Legislature(1999 - 2000)
05/11/1999 06:20 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE May 11, 1999 6:20 P.M. TAPE HFC 99 - 127, Side 1. TAPE HFC 99 - 127, Side 2. TAPE HFC 99 - 128, Side 1. TAPE HFC 99 - 128, Side 2. CALL TO ORDER Co-Chair Mulder called the House Finance Committee meeting to order at 6:20 p.m. PRESENT Co-Chair Mulder Representative Foster Co-Chair Therriault Representative Grussendorf Vice Chair Bunde Representative Kohring Representative Austerman Representative Moses Representative J. Davies Representative Williams Representative G. Davis ALSO PRESENT Representative Sharon Cissna; Wilson Condon, Commissioner, Department of Revenue; John Shively, Commissioner, Department of Natural Resources; Peter Bushre, Chief Financial Officer, Alaska Permanent Fund Corporation, Department of Revenue; Jim Kelly, Research and Liaison Officer, Alaska Permanent Fund Corporation, Department of Revenue; Tamara Cook, Director, Legislative Legal and Research Services, Legislative Affairs Agency; Senator John Torgerson; Annalee McConnell, Director, Office of Management and Budget, Office of the Governor. SUMMARY HB 231 An Act relating to income of the Alaska permanent fund, to the Alaska Income Account, and to permanent fund dividends; and providing for an effective date. HB 231 was heard and HELD in Committee for further consideration. HB 232 An Act making a special appropriation from the budget reserve fund under art. IX, sec. 17©, Constitution of the State of Alaska, to the Alaska Income Account; and providing for an effective date. HB 232 was heard and HELD in Committee for further consideration. HOUSE BILL NO. 231 An Act relating to income of the Alaska permanent fund, to the Alaska Income Account, and to permanent fund dividends; and providing for an effective date. HOUSE BILL NO. 232 An Act making a special appropriation from the budget reserve fund under art. IX, sec. 17©, Constitution of the State of Alaska, to the Alaska Income Account; and providing for an effective date. JIM KELLY, DIRECTOR OF COMMUNICATIONS, ALASKA PERMANENT FUND CORPORATION, DEPARTMENT OF REVENUE, addressed materials distributed to Committee members. [Copies on File]. He noted that the job of the Permanent Fund Corporation (PFC) is managing investments of the permanent fund. It is not the job of that staff to make policy decisions, instead that is the work of the Legislature. The PFC provides an analysis of implications of any proposed changes. Mr. Kelly stated that SB 232 is an investment matter. He noted that Greg Allen had modeedl the proposed statute in order that PFC could get a concrete understanding of the financial implications under a variety of financial market conditions. The initial implications of the proposal are as follows: 1. Moving to a percentage of "market value distribution" approach, which is a sound approach to meeting long term objectives of achieving consistency in distributions and long term preservation of purchasing power. 2. Shifting to a GAAP model from a statutory income approach appears to be an appropriate action. 3. Using a five-year averaging approach should reduce the volatility of distributions. 4. The transition approach appears to be very reasonable (phasing in the five-year period). 5. Incorporating a one-year lag improves planning flexibility and also will ten, over the long term, to reduce the magnitude of the 5.25% distribution when related to current market value. That would make the distribution level more consistent with preservation of fund purchasing power. 6. Limiting fiscal 1999 distributions to the $1,000 dividend would definitely enhance the probability of maintaining sufficient future balances to fund operations in accordance with constitutional requirements. 7. Including the Capital Budget Reserve Fund (CBRF) balance in the new Alaska Income Fund would similarly improve the probability of the program working within Constitutional limits. 8. The future dividend mechanism appears workable. 9. Liberalization of the maximum equity limitation is essential to the attainment of the return objectives that are essential for achievement of both distribution and purchasing power objectives. 10. It is clearly possible, although improbable, that a protracted period of weak financial market returns would undermine the plan or any alternative plan based on distributed earnings. 11. The distribution percentage (5.25%) initially appears aggressive and warrants careful analysis. As noted earlier, the averaging and lagging features incorporated in the proposal moderate the magnitude of the distribution percentage. However, it leaves little if any margin for error. Mr. Kelly stated that it was improbable that any plan based on distribution of earnings would be in jeopardy. Representative Austerman asked if the proposed plan was stronger than what currently exists. Mr. Kelly spoke to the features which make it stronger. * Reduction in this year's payout; * The addition of the CBR account; and * The averaging provisions. Co-Chair Mulder asked if during times of a "bull market" would any plan suffer. Mr. Kelly stated it would. Co-Chair Mulder continued, how would this plan stack up in a protracted market. Mr. Kelly replied that for the concerns listed, it would be structurally sound. Mr. Kelly referenced Page 2 of the handout which addresses the endowment long term spending goal prepared by Greenwich Associates in February 1999. The medium payout rate of all endowments in the United States is 4.9%. The average payout rate is 4.7%. In the case of HB 231, it is averaged over a lagging 20 quarters and is infused with dedicated oil revenues which makes the effective rate less than 4.9%. Mr. Kelly continued, the following 20 pages of the handout were prepared by Gregory Allen, EVP, Callan & Associates, Inc., on the Alaska Permanent Fund Simulation Model, (Mother of Models, All - or MOMA), for HB 231. * Asset allocation assumptions; * 5.25% distribution - using actual results through March 1999, and using the 1999 Callan capital market assumptions. It would assume a 48% equity moving to a 58% equity by the end of FY2000; assuming a net contribution to the income account of $1.873 billion dollars; distributing income of 5.25% of a graduated 5 year average; assuming the dividend is paid at $1 thousand dollars per applicant in 1999, 2000 and 2001 and that general accepted accounting principles are used; * Fund value versus principal balance; * Real fund value adjusted for inflation; * Illustrates how the Alaska Income Account grows based on the median expected rates of return; * Illustrates the distribution from that account each year, dividing it into two pieces, government and dividends; * Range of fund value which identifies the volatility of the plan. The median case expectation is $29.949 billion dollars. The middle line on the chart illustrates the medium case scenario. * Illustrates the "real" inflation adjusted value of the fund. There is a range of possibilities from $37 billion down to $18 billion dollars. * Range of ending Alaska Income Account (AIA) balance. The chart shows the ending balance in that account. * Range of distributed income at 5.25%. Discussion followed among Committee members regarding "doing nothing" and the outcome of that to the Permanent Fund. PETER BUSHRE, CHIEF FINANCIAL OFFICIER, PERMANENT FUND CORPORATION, DEPARTMENT OF REVENUE, commented that the approach to the health of the State's revenue crisis would be as much of a decision as taking no action. Co-Chair Mulder agreed. Mr. Kelly acknowledged that the plans implemented twenty years ago were good plans and worked well during that time. The fund has grown to $26 billion dollars which is greater than ever expected. During the next twenty years for reasons described before, because of crossing the line for oil revenues and fund income, change in the accounting methodology and increased volatility income returns, make having a plan essential. He emphasized that HB 231 is a change in plan. Mr. Kelly continued previewing the handout. * Range of distributed government income. In the year 2003, the median expected production of income would be $831 million dollars. In the year 2008, it is expected to pay just under $1 billion dollars. * Range of effective payout rate. The median payout rate for 1999 is $2.37 billion dollars. The effective median payout rate achieved at 5.25% is 4.85% of market value, which is not much error in margin points. He reiterated that it is important that the effective payout is sound. Mr. Bushre spoke to the financial projection provided in the handout for the years 1999 - 2020. The sheet reflects the status quo, current law, and includes the provision for the Amerada Hess settlement income being transferred to the principal. He offered to provide a comparison of the status quo and HB 231. [Chart included in File]. HB 231 creates a much simpler environment and contains no Amerada Hess settlement income and no inflation proofing. (Tape Change HFC 99 - 127, Side 2). Mr. Bushre continued, there is only one kind of income, which conforms to today's accounting standards. That would be a total return which includes appreciation. Dividends are based upon the thousand dollars per year per recipient for the first three years and 42% of the distribution. He emphasized that the spreadsheets are merely flat projections. They are not forecasts or anything like the MOMA model. Mr. Bushre pointed out that conditions would not be that consistent over the next 20 years. In response to questions, Mr. Bushre commented that the market has been rising since October 29, 1929. The market's history teaches us that over the long term equities have appreciated in value. Co-Chair Mulder clarified that the comparison of financial projections of the status quo versus HB 231, under the status quo, funds would amount to $63.733 billion dollars and under HB 231, those funds would be $56.174 billion dollars. Mr. Bushre agreed. That resulted because of a larger distribution under HB 231. Co-Chair Mulder acknowledged the figure was closer than he had expected. Co-Chair Mulder pointed out that the status quo plan does not take into consideration how the unrealized gains and the needs of the Legislature will come into play to fund government. Mr. Kelly replied that for the past several years, the Board of Trustees has been looking at the percentage of market value distribution of income and the long term spending policy that would fit well with a long term investment policy. Their interest is structurally creating a system that works. Mr. Bushre suggested a hypothetical situation in which there were no other "pockets" of money left in the earnings reserve or the Alaska Income Account which would mean, the only thing left would be the principal. The principal is protected by the Constitution and it would take a constitutional amendment to access. Representative J. Davies commented that the choice would be whether the dividend was funded or if the government was funded. The status quo assumes that conversion would not happen. Representative Bunde questioned the language of the amendment. [Copy on File]. Mr. Bushre explained that one item missing from HB 231 had been included in the amendment. The amendment would clarify in law that the permanent fund could disburse the amount of the distribution to the general fund over the following 12 months which allows the Department of Revenue to project a reasonable cash flow for funding the principal. Representative Bunde asked if the corpus definition would include unrealized earnings. Mr. Bushre stated it would not. The unrealized earnings, if HB 231 were passed would become part of the Alaska Income Account. Representative J. Davies pointed out that this was considered consistent with the generally accepted accounting principles. He questioned where the volatility would lay. Mr. Kelly explained that the model runs 300 different correlated scenarios. Stocks and bonds still move in relationship as do components of the assets. Representative J. Davies asked how the 20-year risk was determined. Mr. Kelly explained that was important because of a transition period. In all cases, the model runs out in 20 years, and usually, only five years is listed, although, once again, the model does provide numbers for 20 years. Representative J. Davies pointed out that the included information shows all stocks and bond market and real estate return variability. The oil price variability is not included. Mr. Bushre provided a sectional analysis of the bill. HB 232 will appropriate the balance in the Constitutional Budget Reserve to the Alaska Income Account, which is the balance remaining after the appropriations for the coming fiscal year's operating budget deficit, included and estimated to be $1.873 billion dollars. In order for that to be effective, the CBR must be invested under the same asset allocation as the Permanent Fund if kept in a separate fund. The Department of Revenue could do that. Additionally, if there is a protracted period of market downturns, and there is 5.25% draw, a larger portion of the AIA balance, the CBR would require a 3/4 vote to be accessed. Mr. Bushre noted that HB 231 is the primary bill before the Committee and that it would establish the definition of the AIA, placing it on the same footing as used by all funds in computing income and determining the balance of the earnings reserve. Mr. Bushre noted that Section 2 is the heart of the bill. It would establish this as a separate account of the Permanent Fund and would establish the percentage of the market value distribution formula. Mr. Bushre spoke to an additional housekeeping amendment provided by the Permanent Fund. The end of 1999 should be addressed because there is a legal opinion that if the bill is silent, the 20-quarter distribution formula would automatically "kick in" on what is already appropriated by the Legislature. That would wipe out the AIA. Nothing to date has been proposed concerning the distribution rate. There is a small margin for error because of the 60% cap on equity investments. If the cap were higher, it would not be a problem. Mr. Bushre testified that the board would recommend moving to a percentage of market value. Mr. Kelly interjected that Mr. O'Leary would be more comfortable with a 5.1% payout, and that the allocation equity ceiling on investments was 65%. Co-Chair Mulder questioned speculation regarding the time frame in which the Internal Revenue Service (IRS) might look at the Permanent Fund as non-taxable. Mr. Bushre replied that the Permanent Fund receives its tax exemption by virtue of the fact that it is a fund of a sovereign state government's legislative bodies. Even if HB 231 was passed and enacted into law, future legislatures have the option of changing it or appropriating different amounts. It is the opinion of the Attorney General that we need the appropriation from the Legislature. And so, if HB 231 was enacted, there would be a need to come back to the Legislature every year with language to appropriate the 5.25%. Mr. Bushre did not see any change between the status quo and the proposed bill in regard to protecting the fund from future taxation. WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE, provided his observations of the plan before Committee. He made a brief comparison of the policy choices reflected in the plan and the consequent results in comparison to the plan that Governor Knowles submitted. He believed that there were a few policy considerations that needed to be addressed. When comparing plans, it is important to consider how they work, who pays, and what burdens would result based on the same assumptions. Commissioner Condon continued, in terms of return on assets for both for the Permanent Fund and the Constitutional Budget Reserve Fund, the Department of Revenue used 8.25%, the return rate consummate with the spreadsheet provided by the House Majority Plan. Additionally, the Department of Revenue proposes a correction for the projections relating to production of oil and gas resources that have not yet been discovered or which have been discovered but which currently, there are no development plans. JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, spoke to a distinct possibility which might occur in a high case scenario for resource development. Obviously a discovered reserve is less risky than an undiscovered reserve. He added that NPR-A may have a lot of oil or concurrently, it could have nothing. He spoke to low case possibilities. The Administration has used the mid case projections, which are more probable. Commissioner Condon spoke to the Governor's plan. He noted that the balance in the CBR would as projected today, go down between the years 2010 and 2020. At that time, the Governor would propose to make another transfer. Details are being worked out. Whether to use a separate fund or use the proposal by the House Majority to access the Permanent Fund. He observed that all technical details have some benefit. The important issue to address is the policy trade-off between the dividend and a broad-based tax. The Governor suggests shifting the burden to a broad-based tax called the Alaska Credit Income Tax. Commissioner Condon continued, the House Majority plan represents a different policy choice for a smaller dividend and then to use that revenue to pay for government services. He spoke to market place volatility, whether the plans would fit together, the investment limit which could result from the proposed legislation, and the asset allocation which would follow the legislation. He questioned if the State could plan to pay out 5.25% of the base specified in the bill while covering inflation proofing and management fees. (Tape Change HFC 99 - 128, Side 1). Commissioner Condon explained that when investment professionals quantify risk, they are talking about volatility. It is important to be realistic about how much the State can depend upon the revenue from the Permanent Fund to pay for schools, hospitals, Pioneer Homes and all those things that are generally believed essential for government to provide. He questioned if the State was putting "too many eggs in the Permanent Fund basket". He acknowledged that a broad-based tax would not help legislators to win a popularity contest, but that it would diversify and provide sound management of State's finances. Commissioner Condon expressed that diversification is an important consideration. Additionally, there will be a need for a vote to access the Permanent Fund. Co-Chair Mulder commented that taxes mean "trouble" in Alaska, particularly with also accessing the Permanent Fund. He suggested that the "new" revenues proposed by Commissioner Condon are flat. Commissioner Condon interjected that the purpose of that number is to simply indicate a target revenue level from a broad-based tax. There was no judgement intended in that number on the performance of Alaska's economy. He emphasized that the plan proposed by the Administration does fill the gap. The Governor is open to using a percent of market value. Those who manage the fund can explain the benefits that go with that approach. In addition to the use of the Permanent Fund, the Governor would ask to see a broad-based tax such as an income or sales tax. That would diversify the revenue being used to fill the gap. Co-Chair Mulder pointed out that the Governor's plan assumes utilization of some portion of the Permanent Fund earnings. Representative Austerman inquired how far off the numbers used in the House Majority plan were for the projection of new oil revenue. Commissioner Shively responded that it was not significantly off. The Governor's plan is less aggressive in the early years and more so later on. The total amount would be the same if the high case scenario was used. Representative Grussendorf commented that regardless of which plan is chosen, taxes will need to be addressed. He asked which plan would Callan and Associates deem more stable from a point of view of investment and soundness of the fund. Commissioner Condon replied that he did not know which plan they would choose, however, that agency has advised the Department for several years on use of the Permanent Fund and that the payout of earnings should be based on a formula percent of market value. That agency would recommend that taking steps to make the Alaska Income Account relatively large compared to the overall size of the Fund which has the effect of reducing the availability of income over the long range. It is important to make the earnings reserve account as large as possible. Co-Chair Mulder pointed out that on Table 5 of the handout, revenue from incremental oil and gas production moved to a well head price per barrel, which is historically different. Commissioner Shively explained that the revenue is based on a well head. He added that both the production tax and the royalty is based on the well head value, not the market value. Commissioner Condon added that every revenue forecast begins with a market determination and then deducts transportation costs to arrive at a value point for royalties and taxes. Representative Austerman inquired if there would come a point when it would be important to deposit more funds into the corpus. He believed that the AIA should be as large as possible given the fluctuations in the market and the income earnings. Commissioner Condon acknowledged Representative Austerman's concern, although, suggested that there were competing considerations and judgements. If there is a possibility that future legislators would be irresponsibly managing the principal, it would be important to take that money "off the table". On the other hand, to have the required flexibility to manage finances is important to readily access the funds. Representative J. Davies requested Commissioner Shively to walk members through the handout: "Incremental Revenue From High Case Forecast of: 1. New Discoveries of Oil and Gas, and 2. Development of Discovered Oil and Gas Not Currently Scheduled for Development". [Copy on File]. Commissioner Shively highlighted major points of the handout: * Table 1 Base line Alaska Production from Department of Revenue Spring 1999 Forecast: * Chart 1 High Case Technically Recoverable Oil Production Not Reflected in Department of Revenue Spring 1999 Forecast; * Table 2 Department of Natural Resources Technically Recoverable Incremental Production 2000-2020; * Table 3 Department of Natural Resources Economically Recoverable Incremental Production 2000-2020; * Table 4 Severance Tax and Royalty Fraction Contributing to State Revenue; * Table 5 Revenue from Incremental Production Estimates; and * Table 6 Unrestricted Revenue to State Using Department of Revenue baseline and Department of Natural Resources Incremental Production. Commissioner Shively agreed that there is not a huge difference between the two plans. Co-Chair Mulder requested Mr. Bushre to have Callan and Associates run the MOMA model on the Governor's plan so that there could be a comparison of the two plans. Representative J. Davies asked why the number for inflation proofing varied among different departments, studies and groups. Commissioner Condon explained that two different types of inflation were being addressed. The first is the national level, the nexy inflation rate is the one reflected in asset prices. The numbers used by the State are the ones provided by Callan and Associates. Much of the work that they provide annually for the State is projection of inflation and the real returns for all the different asset classes which form our asset allocation. Callan and Associates believe that over the next 5 years, given the current economy, Alaska will see an average inflation rate of 3%. Representative J. Davies understood the need for the different figures and agreed that we should not use the inflation rate for growth of government. He acknowledged that the two numbers should be a different policy calls. Representative J. Davies questioned why the Anchorage API was substantially different than the national rate. Commissioner Condon explained, it is assumed that there will be less growth in concerns such as wages. He stated that that broad-based tax would allow a higher dividend. Representative J. Davies requested a calculation scheme which would indicate what each household would pay according to income level. Co-Chair Mulder reiterated the need for the back-up materials. Co-Chair Mulder requested feedback from Legal Counsel regarding the effective date of the statutory enactment to the passage of an advisory vote. TAMARA COOK, DIRECTOR, LEGISLATIVE LEGAL AND RESEARCH SERVICES, LEGISLATIVE AFFAIRS AGENCY, explained that there is little information available since it has not been challenged in our State. She noted that in the research that she had done, there had been one vote placed before the people by the Legislature to approve a voter registration law in 1968. It was a binding vote of the people and apparently it went unchallenged. She continued, the issue is whether the Legislature can delegate its legislative power to enact laws to the people. The Constitutional proceedings discuss that point. At one point in time, some of the members were in favor of an amendment to the Constitution that would provide that. That amendment was defeated following some discussion suggesting that the members who attended the Constitutional Convention felt that the power of initiative and referendum, operated to provide the people a voice in the enactment of laws. That was sufficient, and there was no need to have the extra step of allowing the Legislature to submit to the people for a binding vote the enactment of the law. The issue is whether such a submission would be an improper delegation of the legislative power. Ms. Cook pointed out that the Attorney General's office issued two opinions in 1982 and 1983, concluding that a binding vote scenario tying an effective date to a vote of the people would survive, but acknowledged that was a minority view. The bulk of the United States jurisdictions has looked at that question and has not come out supporting that view. It was recently addressed when our Supreme Court stated that the Constitution specifies that we cannot use an initiative for appropriation, and the Court's have expanded the notion of appropriation to include concerns such as determination between beneficial users of natural resources. The Court found that the transfer by initiative was an improper appropriation. Assistant Attorney General Jim Baldwin has warned that particularly in the area of appropriations, the power of initiative seems to be restricted. The binding vote scenario has not been tried and challenged. Ms. Cook believed that if the Legislature elects the vote scenario with a concern as significant as the long-term fiscal plan, it certainly will be challenged. She recommended that the Legislature take the opportunity to make it very clear to the Court what the intention is regarding severability. If the Court finds that the binding vote is an invalid condition on an effective date, the Legislature should make it clear whether they want the entire bill to fail if the condition is struck down, or if the legislation is to survive if the condition is struck down. In response to comments made by Co-Chair Mulder, Ms. Cook voiced concern with the issue of severability included in legislation of this magnitude. Representative J. Davies asked if the bill was passed, could an initiative be crafted to reverse the legislation. Ms. Cook replied that people have the right to do by initiative more or less what the Legislature has the right to do by law, with some limitations on the power of initiative. One of the limitations is that people may not dedicate revenue. The Legislature has a very restricted ability to dedicate revenue. Additionally, a referendum cannot address a dedication, which creates a curiosity for the Earnings Reserve Account, a dedicated account. In addressing the Permanent Fund, the entire concern becomes confused. The Legislature has the power to dedicate if required by federal programs or perhaps in the case of the Permanent Fund income. However, the people have a clear restriction against dedicating revenue. The first concern Ms. Cook foresaw would be the fundamental question of the interrelationship between the restriction on the initiative process, dedications and the power that the Permanent Fund provision seems to contain to dedicate income of the fund. She believed that the initiative would fail. Co-Chair Mulder agreed that the public, when given the opportunity would raid the treasury. The initiative prevented that from occurring. Ms. Cook added that Alaska is not unique in curtailing the power of initiative with respect to appropriations. It is a common restriction. Representative G. Davis asked if there were restrictions on the timing of a vote. Ms. Cook explained that there is not a statutory method for holding a special election. (Tape Change HFC 99 - 128, Side 2). Ms. Cook suggested that the Legislature could direct the Lieutenant Governor to hold an election on a specified date. She recommended that the election date be scheduled after receiving specific advice from the Division of Elections. Co-Chair Mulder advised that the Division of Elections had indicated that the earliest that they could schedule an election following Legislative adjournment would be September 14th. Representative G. Davis asked if the Governor had proposed a binding vote on an appropriation. Ms. Cook explained that would be the effect of SB 66, which appropriates money from the earnings reserve account to the budget reserve fund. She understood that the effective date would be tied to a vote of the people in a binding fashion. Representative G. Davis understood that would be unconstitutional. Ms. Cook replied from a letter written by Assistant Attorney General Baldwin, it has been suggested that the power to hold a binding vote may be limited. In particular, Mr. Baldwin is concerned about any effort to have a binding vote attach to an appropriation. Co-Chair Mulder questioned how the severability concept would affect this scenario. Ms. Cook explained that was a fundamental question. She did not know how the Courts would treat severability, regardless of what the Legislature says. However, severability should be used to carry out legislative intent. Representative J. Davies asked if it would be admissible for the populace to have an initiative on an advisory vote. Ms. Cook replied that historically, when an advisory note has been presented to the people, the Legislature has always used legislation to present the note and it is then treated as any other substantive piece of legislation. ANNALEE MCCONNELL, DIRECTOR, OFFICE OF MANAGMENT AND BUDGET, OFFICE OF THE GOVERNOR, pointed out that the Governor's proposal was for an advisory vote, not a binding vote. It is the Governor's intent that any kind of plan adopted which would use the Permanent Fund earnings, will be most successful if it has the support of the public. She emphasized the need for public education in order to accomplish this concern. Ms. McConnell stressed that Alaska must take some kind of action as soon as possible in addressing the fiscal crisis. The question continues to be how to accomplish what needs to be addressed with the support of the public. REPRESENTATIVE SHARON CISSNA asked if the Governor believes if an advisory board would be polarized. Ms. McConnell replied that the issue could be polarizing, but not whether the State has a vote. She anticipated that the vote could provide an opportunity to Alaskans to come together on the plan. Ms. McConnell reiterated that there will be a tremendous amount of public education and information that needs to be accomplished first. Ms. McConnell continued, if the vote were not positive and if the public said no, the plan presented would not be the one to implement, which would provide an opportunity to come back and take different action. The Office of the Governor would be interested in pursuing either a broad base income tax or a sales tax. Representative Williams asked if the Governor's plan would be delayed until there was a positive vote. Ms. McConnell replied that the plan would be put into place if the public advisory vote was positive. If the vote was not positive, then subsequent action would need would to be taken by the Legislature. Co-Chair Mulder pointed out that if there was a negative vote, nothing would then be in place under the proposed Governor's plan. Ms. McConnell agreed. She added that in order to pass a plan, there has to be the support of the House and the Senate. She submitted that an additional challenge would be public education and gaining public support. The question is at what stage do we get public support before it is implemented. These are the concerns behind the Governor's proposal, which need advisory vote action. Co-Chair Mulder asked if it would be necessary to have a separate piece of legislation or could it be tacked onto HB 231. Ms. Cook replied that if there was going to be a question about placing a ballot before the people, it must be in a substantive piece of law, rather than in an appropriation act. Co-Chair Mulder asked if HB 231 was considered an appropriation act. Ms. Cook replied that the bill is substantive and it could be contained within that bill subject to a single subject requirement. It is possible that the single subject line could be crossed. She believed that there would be quite a bit of latitude in addressing a fiscal plan. Ms. Cook suggested that there are many mechanisms which could be used. Some would involve a policy choice of whether we want the plan in place or to let the Legislature respond to a negative effective vote, or whether, we want to delay implementation of the plan until the result of the advisory vote is known. Representative J. Davies pointed out that the common denominator is that in no case does the law automatically come into effect depending on the result of the election. Ms. Cook said that was her understanding of a binding, conditional, effective date. That mechanism states that the Legislature recognizes that the law only takes effect if another action occurs. The other action would be a positive vote by the people. That would put the people in the position of taking the last action to make the law go into effect, which is the binding effective date. Representative J. Davies pointed out that HB 232 is dependent on passage of HB 231. In effect, even though the binding vote was on HB 231, HB 232 would be dependent on an advisory vote of the people. Ms. Cook agreed that could "cast a cloud" on the binding vote, however, the effective dates could be untangled if that was a concern of the Legislature. Ms. Cook spoke to the two restrictions on the initiative. The first restriction is against dedicated funds. The Permanent Fund is largely a gigantic dedicated fund program. Additionally, there is a restriction on appropriations through initiative. When speaking of a provision like Section 6, both issues are at play because a system currently exists without the bill. The existing system states that there is a formula under which we will transfer an amount of money from the income of the Permanent Fund to the dividend program. That transfer, if you read the statute, purposes to be automatic. It is a dedication. However, the Legislature implements it every year by making an appropriation. Ms. Cook commented that raised another fascinating question. Assuming that the Permanent Fund indeed can be dedicated, because of the curious last sentence that is attached to that particular constitutional provision, she asked, would that mean that a dedication is not subject to appropriation. She stated that it would be consistent to permit a dedication and still impose an appropriation requirement that the two operate as independent requirements. There is nothing that states in the Permanent Fund language, that expenditures are not ultimately subject to appropriation. Section 6 is essentially a modification to the formula that now exists and does not affect the appropriation question. Representative Austerman voiced his appreciation for all the information that had been made available to Committee members. He recommended that language of the Constitution must also be considered. Representative Austerman acknowledged that the vote of the people is essential because this is such an emotional issue given the perceived right of a dividend. Representative Foster commented that his district has the highest rate of unemployment of any district in the State. A plan depending solely upon dividends would unfairly affect his area. People in the Bush do not understand the long- range implications of these changes. He acknowledged that conversely, an income base tax would affect urban areas more. Representative G. Davis interjected that to do nothing will create an incredible dilemma for both the Bush and Urban Alaska. Doing nothing will make the dividend "go away". HB 231 and HB 232 were HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 9:20 P.M.
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