Legislature(1993 - 1994)

01/26/1994 09:06 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
 CHAIRMAN LEMAN brings up SJR 38 RESTRUCTURE PERMANENT FUND                    
 as the first order of business before the committee today.  The               
 chairman calls Senator Ellis, the prime sponsor of SJR 38, as the             
 first witness.                                                                
                                                                               
                                                                               
 Number 038                                                                    
                                                                               
 SENATOR ELLIS, prime sponsor of SJR 38, says that desperate times             
 require bold solutions, and this resolution is a bold solution.               
 SJR 38 would dramatically change the way the state finances state             
 government.  Senator Ellis announces that there are a number of               
 benefits to the plan contained in SJR 38.  First, the                         
 constitutional amendment would set in place a long-range fiscal               
 plan.  Second, we would have in place a way to deal with windfalls,           
 so that those windfalls would not automatically go into the general           
 fund.  Third, one of the results would be a general belt-                     
 tightening, so SJR 38 could be considered a constitutional spending           
 limit.  The final benefit would be a much bigger permanent fund               
 under which dividends are more secure, in his view, than under the            
 current system.                                                               
                                                                               
 Number 098                                                                    
                                                                               
 SENATOR ELLIS poses a question to critics of SJR 38, asking if they           
 have a better plan.  He says some people deny that the state is               
 having problems with finances, but that most people recognize that            
 the state is having financial problems.  Senator Ellis is willing             
 to work with anyone to come up with potential solutions to the                
 problem with state finances.                                                  
                                                                               
 Number 120                                                                    
                                                                               
 CHAIRMAN LEMAN thanks Senator Ellis and recognizes the issue as an            
 important one.  He feels that the state budget should be forward              
 funded in order to level out spending and break some of the                   
 existing cycles.  SJR 38 would accomplish some of those goals.  The           
 chairman calls for Mr. Cremo to testify.                                      
                                                                               
 Number 133                                                                    
                                                                               
 ROGER CREMO, testifying from Anchorage, thinks that one of the                
 problems the state has arises from reductions in state spending.              
 Minor reductions are tolerable, but substantial reductions, such as           
 those that occurred in 1986, are not tolerable.  The economy in               
 Alaska is very dependent on government spending and is greatly                
 effected by substantial reductions.  The economy of Alaska differs            
 from that of other states in that there is a dearth of private                
 property and private wealth; the result of which is the economy is            
 heavily dependent upon state spending.  The wealth in Alaska is               
 based on natural resources.                                                   
                                                                               
 Number 162                                                                    
                                                                               
 MR. CREMO states that fluctuations in state income and state                  
 spending are the result of the present system of finance in Alaska.           
 He then makes an analogy between the liquid resource in the ground            
 (oil) and the liquidity of the wealth above the ground.  All of the           
 financial resources and budget reserves of the state are too                  
 liquid.  When these very spendable "liquid" funds are enlarged, the           
 legislature spends more money, and when the "liquid" funds shrink,            
 the legislature spends less.  He believes the result of this                  
 occurrence is instability in the economy.                                     
                                                                               
 Number 212                                                                    
                                                                               
 MR. CREMO says that we must determine that some portion of this               
 "liquid" wealth be protected from spending.  Under SJR 38, all                
 natural resource revenues would flow into the permanent fund, which           
 is protected from appropriation.  We would then determine what                
 percentage of money would be available for withdrawal from the                
 permanent fund every year.  The amount withdrawn would not be so              
 great that it would not allow the fund to grow.  The reasoning                
 behind this idea is that by having sustainable spending, the                  
 economy will not fluctuate.                                                   
                                                                               
 Number 240                                                                    
                                                                               
 MR. CREMO says this can be accomplished by declaring                          
 constitutionally that all natural resource revenues and all the               
 money in various principal funds be put into the permanent fund,              
 declared off-limits to spending, and invested.  Once the money is             
 invested, the income from the money would remain in the fund, with            
 the exception of an appropriate percentage of the income, which               
 would be withdrawn for the state budget.  Mr. Cremo believes that             
 6% would be an appropriate percentage for withdrawal, taking into             
 account an inflation rate of approximately 4%, which is his                   
 estimate.  He thinks the rate of withdrawal should remain constant            
 at 6% every year, rather than changing it to reflect the annual               
 earnings of the permanent fund.  The earnings should be calculated            
 from the market value of the twelve preceding calendar quarters, or           
 three years.  By using the twelve preceding calendar quarters for             
 calculation of earnings, the legislature would know how much money,           
 to the penny, would be available for expenditure the following                
 fiscal year.                                                                  
                                                                               
 Number 298                                                                    
                                                                               
 CHAIRMAN LEMAN thanks Mr. Cremo for his testimony and asks if there           
 are any questions.  Hearing none, he announces that SJR 38 will               
 also be heard Friday, January 28, 1994.  The chairman then calls              
 witnesses from the Permanent Fund Corporation.                                
                                                                               
 Number 307                                                                    
                                                                               
 WILLIAM H. SCOTT, Executive Director, Permanent Fund Corporation,             
 and JIM KELLY, Research & Liaison Officer, Permanent Fund                     
 Corporation, introduce themselves.                                            
                                                                               
                                                                               
 Number 313                                                                    
                                                                               
 WILLIAM H. SCOTT states the Permanent Fund Corporation has given              
 the committee all the financial data that has been accumulated by             
 the corporation, and that he and Mr. Kelly are available for                  
 questions.  The accuracy of the data is subject to the assumptions            
 that have been made, so every time there is a new assumption, there           
 will be a new answer.                                                         
                                                                               
 Number 321                                                                    
                                                                               
 CHAIRMAN LEMAN asks Mr. Scott if he is satisfied with the                     
 definitions contained in SJR 38, and if they will be clear to                 
 future interpreters of the constitutional amendment.                          
                                                                               
 Number 329                                                                    
                                                                               
 MR. SCOTT replies it is hard to tell.                                         
                                                                               
 Number 336                                                                    
                                                                               
 MR. KELLY comments he thinks the language relating to allocation of           
 revenues into the permanent fund are pretty clear, though he does             
 have questions about the money that would be withdrawn from the               
 fund.  He is not sure the constitution is a good place to specify             
 a percentage to be taken out for budgetary needs, since earnings              
 and interest rates will change over time.  Mr. Kelly thinks a more            
 legitimate approach would be the one set forth in Senator Rieger's            
 bill, SB 170, which would measure the amount of money to be                   
 withdrawn for budgetary use in terms of real earnings.                        
                                                                               
 Number 355                                                                    
                                                                               
 MR. SCOTT asks the committee to recognize while the permanent fund            
 has earned a very respectable 11% average total return over the               
 last fifteen years, we have been in the biggest bull market of                
 history.  So the earnings of the past fifteen years have to reflect           
 some of the exceptional economic increases we've had as a country.            
 However, if the bubble were to burst, you may not see 11% returns             
 on the permanent fund, and you may, at the same time, see a higher            
 level of inflation.  He echoes Mr. Kelly's concern regarding                  
 putting a fixed number in a constitutional amendment.  He does not            
 think that would serve the best interest of everyone, simply                  
 because we would need some flexibility in the future.                         
                                                                               
 Number 373                                                                    
                                                                               
 CHAIRMAN LEMAN asks if Mr. Scott thinks 20% in the initial year is            
 too high a figure.  He remarks that he, also, is not comfortable              
 with a fixed rate of 6% for some of the same reasons Mr. Scott and            
 Mr. Kelly are not comfortable with it.  The chairman thinks perhaps           
 the percentage could be tied to real earnings in some way.  The               
 plan, in concept, makes sense to him, but perhaps some of the                 
 details need to be refined.                                                   
                                                                               
 Number 380                                                                    
                                                                               
 MR. KELLY says that the Permanent Fund Corporation has done a run             
 using the assumption of low-case revenue forecasts.  The figures              
 used were 8.37% earnings over five years with a 4% inflation rate.            
 Assuming those factors over that period of time (five years), the             
 amount of money going into the fund, even with a 20% withdrawal               
 rate, would be greater than the amount of money coming out of the             
 fund.                                                                         
                                                                               
 Number 390                                                                    
                                                                               
 MR. CREMO understands why Mr. Scott and Mr. Kelly would like to see           
 the real growth approach to withdrawal, but thinks that approach is           
 backwards.  He says the state would be right back in the budgetary            
 fluctuations we are experiencing now; we would change from oil and            
 gas fluctuations to market fluctuations.  It would be a steadier              
 course to use the fixed percentage approach.  It is an approach the           
 Ford Foundation has used for years.  Mr. Cremo asserts the                    
 permanent fund operation has been one of "coupon clipping", or                
 essentially a bond fund, and not very dynamic.  He says the                   
 proposed 20% withdrawal figure for the initial year was arrived at            
 because he thinks it is a figure legislators could live with.  He             
 does, however, think the initial figure should be lower, perhaps              
 17%.                                                                          
                                                                               
 Number 444                                                                    
                                                                               
 SENATOR DUNCAN asks if printouts which were referred to earlier               
 from the Permanent Fund Corporation are available.  Mr. Kelly                 
 replies that he will leave a copy with the committee today so that            
 members can review the information before the next committee                  
 meeting.                                                                      
                                                                               
 Number 449                                                                    
                                                                               
 SENATOR ELLIS comments that House Research and the House Finance              
 Committee are also doing a number of runs.  He will provide those             
 to the committee also, but is not sure when they will be available.           
                                                                               
 Number 455                                                                    
                                                                               
 MR. SCOTT makes one other observation, which is that the Permanent            
 Fund Corporation takes no position on this legislation, and their             
 only objective is to provide information on the issue to the                  
 committee.                                                                    
                                                                               
                                                                               
 Number 466                                                                    
                                                                               
 CHAIRMAN LEMAN states he is impressed with the performance of the             
 corporation and the quality of its staff, and hopes the corporation           
 can help analyze and develop the plan set forth in SJR 38.  The               
 chairman calls the next witness.                                              
                                                                               
 Number 475                                                                    
                                                                               
 VINCENT O'REILLY, testifying from Kenai, says many people have come           
 to two conclusions: first, there is a budget problem and                      
 forthcoming fiscal gap, and second, this state has a budget                   
 mechanism problem.  There are at least three deficiencies under the           
 present budget mechanism system.  Those deficiencies are violent,             
 unpredictable fluctuation of revenues, unbearable pressures on the            
 legislature to appropriate in a prudent manner, and the creation              
 and sustenance of the boom-bust cycle both in the private economy             
 and in government activities and programs.  He thinks SJR 38 would            
 tend to greatly resolve the budget mechanism problem.                         
                                                                               
 Number 519                                                                    
                                                                               
 MR. O'REILLY  adds several other factors he believes are important            
 in the consideration of this plan: one, it would encourage and                
 support the growth of the permanent fund principal, secondly, the             
 size of the permanent fund dividend would still rest with the                 
 legislature, and third, SJR 38 would tie the general fund to the              
 permanent fund.  Mr. O'Reilly asserts that SJR 38 has received                
 relatively wide-spread support on the Kenai Peninsula.  In                    
 addition, the Alaska Conference of Mayors unanimously endorsed                
 criteria calling for budget reform; this plan fills the criteria.             
 Drastic times call for drastic action.  He paraphrases Winston                
 Churchill, saying, "fiscally, this was...(the legislature's) finest           
 hour."                                                                        
 Number 542                                                                    
                                                                               
 CHAIRMAN LEMAN thanks Mr. O'Reilly for his testimony and calls the            
 next witness.                                                                 
                                                                               
 Number 543                                                                    
                                                                               
 JOHN WILLIAMS, Kenai Mayor, testifying from Kenai, states he is               
 representing the views of the city of Kenai, and hopes he also                
 represents the views of the Alaska Conference of Mayors.  A                   
 resolution relating to this subject which embodied most of the                
 philosophy of SJR 38 was adopted by the Alaska Conference of                  
 Mayors.  Mr. Williams philosophizes about the history of the state            
 and its budget system and financial operations.  He notes that one-           
 third of the money the state has earned has been saved, which is              
 extremely unusual.                                                            
                                                                               
                                                                               
 TAPE 94-4, SIDE A                                                             
 Number 579                                                                    
                                                                               
 MR. WILLIAMS contends an annuity government is probably the finest            
 type of government we could possibly have, and would encourage                
 growth and encourage further development of small businesses and              
 small industry in the state.  He thinks an annuity government would           
 solve some of the problems with stagnated resource development that           
 is occurring today.  We want to leave a legacy for our children and           
 grandchildren, and give them the same chances we have had.  We now            
 have the grand opportunity to be the creators of a major legacy for           
 our children and grandchildren.                                               
                                                                               
 Number 525                                                                    
                                                                               
 CHAIRMAN LEMAN thanks Mr. Williams for his testimony and calls the            
 next witness.                                                                 
                                                                               
 Number 522                                                                    
                                                                               
 KAREN DEMPSTER, testifying from Anchorage, wants the cycle of boom            
 and bust changed.  She believes the legislature has both the                  
 ability and the resources to change the boom and bust cycle.                  
 Economic stability is important.  We can use the budget reserve               
 account to make the transition to an annuity-funded government very           
 easy, with little disruption.  Economic stability is an incentive             
 for development.                                                              
                                                                               
 Number 473                                                                    
                                                                               
 CHAIRMAN LEMAN thanks Ms. Dempster for her testimony and announces            
 that SJR 38 will be held over until Friday, January 28, 1994.                 

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