corpus of
the Fund. Of that amount, he stated 80 percent would be
appropriated to the dividend and 20 percent for government
operations. He calculated that the current market value of the Fund
would provide approximately $280 million for government services of
the approximate $1.4 million POMV. He cited observations from
Permanent Fund Corporation representatives that reviewing past
performance provides insight into predicting future performance. He
listed various other divisions between 65 percent for dividends and
35 percent for government services, and 76 percent for dividends
and 24 percent for government services. He acknowledged the
difficulty in accurately predicting the future in that the certain
market performances and asset allocation decisions must be assumed.
He predicated this resolution based on calculations how a POMV
would have affected the Permanent Fund if implemented since 1990.
Senator Elton also pointed out this approach would not prioritize
dividend payments above inflation proofing, explaining the
assumption that POMV provides inflation proofing because only five-
percent is withdrawn from the Fund.
Senator Elton agreed with Senator Hoffman's comments that also
reflect the "notion" of the Conference of Alaskans that the State
has transformed a "pool of natural resources" into a "pool of
money" that continues to grow. Senator Elton asserted that a
significant portion of the corpus of the Permanent Fund is a direct
result of prudent actions of past legislatures in inflation-
proofing the Fund.
Senator Elton opposed the committee substitute adopted by the
Senate Judiciary Committee because it was contingent upon
legislative and voter approval of a constitutional spending limit,
which he stated has not been finalized. He recommended against
including a spending limit in a proposal to constitutionally
guarantee the Permanent Fund Dividend program, as such action could
be considered a revision rather than an amendment to the
Constitution.
Senator Elton then addressed the matter of whether this resolution
would be a revision of the Constitution. He surmised that making
such a determination is inappropriate at the committee level.
Senator Bunde was pleased to note that the sponsor pointed out the
income from the Permanent Fund, which he calculated has
"outdistanced the income to the State" generated from development
of oil resources. Senator Bunde remarked that a POMV is intended to
stabilize the earnings of the Permanent Fund and the method in
which those earnings are calculated. He understood the amounts of
the dividend would subsequently become stable rather than fluctuate
as it has in the past. By extension, he stated that the 20 percent
used to fund State services would also be stabilized. He listed the
budget deficit for the current year at $500 million, of which
approximately one half could be offset with the aforementioned 20-
percent. However he warned that the deficit would continue to
increase and that this scenario would not adjust for inflation.
SFC 04 # 40, Side B 09:55 AM
Senator Bunde asked whether the sponsor had considered how the
remaining government expenses in excess of those covered by the 20
percent of POMV funds would be addressed.
Senator Elton qualified that the State is fortunate this year
because the price of oil is currently over $36 per barrel, and the
$500 million deficit amount is a conservative estimate. In the
future, he expected the gap between revenues and expenditures would
be significantly higher. He did not consider this resolution to be
a complete fiscal solution, but rather as a component of a broader
fiscal plan. He clarified he did not intend to suggest that
additional efforts to address government funding should be ignored.
Senator Bunde agreed that depending on the price of oil, the
deficit could be approximately $1 billion and that "draconian"
taxes and budget reductions could be necessary to offset the
balance. He asked whether, in the current year, the entire deficit
would be equal to fifty-percent of the five percent earnings
available for appropriation under the POMV method.
Senator Elton replied that an equal division of the total POMV
earnings of $1.4 billion would provide approximately $700 million,
an amount that would be adequate to cover the projected deficit.
However, he cautioned that if the deficit increased to $1 billion,
the earnings would not be sufficient.
SENATOR GARY STEVENS expressed he is a "great fan" of the Alaska
Constitution and was "loathe" to amend it too readily. He asked how
the sponsor determined this issue merits such an amendment, given
that the framers at the Constitutional Convention determined to
leave the details to the Legislature to resolve.
Senator Elton replied that the Constitution has provided Alaskans
with significant latitude. He stated this resolution would provide
further definition as to how the Permanent Fund would be managed.
He reiterated it would not be implemented unless a constitutional
amendment relating to POMV was approved.
Senator Hoffman commented that the Constitution was very general;
however specific changes have been made to benefit few people, such
as the limited entry provision that benefited few fishers. He
asserted this resolution would benefit every Alaskan.
Senator Seekins asked if the sponsor had obtained a legal opinion
advising whether this resolution conforms to the ruling in Bess
versus Ulmer.
Senator Elton informed he had and described the opinion from Tam
Cook of the Division of Legal and Research Services advising that
the matter is "indeterminate" and could be determined by a court to
be a constitutional revision or amendment.
Senator Seekins clarified that currently all income generated from
the Permanent Fund is deposited into the State general fund, and
subject to discretionary appropriation by the legislature. He
understood this resolution would provide that appropriation would
no longer be discretionary and instead 80 percent would be
distributed as dividends and only the remaining funds would be
discretionary.
Senator Elton affirmed, noting these provisions are currently
statutory and this resolution would codify them in the
Constitution. He encouraged the Committee, as it considers all
approaches, to consider that all Alaskans must endorse this
constitutional amendment.
Senator Seekins asked if the sponsor would therefore not "have any
problem that the first dollar that would have to be spent for any
reason in any particular year regardless of the financial condition
of the state of Alaska would be to pay the dividend."
Senator Elton corrected that the "first dollar" would be
appropriated to inflation proof the Permanent Fund. The reminder,
he affirmed would be allocated 20 percent for government services
and 80 percent for the dividend.
Senator Seekins clarified, "we would inflation proof our savings
account no matter what our other requirements were for State income
to meet the needs of the State of Alaska. The second dollar then
would be for a dividend. Then we could worry about the rest of
State needs after that."
Senator Elton countered he would not characterize the process in
this way. I saw no "difference" between the funding available for
the dividend and that for State services; both would be guaranteed
in the Constitution.
Senator Hoffman stated the Fund would first be inflation-proofed,
"then government gets a crack at it and then the people get a crack
at it." He noted the ratio of funds allocated for dividends and for
government services could be changed.
Senator Bunde asserted that the "ultimate recipient" of government
spending is the people, that government services are provided for
the people, and therefore 100 percent of the earnings would benefit
the people.
Senator Bunde asked Senator Seekins as Chair of the Senate
Judiciary Committee, if the issue of whether these proposals are
amendments or revisions to the Constitution could be resolved
before the process of an election and court challenges.
Senator Seekins shared his research into the matter of dedicating
income in the Constitution from the Permanent Fund to the dividend
program. He learned that if the legislature were to pass a
resolution to amend the Constitution in this manner, the issue
would be challenged in court before the election was held on the
subsequent ballot initiative. He knew of no other method to obtain
a court ruling on whether such a change would be deemed an
amendment or a revision.
Senator Seekins warned that such change to the Constitution would
be the first instance in which funds were allocated directly to
individuals. He explained that historically, revenues from the
Permanent Fund have been deposited into the State general fund then
appropriated for dividends. He remarked this change would subvert
the legislative appropriation authority and would therefore likely
be considered a revision to the Constitution. He noted the State
Supreme Court would make the ultimate decision on the matter.
Senator Elton relayed his understanding that a court decision would
not be rendered until after a ballot initiative passed in a
statewide election.
Co-Chair Green studied the calculations of the dividend payments
provided in a POMV process and the impact on the dividends if a
percentage of the available amount were appropriated for government
services. She anticipated a "bidding war" could ensue in effort to
establish support for certain percentage amounts.
Senator Elton interpreted the graph provided by the Alaska
Permanent Fund Corporation, titled "Comparison of dividend payout
methods; Historical and forecasted data" [copy on file], to
indicate that if this resolution had been enacted between 1990 and
the current year, the division would be "about 76 / 24". He
qualified that the method of managing and investing the assets of
the Fund have changed. He stated that under this approach, any
asset allocation decision or market behavior changes could distort
future earnings. He cited testimony given by representatives of the
Corporation that to replicate future "dividend behavior" under the
current method, an allocation of 60 or 65 percent to dividends
would be likely.
Senator Hoffman suggested that instead of entering a "bidding war",
the legislature should present options to voters listing the
impacts that allocating different percentages for government
services would have on the dividend. He cautioned against
practicing "one-ups-man-ship." He asserted that the State has
developed its oil reserves, a nonrenewable resource, and allocating
the proceeds to all Alaskan residents. He commented that whether or
not these residents remain in Alaska in 25 years, they would still
receive some benefits of the resources. He doubted any recipients
of the dividend were "buying a golden condo", but opined that
individuals are better able to spend these funds than the
government.
Senator Bunde relayed a comment made during the Conference of
Alaskans that the U.S. Congress has been "generous" to Alaska and
is are "not unaware" of "what we do up here". He noted that over
one-half of the State's annual $10 billion budget is comprised of
federal funding and that Alaska receives $7 for every $1 paid to
the federal government. He hoped this practice would continue, but
warned it is contingent upon the perceptions of members of
Congress. If Alaskans vote to constitutionally "lock up" money and
dedicate its use for personal expenditures, and yet expect the
federal government to fund basic services, he predicted Congress
could reconsider its appropriations to the State.
Senator Stedman calculated that a division of 60 percent and 40
percent of POMV revenue was more realistic. He reiterated his
mosaic analogy and the impact of each component on the complete
State fiscal situation, specifically the "doors" this proposal
could "close" to other funding sources, such as from the federal
government.
Senator Elton remarked that it is difficult to predict the future.
He ascertained Alaskans do not consider the Permanent Fund to be a
"shock absorber" for deficit funding. He recalled Governor
Murkowski's statement that the "cushion" is the Constitutional
Budget Reserve fund and that a balance of at least $1 billion
should be retained in that fund. Senator Elton agreed with the
Governor on this point and furthered that the Permanent Fund should
be managed in the same manner as other State resources.
SENATOR HOLLIS FRENCH emphasized the proposed constitutional
amendment is the focus and characterized it as "highly principled"
and "highly pragmatic". He expounded that the discussion represents
a "classic American struggle" between "power and liberty," of
whether money should be appropriated to government or individuals.
He furthered that the issue is pragmatic in that if a portion of
earnings from the Permanent Fund are to be used for government
services, a proposal for this must be crafted that would receive
public approval. He predicted that a proposal to adopt a POMV
method would not receive public approval without this resolution.
He remarked upon the Conference of Alaskans conclusion that to
receive public approval for POMV, an "iron clad guarantee" of
continued dividend payments would be required.
Senator Elton appreciated the comments. He agreed the matter is a
conflux of policy and philosophy but stressed that politics is also
an issue. He surmised that the public needs assurance that
dividends would be guaranteed if POMV were enacted and he stated
this resolution is the result of this need.
Senator Hoffman asked about the division of three to five percent
POMV between inflation proofing and allocation for dividends and
government. He asked whether the sponsor had considered that five-
percent could be too high.
Senator Elton stated that in constructing this resolution, he
divorced himself from that question and rather addressed allocation
of the income "stream". He emphasized that any discussion of POMV
must include discussion on the appropriate annual amount to
withdraw from the Permanent Fund. He qualified that different
entities reached different conclusions of the appropriate amount.
Exampled that the withdrawal amount from the Harvard Endowment is
decided annually based on the performance of that fund. He pointed
out that other endowment funds are managed differently than the
Alaska Permanent Fund. He stressed that this Committee as well as
the Senate should scrutinize the percentage amount. He relayed a
suggestion made at the Conference of Alaskans that five-percent is
appropriate and would not impact the corpus of the Fund over time.
Whatever decision on the POMV amount, he stressed would not affect
this "tag-along" Constitutional amendment, because it is predicated
on the annual revenue.
Co-Chair Wilken ordered the bill HELD in Committee.
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