Legislature(2001 - 2002)

05/03/2002 01:44 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                SJR 13-CONST. AM: PERMANENT FUND                                                                            
CHAIRMAN   TAYLOR  said   SJR  13  proposed   amendments   to  the                                                              
Constitution  of  the  State  of Alaska  relating  to  the  Alaska                                                              
permanent fund.  He asked Mr. Jay Hogan to provide testimony.                                                                   
MR. JAY HOGAN  referred the committee  to his letter dated  May 3,                                                              
2002.  He  wanted to make one  correction to that letter  and said                                                              
HB 304 had passed out of the House  of Representatives and was now                                                              
in the Senate.  He said the letter explained his position.                                                                      
He said  a great  deal of change  had been  made to the  permanent                                                              
fund by statute  over the past 26  years.  He said  the investment                                                              
policy  and inflation  proofing was  provided for  by statute,  as                                                              
well as a  host of other improvements.   He said that  was the way                                                              
it was supposed to be.                                                                                                          
He said he  sat through many  committee hearings in 1975  when the                                                              
statutory permanent fund was passed  by the legislature and vetoed                                                              
by  the governor.   He  said the  discussions in  1976 focused  on                                                              
making it a  flexible provision so that future  legislatures would                                                              
be able  to change the administrative  structure, purposes  of use                                                              
and other things.   He said the  only provisions that were  put in                                                              
the Constitution were  the concept of a trust fund,  the source of                                                              
income (25%  of certain  mineral royalties)  and that funds  could                                                              
not be withdrawn once they were in the corporate status.                                                                        
MR. HOGAN  said Wyoming had created  a payout provision  for their                                                              
public school  fund and permanent  mineral trust fund  by statute.                                                              
He said  other states did  the same thing  by statute  and through                                                              
their constitution.   He said it was historically  correct to make                                                              
this change by statute.  He didn't  understand why there should be                                                              
a constitutional  provision  when a statutory  provision  would do                                                              
the job.                                                                                                                        
3:35 p.m.                                                                                                                       
CHAIRMAN  TAYLOR  said  it seemed  that  SJR  13  would set  up  a                                                              
disconnect between the earnings and  dividends by going to a fixed                                                              
average percentile  instead of  the 5-year  income averaging.   He                                                              
asked if  SJR 13 would cause  dividends to eat into  the principal                                                              
of the fund.                                                                                                                    
MR. HOGAN  said from his own  research on the issue  he discovered                                                              
that there were  a number of endowments and trust  funds that used                                                              
the 5%  payout method.   The  theory is  that over  time it  would                                                              
allow for  inflation proofing of  the fund and allow  a reasonable                                                              
return of money to be used for other  purposes.  He said the State                                                              
had  more than  20  years  of experience  inflation  proofing  the                                                              
permanent fund by  statute by putting earnings  reserve money into                                                              
it and inflation  proofing on an  annual basis.  He said  that was                                                              
the  choice  of  those  individual  legislatures.    He  felt  the                                                              
permanent fund  had been  doubly inflation proofed.   He  said the                                                              
legislature should  retain the ability  to choose what to  do with                                                              
the income of the permanent fund.                                                                                               
SENATOR THERRIAULT  commented that  Mr. Hogan's letter  provided a                                                              
good synopsis of the history of the  permanent fund and what other                                                              
states were  doing.  He would probably  use the first part  of the                                                              
letter that talked  about the creation of the permanent  fund.  He                                                              
received an email from a constituent  that said the permanent fund                                                              
was created to dish  out dividends.  He was amazed  that there was                                                              
so much misinformation out there.                                                                                               
He  said  the  Senate  State  Affairs  committee  substitute  (CS)                                                              
addressed the  issue of the  possibility of eroding  the principal                                                              
of the  permanent fund.   He referred  to page  1, line  16, which                                                              
stated,  "Money  may be  appropriated  from the  earnings  reserve                                                              
account."   He said Section 1  specified that all income  from the                                                              
permanent fund  would be retained  in a separate  earnings reserve                                                              
account.   He  said  the  5% draw  was  limited to  that  earnings                                                              
reserve account and would not be taken from the principal.                                                                      
CHAIRMAN TAYLOR asked if there were  any further questions for Mr.                                                              
Hogan.   There were  none.  He  asked Ms.  Sheila Howe  to provide                                                              
MS. SHEILA  HOWE, N.E.C.,  said she  was a mother.   She  said she                                                              
spent most of  the summer reading over the information  on SJR 13.                                                              
She supports  SJR 13  because the bill  would give some  stability                                                              
and  permanency  to  the  inflation   proofing  qualities  of  the                                                              
permanent  fund.   She  understood  that  the permanent  fund  was                                                              
initially intended to  meet the needs of the state  in the future.                                                              
She wasn't  concerned  about the  dividends paid  out on a  yearly                                                              
basis.   She saw the  need to protect  the permanent  fund against                                                              
inflation and perpetuities and thought  SJR 13 was the best way to                                                              
accomplish that.                                                                                                                
SENATOR THERRIAULT asked if she was  in Alaska during the advisory                                                              
vote  on the  permanent fund  dealing with  the long-range  fiscal                                                              
MS.  HOWE said  she had  been in  Alaska  since 1969  and had  not                                                              
missed an election.                                                                                                             
SENATOR  THERRIAULT  asked if  she  felt comfortable  telling  the                                                              
committee how she voted.                                                                                                        
MS. HOWE was against that proposal  because of the way it was laid                                                              
out.  She wasn't against using the APF.                                                                                         
SENATOR THERRIAULT  said Mr. Eddie  Burke [ph.] said he  spoke for                                                              
Ms. Howe.   He said Mr. Burke's  editorials lumped Ms.  Howe's no-                                                              
vote with the  83% that voted against  the proposal.  He  said Ms.                                                              
Howe's position was very different than Mr. Burke's.                                                                            
CHAIRMAN TAYLOR asked Mr. Robert Storer to provide testimony.                                                                   
MR.  ROBERT  STORER, Executive  Director,  Alaska  Permanent  Fund                                                              
Corporation (APFC),  Department of  Revenue (DOR), said  the board                                                              
of APFC  believed that inflation  proofing should  be memorialized                                                              
in the  Constitution.  He  said that could  be done by  creating a                                                              
spending limit  of no more  than 5% of  the moving average  of the                                                              
APF over  a five-year period.   He said only the  earnings reserve                                                              
of the APF would  be available and the principal  of the APF would                                                              
be protected.  He said SJR 13 was  heard extensively in the Senate                                                              
State Affairs Committee.                                                                                                        
MR. JIM  KELLY, Director  of Communications,  APFC, DOR,  referred                                                              
the  committee  to  the  memorandum  from  Mr.  Storer  requesting                                                              
amendments  to SJR  13 dated  April 23,  2002.   He addressed  the                                                              
fourth paragraph  on page 2 of  the memorandum, which  requested a                                                              
technical amendment:                                                                                                            
     Sec.  30.  Transition.   On  the effective  date of  the                                                                 
     2002 amendments  relating to  the Alaska permanent  fund                                                                   
     (art.  IX,  sec.  15),  the  balance  [PORTION]  of  the                                                               
     statutory earnings reserve account  (AS 37.13.145) [THAT                                                                   
     CONSISTS   OF  INCOME]   of   the  permanent   fund   is                                                                   
     transferred to the earnings  reserve account established                                                                   
     in Section 15(a) [15(b)] of Article IX.                                                                                
MR.  KELLY   said  he  discussed   this  amendment   with  Senator                                                              
Therriault and  believed he  was supportive of  it.  He  said APFC                                                              
had not had time to show the Senate  State Affairs CS to the board                                                              
and  legal counsel  when it  was moved  out of  committee.   After                                                              
legal counsel reviewed the CS, it  was discovered that 15(b) would                                                              
need to be  changed to 15(a).   He said that was just  a technical                                                              
error.  The addition of the word  "balance" and the subtraction of                                                              
"that consists  of income" would  be necessary to make  the intent                                                              
clear.  He said  the APF's market value was the  combined total of                                                              
the principal,  the realized and  the unrealized income.   He said                                                              
5% of  that would be the  payout limit in  any given year,  all of                                                              
which would come from the earnings reserve account.                                                                             
He  asked for  a further  amendment  to add  the words  "inflation                                                              
proofing" after the  words "relating to" in the first  line of the                                                              
title.   He said SJR  13 was really  about inflation  proofing the                                                              
APF.   He said  the 5% limit  would ensure that  the APF  was made                                                              
permanent  in  the  Constitution.    He  said  as  long  as  those                                                              
provisions  were  in  the  Constitution,  APFC would  be  able  to                                                              
provide  a growing  income stream  in  addition to  what would  be                                                              
needed  to be  retained  to offset  inflation.    He believed  the                                                              
change  in the  title  would  make it  easier  for  the people  to                                                              
support SJR 13 at the polls after it passed the legislature.                                                                    
CHAIRMAN  TAYLOR moved  Amendment 1  to add  the words  "inflation                                                              
proofing" after the  words "relating to" on page 1,  line 1 in the                                                              
title; replace the word "portion"  with the word "balance" on page                                                              
2, line 9; strike  the words "that consists of income"  on page 2,                                                              
line 10; and replace "15(b)" with "15(a)" on page 2, line 11.                                                                   
3:50 p.m.                                                                                                                       
SENATOR THERRIAULT  said the  wording of the  title had  gone back                                                              
and forth between the legislative  drafters and the APFC.  He said                                                              
bill titles  were supposed  to express the  contents of  the bill.                                                              
He  understood  that  the  APFC  wanted  the  title  reworded  for                                                              
salesmanship but  inflation proofing didn't really  cover the full                                                              
contents of the  bill.  He said  SJR 13 was more than  just an act                                                              
dealing with  inflation proofing  because it would  set up  the 5%                                                              
draw.   He said inflation  proofing would  be accomplished  but he                                                              
didn't think that would be a correct title for the bill.                                                                        
SENATOR DONLEY said it wouldn't be a legal title.                                                                               
CHAIRMAN TAYLOR removed the title change from Amendment 1.                                                                      
MR. KELLY  said the  rest of the  amendment was for  clarification                                                              
purposes.  He said  the point of that section was  to transfer all                                                              
of  the  money  that  was in  the  earnings  reserve  account  and                                                              
everything  that everybody  thought  was in  the earnings  reserve                                                              
account.   He  said that  was currently  in  a statutory  earnings                                                              
reserve account and SJR 13 would  set up a constitutional earnings                                                              
reserve  account.   They  just  wanted to  be  sure  that the  two                                                              
accounts matched up.                                                                                                            
SENATOR  THERRIAULT  said  that  was added  in  the  Senate  State                                                              
Affairs Committee so that the legislature  wouldn't have access to                                                              
the earnings reserve  account by a simple majority  vote.  He said                                                              
the new  account would  be protected  and only  5% per year  would                                                              
come out.                                                                                                                       
MR.  KELLY said  the words  "that  consists of  income" should  be                                                              
stricken  because  they  suggested that  the  unrealized  earnings                                                              
would not be transferred when they should be.                                                                                   
SENATOR THERRIAULT  said they wanted to make sure  that everything                                                              
from the  statutory earnings  reserve account  got moved  into the                                                              
constitutional earnings reserve account.                                                                                        
CHAIRMAN TAYLOR asked if there was objection to Amendment 1.                                                                    
There being no objection, Amendment 1 was adopted.                                                                              
CHAIRMAN TAYLOR asked  if there was further discussion  on SJR 13.                                                              
There was none.  He asked if anyone  else wished to testify on SJR
13.  There was nobody.                                                                                                          
SENATOR  THERRIAULT  moved CSSJR  13(JUD)  out of  committee  with                                                              
attached fiscal note and individual recommendations.                                                                            
CHAIRMAN TAYLOR noted that there was an objection.                                                                              
Upon a roll call vote, Senators Cowdery,  Ellis and Therriault and                                                              
Chairman  Taylor voted  in favor  of moving CSSJR  13(JUD)  out of                                                              
committee and  Senator Donley voted  against moving  CSSJR 13(JUD)                                                              
out  of  committee.    Therefore,   CSSJR  13(JUD)  moved  out  of                                                              
committee by a vote  of four to one with attached  fiscal note and                                                              
individual recommendations.                                                                                                     

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