Legislature(2001 - 2002)

02/20/2002 01:42 PM House FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                   HOUSE FINANCE COMMITTEE                                                                                      
                      February 20, 2002                                                                                         
                          1:42 P.M.                                                                                             
                                                                                                                                
TAPE HFC 02   28, Side A                                                                                                        
TAPE HFC 02 - 28, Side B                                                                                                        
TAPE HFC 02 - 29, Side A                                                                                                        
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Williams   called  the  House   Finance  Committee                                                                    
meeting to order at 1:42 P.M.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Eldon Mulder, Co-Chair                                                                                           
Representative Bill Williams, Co-Chair                                                                                          
Representative Con Bunde, Vice-Chair                                                                                            
Representative Eric Croft                                                                                                       
Representative John Davies                                                                                                      
Representative Richard Foster                                                                                                   
Representative John Harris                                                                                                      
Representative Bill Hudson                                                                                                      
Representative Ken Lancaster                                                                                                    
Representative Carl Moses                                                                                                       
Representative Jim Whitaker                                                                                                     
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative Gary  Stevens; Tamara Cook,  Director, Alaska                                                                    
Legislative  Legal and  Research  Services; Tim  Benintendi,                                                                    
Staff,  Representative  Carl  Moses; Kevin  Ritchie,  Alaska                                                                    
Municipal  League,   Juneau;  Jack  Kreinheder,   Office  of                                                                    
Management  and   Budget,  Office  of  the   Governor;  Bill                                                                    
Rolfzen,   State  Revenue   Sharing  Municipal   Assistance,                                                                    
National Forest Receipts, Fish  Tax, Department of Community                                                                    
&   Economic    Development;   Jim   Kelly,    Director   of                                                                    
Communications, Alaska Permanent Fund Corporation.                                                                              
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 20     An  Act relating  to state  aid to  municipalities                                                                    
          and certain other recipients,  and for the village                                                                    
          public   safety  officer   program;  relating   to                                                                    
          municipal  dividends;   relating  to   the  public                                                                    
          safety  foundation program;  and providing  for an                                                                    
          effective date.                                                                                                       
                                                                                                                                
          HB 20 was HEARD and  HELD in Committee for further                                                                    
          consideration.                                                                                                        
                                                                                                                                
#HB20                                                                                                                         
HOUSE BILL NO. 20                                                                                                             
                                                                                                                                
     An  Act relating  to state  aid  to municipalities  and                                                                    
     certain other  recipients, and  for the  village public                                                                    
     safety   officer   program;   relating   to   municipal                                                                    
     dividends;  relating to  the  public safety  foundation                                                                    
     program; and providing for an effective date.                                                                              
                                                                                                                                
TIM BENINTENDI, STAFF, REPRESENTATIVE CARL MOSES, explained                                                                     
that  the  establishment  of a  Municipal  Dividend  program                                                                    
would provide Alaskan municipalities  with a predictable and                                                                    
reliable  source  of  income with  which  to  address  basic                                                                    
community  needs.  Currently,  full  funding  for  essential                                                                    
services is unmet,  in part, due to a  declining State muni-                                                                    
cipal   assistance   and   revenue  sharing   general   fund                                                                    
allocations.  Increases  in  local property  taxes  are  not                                                                    
always  the answer,  especially  in  many communities  where                                                                    
there is an insufficient tax base to draw upon.                                                                                 
                                                                                                                                
Mr. Benintendi noted that HB 20 would repeal the current                                                                        
revenue   sharing  and   safe  communities   programs,  thus                                                                    
allowing  for  a  general  fund  cut  of  approximately  $51                                                                    
million.  It  would fund  defined  basic  services from  the                                                                    
surplus earnings  of the  Permanent Fund at  a rate  of $150                                                                    
per dividend  recipient, only  after inflation  proofing and                                                                    
only after  payment of individual dividends.  The plan would                                                                    
provide approximately $89  million dollars to municipalities                                                                    
in  the next  fiscal year  (FY03).   It clearly  defines the                                                                    
uses  to which  funding may  be applied,  and would  provide                                                                    
minimum  amounts  for  small  municipalities  ($45,000)  and                                                                    
unincorporated communities.                                                                                                   
                                                                                                                                
Mr. Benintendi added that it would not require a                                                                                
constitutional  amendment, nor  would it  require a  vote of                                                                    
the  public.   Approval of  the municipal  dividend plan  is                                                                    
fully within  the authority of  the legislature.   Within HB
20,  annual  legislative   powers  of  appropriation  remain                                                                    
intact. The  bill's impact on  an individual  dividend check                                                                    
is slight  over time, with  estimates by the  Permanent Fund                                                                    
Corporation at  approximately $20 in nine  years.  Measuring                                                                    
that  against  the value  of  adequate  local police,  fire,                                                                    
emergency  medical  technicians  (EMT's), health  care,  and                                                                    
road   maintenance  services   of   benefit  to   individual                                                                    
residents over the same time period.                                                                                            
                                                                                                                                
Mr. Benintendi commented that given the State's inability                                                                       
to  substantially cut  the operating  budget, and  given our                                                                    
apprehension for raising new revenues,  Alaska needs to look                                                                    
at  using surplus  earnings of  the permanent  fund in  some                                                                    
effective way.  HB 20 is,  in part, what the earnings of the                                                                    
permanent fund  were destined for.   The  municipal dividend                                                                    
program  responds  to  the   continued  reduction  in  State                                                                    
funding  to  municipalities,  and   would  be  an  effective                                                                    
counter to the  popularity of a local tax cap  solution.  HB
20  is effective,  reliable, and  accountable.   HB 20  is a                                                                    
plausible component of a long-range fiscal plan.                                                                                
                                                                                                                                
Mr.  Benintendi  stated  that  the  Community  and  Regional                                                                    
Affairs  version of  the  legislation  changed the  original                                                                    
bill by changing the effective date  to June 30, 2001.  That                                                                    
date  needs to  be changed  for  the program  to begin  this                                                                    
year.                                                                                                                           
                                                                                                                                
Mr. Benintendi highlighted the bill which will:                                                                                 
                                                                                                                                
     •    Put new  money into the economy  instead of taking                                                                    
          it out by way of new taxes;                                                                                           
     •    Stand  alone   or  package  component   of  fiscal                                                                    
          reform/long-term plan;                                                                                                
     •    Retain annual legislative  powers of appropriation                                                                    
          and program accountability is assured;                                                                                
     •    Create  $51   million  dollars  in   general  fund                                                                    
          reductions  because of  repeal of  Revenue Sharing                                                                    
          and  Safe Communities  programs.   More reductions                                                                    
          will be possible if other  services in the general                                                                    
          fund are cut;                                                                                                         
     •    Return  considerable  decision-making  opportunity                                                                    
          to local governing entities, including the option                                                                     
          for local property tax relief.                                                                                        
                                                                                                                                
Mr. Benintendi listed the program provisions:                                                                                   
                                                                                                                                
     •    Public Safety foundation                                                                                              
     •    Road maintenance                                                                                                      
     •    Ice road maintenance                                                                                                  
     •    Fire fighting services                                                                                                
     •    EMT services                                                                                                          
     •    Police services                                                                                                       
     •    Education supplement                                                                                                  
     •    Health facilities & hospitals                                                                                         
    •    Village Public Safety Officers (VPSO) services                                                                         
     •    Minimum entitlement                                                                                                   
     •    Municipal matching grants                                                                                             
                                                                                                                                
Mr. Benintendi stated that HB 20 would apply to:                                                                                
                                                                                                                                
     •    16 boroughs,  49 munis  within boroughs,  96 munis                                                                    
          in the unorganized boroughs;                                                                                          
     •    Approximately  70 unorganized  communities in  the                                                                    
          unorganized borough;                                                                                                  
     •    And if amended,  HB 20 could apply  to another 65-                                                                    
        70 unorganized communities within boroughs.                                                                             
                                                                                                                                
Co-Chair  Williams advised  that it  was not  his intent  to                                                                    
move the bill from Committee at this time.                                                                                      
                                                                                                                                
Vice-Chair  Bunde  inquired  about   the  use  of  the  term                                                                    
"entitlement" throughout  the bill.   He asked if  there was                                                                    
another  word  that could  be  used  that would  be  equally                                                                    
descriptive.                                                                                                                    
                                                                                                                                
Mr. Benintendi acknowledged  that consideration had surfaced                                                                    
in discussion.   He noted  that there would be  no objection                                                                    
using a synonym for entitlement.                                                                                                
                                                                                                                                
Vice-Chair  Bunde  asked  if  the  money  being  moved  into                                                                    
education could likely become a property tax relief.                                                                            
                                                                                                                                
Mr. Benintendi responded that any  option was possible.  The                                                                    
intent is  for there to  be a  little "assist" on  the local                                                                    
level.   The local  assembly would  determine the  impact on                                                                    
local property taxes.                                                                                                           
                                                                                                                                
Vice-Chair Bunde asked if the  sponsor was willing to give a                                                                    
more firm  direction that  the money  be used  for education                                                                    
and not property tax exemption.                                                                                                 
                                                                                                                                
Representative Moses explained that  the intent was that the                                                                    
decisions be made on the local level.                                                                                           
                                                                                                                                
Vice-Chair  Bunde  referenced federal  guidelines  regarding                                                                    
local contributions.  He asked  how funding would be handled                                                                    
in areas that have both VPSO's and local police.                                                                                
                                                                                                                                
Mr.  Benintendi  explained  that the  communities  would  be                                                                    
eligible for  the allocation from  the police  components of                                                                    
the bill and the VPSO program.                                                                                                  
                                                                                                                                
Representative Davies  referenced the spreadsheet  and asked                                                                    
for  a  general overview  of  that  information.   [Copy  on                                                                    
File].                                                                                                                          
                                                                                                                                
Mr. Benintendi  explained that  those numbers  are estimates                                                                    
and might not quite meet the $89 million dollars.                                                                               
                                                                                                                                
Representative  Davies  inquired  if the  subsections  might                                                                    
total more than the draw.                                                                                                       
                                                                                                                                
Mr.  Benintendi did  not think  so.   He added  that it  was                                                                    
possible that  it could  be less.   He  thought it  would be                                                                    
close either way.                                                                                                               
                                                                                                                                
Representative Davies referenced Page 8  & 9, and the phrase                                                                    
"each individual  would receive a service".   He recommended                                                                    
that terminology be narrowed.                                                                                                   
                                                                                                                                
Representative Lancaster inquired if  an allocation would be                                                                    
raised on the local level.                                                                                                      
                                                                                                                                
Mr.  Benintendi replied  that it  could.   He stressed  that                                                                    
local option would be made by local determination.                                                                              
                                                                                                                                
Representative Hudson referenced the  flow of the money into                                                                    
the new  Municipal Dividend Fund  managed by  the Department                                                                    
of  Community &  Economic  Development.   He  asked if  they                                                                    
would be responsible to establish the regulatory processes.                                                                     
                                                                                                                                
Mr.  Benintendi  replied  that  they would.    Many  of  the                                                                    
existing provisions  would remain  in place.   The  bill has                                                                    
not been  designed to adjust  the operational  procedures in                                                                    
any  of  the  programs.    The  Department  of  Community  &                                                                    
Economic  Development  would  have the  authority  to  write                                                                    
regulations.  He pointed out the  two zero fiscal notes.  He                                                                    
thought  that  there  would be  some  minor  adjustments  to                                                                    
accommodate the program.  Whatever  is in the budget will be                                                                    
sufficient for the Department to manage the program.                                                                            
                                                                                                                                
Representative  Whitaker  questioned  if the  intention  was                                                                    
that  the  funding source  would  replace  any general  fund                                                                    
expenditures.                                                                                                                   
                                                                                                                                
Representative Croft  referenced the revenue  sharing amount                                                                    
of  $29 million  dollars.   He  asked if  there was  another                                                                    
source  of  money that  could  increase  it to  $51  million                                                                    
dollars.                                                                                                                        
                                                                                                                                
Mr. Benintendi  requested that  the Department  clarify that                                                                    
information.   He  elaborated  that  revenue sharing  totals                                                                    
approximately $30  million dollars, the VPSO  amount is $7.5                                                                    
million  dollars, and  the municipal  capital-matching grant                                                                    
is approximately $15 million dollars.                                                                                           
                                                                                                                                
Vice-Chair  Bunde asked  if the  Department  of Community  &                                                                    
Economic Development  would be administering the  grant.  He                                                                    
foresaw each entity competing for  the funds, and questioned                                                                    
how the determination  would be made regarding  who gets the                                                                    
money.                                                                                                                          
                                                                                                                                
Mr.  Benintendi replied  that  the  municipality would  make                                                                    
that  determination within  the organized  communities.   In                                                                    
the unorganized communities,  the Department would recognize                                                                    
a local  council or other entity.   There would only  be one                                                                    
choice  in   each  community.     He  reiterated   that  the                                                                    
Department would make the  determination when a municipality                                                                    
does not exist.                                                                                                                 
                                                                                                                                
Representative Davies  noticed that $15 million  dollars was                                                                    
listed as  capital matching grants.   He was  surprised that                                                                    
money was included, as he thought it was not being funded.                                                                      
                                                                                                                                
Mr. Benintendi understood that program  would be funded with                                                                    
what  was remaining  after the  other two  had been  funded.                                                                    
The amount would not be fixed from one year to the next.                                                                        
                                                                                                                                
Mr. Benintendi  added that there  could be years  when money                                                                    
available in the program would  not be allocated as outlined                                                                    
in  the bill,  as  it  would be  determined  on a  prorating                                                                    
basis.                                                                                                                          
                                                                                                                                
Co-Chair   Mulder  clarified   that  through   the  proposed                                                                    
program,   by  using   alternative   means,  the   Municipal                                                                    
Assistance  and   Safe  Communities  would   fund  municipal                                                                    
assistance  and capital  matching  grants.   He pointed  out                                                                    
that  those two  components currently  compromise about  $67                                                                    
million  dollars in  the State's  budget.   Last year,  that                                                                    
amount  was  $51 million  dollars.    That amount  would  be                                                                    
funded  through  the  earnings  reserve  fund  and  not  the                                                                    
general fund.                                                                                                                   
                                                                                                                                
Representative  Croft asked  the correct  amounts for  State                                                                    
revenue sharing and safe communities.                                                                                           
                                                                                                                                
BILL  ROLFZEN, STATE  REVENUE SHARING  MUNICIPAL ASSISTANCE,                                                                    
NATIONAL FOREST RECEIPTS, FISH  TAX, DEPARTMENT OF COMMUNITY                                                                    
&  ECONOMIC DEVELOPMENT,  advised that  the revenue  sharing                                                                    
contribution  for  FY02 was  $12.855  million  and the  safe                                                                    
communities appropriation  was $16.775  million, a  total of                                                                    
$29.603 million.                                                                                                                
                                                                                                                                
Representative   Whitaker   noted   that  there   had   been                                                                    
indication  from   previous  testimony  that   the  earnings                                                                    
reserve  was unable  to  pay  out, in  any  given year,  the                                                                    
amount formulated.                                                                                                              
                                                                                                                                
Mr. Benintendi  recalled that  there is  a provision  in the                                                                    
bill which addresses pro-ration concerns.                                                                                       
                                                                                                                                
Mr. Rolfzen noted that concern  was addressed in Section 11,                                                                    
Page 14, Line  11: "The amount is  calculated by multiplying                                                                    
$150 by the  number of permanent fund dividends  paid by the                                                                    
Department".    That  amount would  go  into  the  municipal                                                                    
dividend  fund from  which  the  Legislature would  annually                                                                    
draw money to pay for programs.                                                                                                 
                                                                                                                                
Co-Chair  Williams directed  his question  to the  Permanent                                                                    
Fund  Corporation  regarding  the  Permanent  Fund  Earnings                                                                    
Reserve.    He commented  that  fund  was an   uncomfortable                                                                    
source" for the proposed fund.                                                                                                  
                                                                                                                                
JIM  KELLY,  DIRECTOR  OF COMMUNICATIONS,  ALASKA  PERMANENT                                                                    
FUND  CORPORATION, advised  that  the  earnings reserve  has                                                                    
dropped in value  over the last year due to  the fact of the                                                                    
$1 billion  dollar dividend payout, the  $700 million dollar                                                                    
transfer of  money to principle  for inflation  proofing and                                                                    
the $600 million  dollar decline in the market  value of the                                                                    
fund due to a negative 3.3%  rate of return last year.  This                                                                    
year,  the negative  rate  continues.   For  the last  seven                                                                    
months, the  fund has  had a  total return  of  1.25%.   The                                                                    
amount of  unrealized income  is declining  as the  value of                                                                    
the assets  decline.   Managers are  selling stocks  and are                                                                    
taking losses when selling those stocks.                                                                                        
                                                                                                                                
Mr. Kelly  pointed out that  through January,  the statutory                                                                    
net  income of  the  permanent fund  has  been $132  million                                                                    
dollars, the same amount through  the past seven months.  He                                                                    
added that  he has seen  times when that number  was doubled                                                                    
in  a one-month  period.   The statutory  net income  is the                                                                    
cash  money generated  from interest  on the  bonds and  the                                                                    
dividends on  the stock,  the cash flow  on the  real estate                                                                    
and the  net of  gains and  losses from  selling securities.                                                                    
That amount  is added to  the earnings reserve  account that                                                                    
the State had  last year of $3.6 million dollars  as of June                                                                    
30th.    From that  combined  total  will come  next  year's                                                                    
dividend and  the inflation proofing,  which will  draw down                                                                    
the realized earnings close to  $900 million dollars.  Based                                                                    
                     th                                                                                                         
on that,  by June  30,   the earnings  reserve will  be $2.6                                                                    
billion  dollars, which  will  be the  amount  that will  be                                                                    
available to the Legislature to appropriate.                                                                                    
                                                                                                                                
Co-Chair  Williams asked  how long  this  type of  financial                                                                    
environment  could last.   He  understood that  the proposed                                                                    
legislation would  "eat" $89 million dollars  of that amount                                                                    
per year.                                                                                                                       
                                                                                                                                
Mr.   Kelly   advised   that  he   could   not   make   that                                                                    
determination.   The  best estimate  of  what the  permanent                                                                    
fund will make next year is  an 8% earnings.  If that amount                                                                    
is earned, the balance will  increase next year, which would                                                                    
make the  addition of $56  million dollars of  realized gain                                                                    
in the  permanent fund.  He  stated that would be  plenty to                                                                    
pay for the municipal dividend.                                                                                                 
                                                                                                                                
Representative  Whitaker  spoke  to  the  possible  scenario                                                                    
presented  last  week  by the  Permanent  Fund  Corporation,                                                                    
which  indicated a  decline  in the  value  of the  earnings                                                                    
reserve.  He commented that  the general fund draws from the                                                                    
capital budget  reserve (CBR), in  the same manner  that the                                                                    
permanent fund draws  from the earnings reserve.   Given the                                                                    
usage of the CBR by the  general fund at the amount which is                                                                    
being drawn, it appears that  in FY05, there will be nothing                                                                    
left in the  CBR.  Another significant  funding source would                                                                    
need to be found to replace it.                                                                                                 
                                                                                                                                
Mr. Kelly responded that in  FY05, the best estimate is that                                                                    
there will  be $4  billion dollars  in the  earnings reserve                                                                    
account.   The Permanent  Fund Corporation does  not project                                                                    
that account  should diminish over  the next  several years.                                                                    
The dividend will diminish but  the earnings reserve account                                                                    
should grow  modestly as  the fund  grows at  its 8%.   That                                                                    
account is available for appropriation by the Legislature.                                                                      
                                                                                                                                
Representative Whitaker  disagreed, pointing out  that since                                                                    
$1 billion dollars  per year is taken from  that account, it                                                                    
would  not be  sustainable.   He thought  that consideration                                                                    
should  be  addressed  before  contemplating  to  spend  $89                                                                    
million dollars per year from that account.                                                                                     
                                                                                                                                
Co-Chair  Mulder   agreed  with   the  point   presented  by                                                                    
Representative Whitaker.   He asked  how the  proposal could                                                                    
be a  part of the  puzzle in relationship to  functions that                                                                    
heretofore have  been paid for  through general funds.   Co-                                                                    
Chair Mulder thought  that it could be a  solution, as those                                                                    
functions for  local entities would decide  where that money                                                                    
goes.  He  believed that it would allow  more flexibility as                                                                    
it  provides for  the option  of  property tax  relief.   It                                                                    
would put  the money back  into local communities  for local                                                                    
determination.                                                                                                                  
                                                                                                                                
Co-Chair  Williams  requested  that this  discussion  remain                                                                    
open  including  the  Permanent  Fund  Corporation  and  the                                                                    
Department.  He encouraged  that the legislator's statements                                                                    
be held until the end of the discussion.                                                                                        
                                                                                                                                
Representative  Croft asked  how  the bare  market from  the                                                                    
past  two  years has  affected  the  range of  the  earnings                                                                    
reserve.   That reserve  has been much  less what  the State                                                                    
has been  use to  receiving.  He  advised that  every dollar                                                                    
removed  from  the  reserve,  reduces  the  cushion  of  the                                                                    
Permanent Fund.                                                                                                                 
                                                                                                                                
                                                                                                                                
TAPE HFC 02 - 28, Side B                                                                                                      
                                                                                                                                
                                                                                                                                
Mr.  Kelly  explained  that  the  permanent  fund  could  be                                                                    
expected to  earn an  8% rate  of return.   Mr.  Kelly added                                                                    
that  if that  fund is  inflation proofed,  the State  could                                                                    
count on  a 5% payout  each year and  will be money  that is                                                                    
available for any purposes.                                                                                                     
                                                                                                                                
Representative  Croft  interjected  that the  State  is  now                                                                    
taking $90 million per year  from the earnings reserve.  The                                                                    
impact will have  a small effect on the permanent  fund.  He                                                                    
commented  that action  would further  increase the  risk of                                                                    
that fund over a period of time.                                                                                                
                                                                                                                                
Mr. Kelly  explained that given the  outside limits proposed                                                                    
by  Representative Croft,  there  is a  25% likelihood  that                                                                    
could happen;  however, there  is a  50% likelihood  that it                                                                    
would  be higher  than that  number.   He acknowledged  that                                                                    
anything was possible.                                                                                                          
                                                                                                                                
Representative Croft  asked what level of  annual withdrawal                                                                    
from the  earnings reserve could  the permanent  fund secure                                                                    
for an adequate cushion.                                                                                                        
                                                                                                                                
Mr. Kelly responded that given  the existing requirements in                                                                    
law for  the use of earnings,  the bottom would not  be seen                                                                    
for the next  couple years even if the market  stayed as low                                                                    
as  it currently  is.   He  reiterated  that the  withdrawal                                                                    
limit  risk  must be  determined  by  the Legislature.    He                                                                    
advised that  the State has  a $2.6 billion  dollar earnings                                                                    
reserve account and a $21 billion dollar principle.                                                                             
                                                                                                                                
Vice-Chair Bunde  understood that the money  is available to                                                                    
be appropriated  through the hold  harmless clause  and then                                                                    
placing it back into the corpus.   He asked if the Permanent                                                                    
Fund  Corporation  would take  a  position  on the  proposed                                                                    
legislation  and if  they  were  comfortable spending  those                                                                    
reserves.                                                                                                                       
                                                                                                                                
Mr. Kelly emphasized that the  Permanent Fund Corporation is                                                                    
on record  stating that  the State can  count of  $1 billion                                                                    
dollars every  year or the  State can spend that  much money                                                                    
every year.  To keep things  the way they are, the State can                                                                    
spend another $175  to $300 million dollars  and the comfort                                                                    
of  the  Corporation  would  be   fine.    The  State  could                                                                    
comfortably  take that  amount every  year.   He added  that                                                                    
$1.2 billion dollars  per year, over a  20-year time period,                                                                    
provides twice as much money  as the State will receive from                                                                    
oil.                                                                                                                            
                                                                                                                                
Representative  Hudson commented  that the  earnings reserve                                                                    
account  is a  composite of  realized and  unrealized gains.                                                                    
The unrealized gains are the  difference of the value of the                                                                    
portfolio within the corpus of  the fund when bought and the                                                                    
value  at  this  time.    If nothing  changes  by  2004,  he                                                                    
questioned how much would remain.                                                                                               
                                                                                                                                
Mr. Kelly  expected that there  could be $2  billion dollars                                                                    
in each portion of the earnings reserve account.                                                                                
                                                                                                                                
Representative Hudson  noted to  receive that  would require                                                                    
selling off  stock to  get at  the corpus of  the fund.   In                                                                    
committing $100 million dollars a  year for the needs of the                                                                    
bill, would reduce the realized side of the portfolio.                                                                          
                                                                                                                                
Mr. Kelly responded that realized  income comes from lending                                                                    
permanent fund  dollars to the U.S.  government corporations                                                                    
as they pay interest.   It also comes from investing stocks,                                                                    
receiving  dividends and  from  investments  in real  estate                                                                    
throughout the  country, which generates a  real estate cash                                                                    
flow.   When  the  permanent fund  dividends  are paid  each                                                                    
year, mostly realized earnings are used.                                                                                        
                                                                                                                                
Representative Hudson understood that  the bill assumes that                                                                    
there is  a certain  amount of  money in  the portfolio.   A                                                                    
decision  for the  legislators is  whether  the $90  million                                                                    
dollars  will  be drawn  from  the  Permanent Fund  Earnings                                                                    
Reserve Account.   He  stated that this  was a  major policy                                                                    
issue.                                                                                                                          
                                                                                                                                
Vice-Chair   Bunde  spoke   to   the   frustration  of   the                                                                    
municipalities with  unfunded mandates.   He asked  if there                                                                    
was  anything  in  the  bill that  would  prevent  or  allow                                                                    
municipalities to  use monies to fund  their senior property                                                                    
taxes.                                                                                                                          
                                                                                                                                
Mr. Benintendi  stated that  he did not  believe so.   There                                                                    
are no  prohibitions, noting that  there is  the flexibility                                                                    
to do accomplish something like that.                                                                                           
                                                                                                                                
KEVIN  RITCHIE, ALASKA  MUNICIPAL LEAGUE,  ALASKA CONFERENCE                                                                    
OF MAYORS, JUNEAU, voiced his  appreciation to the Committee                                                                    
for asking  questions about the  fiscal future of  the State                                                                    
of Alaska.   Mr. Ritchie  acknowledged that securing  a plan                                                                    
for  the  fiscal future  of  the  State  is the  number  one                                                                    
priority for  the Alaska  Conference of  Mayors.   He agreed                                                                    
that  HB 20  is a  part of  a fiscal  puzzle.   HB 20  could                                                                    
create a  partnership between  the State  and municipalities                                                                    
to provide  the basic  functions that people  in communities                                                                    
need and want.  HB 20 is truly a second dividend program.                                                                       
                                                                                                                                
Mr.  Ritchie commented  that HB  20  does not  create a  new                                                                    
system of distributing  money.  It is  an accountable system                                                                    
used  prior  to  1979.   That  system  allowed  for  greater                                                                    
accountability.                                                                                                                 
                                                                                                                                
Co-Chair Mulder  asked if the Alaska  Municipal League (AML)                                                                    
had been somewhat involved in  the construction of the bill.                                                                    
He wondered  if the  complicated formula  would tie  some of                                                                    
the community's hands.                                                                                                          
                                                                                                                                
Mr.  Ritchie  acknowledged that  they  had  helped with  the                                                                    
bill.  He  added that the municipalities would  like to have                                                                    
the money  without the strings  being attached.  The  way in                                                                    
which  the  formula  works  is  that  the  communities  that                                                                    
provide specific  services will  receive revenue  sharing to                                                                    
help them  provide those services.   It is  an encouragement                                                                    
for them to  provide high quality police  and fire services,                                                                    
etc.  There  is a fair amount of flexibility  in the bill in                                                                    
that  if a  community wants  to lower  taxes, the  bill will                                                                    
allow  them that  flexibility.   That  has been  one of  the                                                                    
goals of revenue sharing in the  past.  The bill also allows                                                                    
the  flexibility  to  move  funding  between  education  and                                                                    
funding for other core services.                                                                                                
                                                                                                                                
Co-Chair  Mulder  asked if  it  would  "tie the  communities                                                                    
hands".   He asked  if it  would be  better to  include line                                                                    
items  in  the community  and  then  fund them  through  the                                                                    
earnings reserve.                                                                                                               
                                                                                                                                
Mr. Ritchie acknowledged that the  communities would like to                                                                    
have fewer  obligations.  Essentially revenue  sharing is an                                                                    
encouragement   to  provide   high   quality.     There   is                                                                    
flexibility to  allow the communities to  lower taxes, which                                                                    
was  one the  goals  of revenue  sharing in  the  past.   It                                                                    
allows the  communities the flexibility  to move  money into                                                                    
community education.                                                                                                            
                                                                                                                                
Mr. Ritchie  added that the  public likes to know  where the                                                                    
money goes.                                                                                                                     
                                                                                                                                
Representative Croft asked how  much the senior property tax                                                                    
exemption costs.                                                                                                                
                                                                                                                                
Mr.  Ritchie  remembered that  it  was  in the  $24  million                                                                    
dollar  range.   In  response to  queries by  Representative                                                                    
Croft  regarding community  jails, he  stated that  the FY02                                                                    
cost  was about  $5  million dollars.    There are  probably                                                                    
other  topics  of consideration  that  balance  how big  the                                                                    
program could be and what services should be included.                                                                          
                                                                                                                                
Vice-Chair  Bunde  asked  if the  funding  procedures  would                                                                    
encourage some of the unorganized communities to organize.                                                                      
                                                                                                                                
Mr. Ritchie responded that a  strong revenue sharing program                                                                    
would encourage municipalities to organize.                                                                                     
                                                                                                                                
Co-Chair Mulder  commented that functions are  being funded,                                                                    
however, the  limitation in the funding  is somewhat formula                                                                    
driven.   Right now, there is  $150 per person put  into the                                                                    
formula.   To  put a  lid  on that  funding could  encourage                                                                    
ineffective  utilization.     He  mentioned  the  unintended                                                                    
consequences.                                                                                                                   
                                                                                                                                
Mr.  Ritchie  acknowledged  that   the  cap  would  be  $150                                                                    
dollars.    It is important  to know that the money would be                                                                    
used as an  incentive and that it would help  to off set and                                                                    
encourage a municipality to provide more service.                                                                               
                                                                                                                                
Co-Chair Mulder  asked if it  the amount was scaled  down to                                                                    
$100 dollars per person, what effect would that have.                                                                           
                                                                                                                                
Mr. Ritchie explained  that the manner in which  the bill is                                                                    
set up, the use of the  money is a public safety foundation.                                                                    
The balance of the funding in  the account would be used for                                                                    
capital matching grants.  There  is not a pro-ration program                                                                    
that prorates money equally between the three programs.                                                                         
                                                                                                                                
Co-Chair Mulder  commented that to change  the amount, would                                                                    
change  the  formula  in  order   to  allow  for  a  similar                                                                    
distribution of municipal assistance and revenue sharing.                                                                       
                                                                                                                                
Vice-Chair  Bunde asked  about the  idea of  AML to  help to                                                                    
market the bill throughout Alaska.                                                                                              
                                                                                                                                
Mr. Ritchie  replied that  the "marketing"  is very  much on                                                                    
the  minds of  all the  municipalities.   The municipalities                                                                    
are truly  subdivisions of the  State and if the  State does                                                                    
not do  well, then the municipalities  do not do well.   The                                                                    
municipalities   are   interested   in  working   with   the                                                                    
Legislature  in  carrying  on a  dialogue  with  the  public                                                                    
regarding the needs of the future.                                                                                              
                                                                                                                                
Representative  Whitaker asked  if municipal  assistance had                                                                    
decreased since 1990.                                                                                                           
                                                                                                                                
Mr.  Ritchie replied  that it  has.   The general  impact of                                                                    
that  is  that  there  is   less  money  and  less  service.                                                                    
Sustainability is important to any plan.                                                                                        
                                                                                                                                
Representative   Moses   stated   that   the   question   of                                                                    
"marketing"   is  discretionary.     He   thought  that   an                                                                    
additional $150 dollars  should be put in.   The communities                                                                    
might  want  to start  another  permanent  fund on  a  local                                                                    
level.    Those  types  of concerns  suggest  that  spending                                                                    
should be discretionary.                                                                                                        
                                                                                                                                
JACK KREINHEDER, OFFICE OF MANAGEMENT  AND BUDGET, OFFICE OF                                                                    
THE   GOVERNOR,   commented   that   at   this   time,   the                                                                    
Administration has taken a "neutral" position on the bill.                                                                      
                                                                                                                                
He stated that  the bill should be looked at  in the context                                                                    
of  solving the  State's  fiscal  gap.   He  added that  the                                                                    
Governor  has expressed  a preference  to  using broad  base                                                                    
taxes.                                                                                                                          
                                                                                                                                
Mr.  Kreinheder  asked  if  the State  decides  to  turn  to                                                                    
permanent fund  earnings, would municipal aid  and local tax                                                                    
relief be the highest priority use relative to education.                                                                       
                                                                                                                                
Mr.  Kreinheder  noted that  regarding  the  subject of  tax                                                                    
relief,  the  questioned  asked  if it  should  be  a  local                                                                    
option.  Given the tough times  that the State is facing, is                                                                    
that the direction that the State  wants to move toward.  He                                                                    
referenced  SJR  23, the  spending  limit  bill proposed  by                                                                    
Senate Finance Committee.    If that  amendment was enacted,                                                                    
it provides a  restrictive spending limit of 2%  per year in                                                                    
State spending  growth.  If  HB 20 moves forward,  about 1/2                                                                    
of the allowable  growth would be taken up  by the increased                                                                    
spending under HB 20.                                                                                                           
                                                                                                                                
Mr. Kreinheder  spoke to the  findings section of  the bill,                                                                    
which  mentions that  the municipal  dividend would  be paid                                                                    
surplus  earnings of  the permanent  fund.   He pointed  out                                                                    
that there  were no surplus  earnings in the  permanent fund                                                                    
in 2001 or 2002.  He  acknowledged that they are expected to                                                                    
come back  over time;  however, there  is no  guarantee that                                                                    
there will be surplus earnings.                                                                                                 
                                                                                                                                
Mr. Kreinheder added  that there might be  confusion in what                                                                    
HB 20 will save in  general fund spending, about $51 million                                                                    
dollars   versus   what  will   be   spent   under  HB   20,                                                                    
approximately $76 million dollars.                                                                                              
                                                                                                                                
Vice-Chair  Bunde  commented  that  there  is  a  difference                                                                    
between  the   permanent  fund   dividend  and   the  excess                                                                    
earnings.                                                                                                                       
                                                                                                                                
Mr. Kreinheder responded that  the projections indicate that                                                                    
the  bill  would  not  have  a  significant  impact  on  the                                                                    
dividends.    Mr.  Kreinheder  stated  that  the  Governor's                                                                    
position  is that  any change  in the  use of  the permanent                                                                    
fund dividend should have a vote of the people.                                                                                 
                                                                                                                                
Representative Croft  thought that  the spending  cap should                                                                    
protect the dividends.                                                                                                          
                                                                                                                                
Representative Moses asked  if the Administration's position                                                                    
would  require a  vote  of the  people for  any  use of  the                                                                    
dividend.                                                                                                                       
                                                                                                                                
Mr.  Kreinheder  suggested  that  his  testimony  should  be                                                                    
characterized  as things  to keep  in mind.   He  reiterated                                                                    
that there is an Administrative  preference for the usage of                                                                    
broad base taxes.                                                                                                               
                                                                                                                                
Co-Chair Mulder  understood that the formula  was limited by                                                                    
the amount  of money per  person.  The bill  prescribes $150                                                                    
dollars  per  person.    The  formula  cannot  grow  if  the                                                                    
Legislature does not raise it.                                                                                                  
                                                                                                                                
Mr. Kreinheder agreed  and noted that the  distinction is in                                                                    
comparing what we  spend today on the  programs which totals                                                                    
about  $51 million  dollars as  compared to  what the  State                                                                    
would be spending with the bill.                                                                                                
                                                                                                                                
Co-Chair Mulder stressed that the  legislation would have no                                                                    
barring on  the spending  limit.  Mr.  Kreinheder understood                                                                    
that  the  timing  of  the  legislation  combined  with  the                                                                    
spending limit would count under SJR 23.                                                                                        
                                                                                                                                
In  response to  a  question by  Representative Hudson,  Mr.                                                                    
Kreinheder explained  that without an increase  in municipal                                                                    
assistance  and   revenue  sharing,   it  would  be   a  $51                                                                    
million/$51  million  dollar split.    HB  20 would  provide                                                                    
substantially more funding than  what the State is currently                                                                    
spending.                                                                                                                       
                                                                                                                                
Co-Chair  Williams interjected  that  it was  his intent  to                                                                    
create a committee substitute for HB 20.                                                                                        
                                                                                                                                
Representative  Hudson  inquired  if  other  pieces  of  the                                                                    
fiscal policy considerations would be included.                                                                                 
                                                                                                                                
Co-Chair  Williams stated  that HB  20  was a  piece of  the                                                                    
puzzle.     He  understood  that  the   Committee  knew  the                                                                    
direction that  they intended to go  and that HB 20  is part                                                                    
of that  consideration.  He added  that it is only  one area                                                                    
of  the  consideration.    Time  remains  to  discuss  those                                                                    
concerns.                                                                                                                       
                                                                                                                                
Representative Davies  asked if  Co-Chair Williams  would be                                                                    
working  with  the  sponsor  of  the  bill  to  develop  the                                                                    
committee substitute.                                                                                                           
                                                                                                                                
Co-Chair  Mulder concurred  that members  do have  ideas and                                                                    
that  they  should note  their  concerns  to the  Chairman's                                                                    
office.                                                                                                                         
                                                                                                                                
Co-Chair Williams asked if anyone objected to the bill.                                                                         
                                                                                                                                
Representative Davies  noted that he supported  the bill and                                                                    
that he  did have  suggestions.  Moving  money to  the local                                                                    
level should  be discretionary.   He emphasized  that Alaska                                                                    
is a State in which "one size does not fit all".                                                                                
                                                                                                                                
Representative J.  Davies added  that the effective  date of                                                                    
the  bill has  to be  contingent on  a total  tax bill.   By                                                                    
doing it piece  meal, the Legislature loses  control of what                                                                    
the  plan should  look like.   He  suggested that  tying the                                                                    
effective date  with the enactment  of all the  pieces could                                                                    
provide a good plan.  He  noted that his support of the bill                                                                    
would be contingent on that.                                                                                                    
                                                                                                                                
Co-Chair  Williams   acknowledged  that   is  the   type  of                                                                    
discussion which  is needed.   He  acknowledged that  he was                                                                    
willing to get the bill "out there".                                                                                            
                                                                                                                                
Representative Croft added that  not just the effective date                                                                    
should  be  tied  to  the   entire  package  as  nothing  in                                                                    
isolation will work.  He  thought that individual bills will                                                                    
fail  individually but  tied  together,  they could  address                                                                    
fiscal  concerns.   Filling the  gap and  assuring for  some                                                                    
type of fiscal future will be the "prize" for the State.                                                                        
                                                                                                                                
                                                                                                                                
TAPE HFC 02 - 29, Side A                                                                                                      
                                                                                                                                
                                                                                                                                
Co-Chair Williams  agreed that there should  be a discussion                                                                    
regarding a "package deal".                                                                                                     
                                                                                                                                
Vice-Chair Bunde  expressed his  support for the  concept of                                                                    
the legislation.   He thought  that it could help  the State                                                                    
address the  challenges that we  face.  He hoped  that there                                                                    
would be  some way,  using the  proposed mechanism,  for the                                                                    
smaller communities to become incorporated.                                                                                     
                                                                                                                                
Representative Lancaster  commented that the bill  would "do                                                                    
good" as a  stand-alone for the communities.   It would give                                                                    
the  local   communities  some  control  over   their  local                                                                    
funding.    The local  communities  have  lost some  funding                                                                    
every  year.   He noted  that  he would  like to  see HB  20                                                                    
included with other fiscal policy legislation.                                                                                  
                                                                                                                                
Representative Whitaker voiced his concern with the:                                                                            
                                                                                                                                
     •    Sustainability;                                                                                                       
     •    Linkage to a more comprehensive package; and                                                                          
     •    With the notion that the State would be saving                                                                        
          $51 million dollars while spending $75 million                                                                        
          dollars.                                                                                                              
                                                                                                                                
Representative Hudson saw HB 20  in light of the total value                                                                    
of the earnings recorded by  the Permanent Fund and how that                                                                    
could be spun  off the total value arriving  at $1.1 billion                                                                    
dollars to fill the gap.   He asked what is the total amount                                                                    
of  money that  realistically  will be  available on  annual                                                                    
basis.   If the gap is  left open, the State  will be forced                                                                    
to  go back  into the  CBR.   HB  20, the  dividend and  any                                                                    
future use of  the excess earnings will be in  jeopardy.  He                                                                    
recommended  that the  Committee  give  serious thought  and                                                                    
consideration to  using the  whole amount  of money  for the                                                                    
best combination of purposes.                                                                                                   
                                                                                                                                
Representative  Harris  pointed   out  that  fiscal  revenue                                                                    
sharing is not an entitlement  program that the State has to                                                                    
do.   He pointed out  that the two largest  communities have                                                                    
chosen not  to put on a  sales tax.  He  understood that was                                                                    
not a  popular idea, however,  it is  an issue that  is out.                                                                    
If people  want local control,  they should raise  the money                                                                    
locally.     He  added  that   he  was  supportive   of  the                                                                    
legislation but  that if more  money is  to be given  to the                                                                    
local  communities,  there  needs   to  be  flexibility  and                                                                    
information, available for the State to look at.                                                                                
                                                                                                                                
Co-Chair Mulder pointed out that  some places have chosen to                                                                    
have high property  taxes rather than paying sales  tax.  He                                                                    
was troubled by  the linkage question.  He noted  that HB 20                                                                    
has merit  on its own and  that when creating a  fiscal plan                                                                    
too closely intertwined, if one  straw should fall, then the                                                                    
entire plan could fall.                                                                                                         
                                                                                                                                
Co-Chair Mulder added that he  would be satisfied at the end                                                                    
of the  day, if  progress has been  made toward  closing the                                                                    
fiscal gap.   He  reiterated that  the Committee  should not                                                                    
tie everything so closely together.                                                                                             
                                                                                                                                
Vice-Chair Bunde  commented that  that the  Committee should                                                                    
be  aware of  the  complications with  the Internal  Revenue                                                                    
Service (IRS) taxation of the Permanent  Fund if it is to be                                                                    
used for  a public purpose.   He thought that the  HB 20 use                                                                    
of funds would be considered use for a public purpose.                                                                          
                                                                                                                                
Co-Chair Williams commented that the  fund has been used for                                                                    
public  purposes since  inception.   He noted  that a  large                                                                    
portion of that money stays in Alaska.                                                                                          
                                                                                                                                
Co-Chair Williams indicated that his office would work with                                                                     
the entire Committee on creating amendments for the                                                                             
committee substitute.                                                                                                           
                                                                                                                                
HB 20 was HELD in Committee for further consideration.                                                                          
#                                                                                                                             
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 3:30 P.M.                                                                                          
                                                                                                                                
                                                                                                                                

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