Legislature(2005 - 2006)HOUSE FINANCE 519

04/06/2005 01:30 PM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 187 AMERADA HESS INCOME; CAPITAL INCOME ACCT. TELECONFERENCED
Heard & Held
+ HB 188 STATE OF AK CAPITAL CORP.; BONDS TELECONFERENCED
Heard & Held
Bills Previously Heard/Scheduled
= HB 122 LIFE INSURANCE FOR NATIONAL GUARD
Moved CSHB 122(FIN) Out of Committee
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 6, 2005                                                                                            
                         2:01 p.m.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Meyer called the House  Finance Committee meeting to                                                                   
order at 2:01:20 PM.                                                                                                          
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Bill Stoltze, Vice-Chair                                                                                         
Representative Eric Croft                                                                                                       
Representative Richard Foster                                                                                                   
Representative Mike Hawker                                                                                                      
Representative Jim Holm                                                                                                         
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Carl Moses                                                                                                       
Representative Bruce Weyhrauch                                                                                                  
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Cheryl  Frasca, Director,  Division of  Management &  Budget,                                                                   
Office of the  Governor; Devon Mitchell,  Executive Director,                                                                   
Alaska Municipal Bond Bank Authority,  Department of Revenue;                                                                   
Mike  Barnhill,  Assistant Attorney  General,  Department  of                                                                   
Law;  Kelly  Huber, Staff,  Representative  Nancy  Dahlstrom;                                                                   
John  Cramer,  Director,  Administration  Services  Division,                                                                   
Military and Veterans Affairs;                                                                                                  
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Cynthia  Weed,  Bond  Counsel,   Preston,  Gates  and  Ellis,                                                                   
Anchorage;  Dan Fauske,  Executive  Director, Alaska  Housing                                                                   
Finance Corporation, Department of Revenue                                                                                      
                                                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 122    An Act relating to payment  of premiums for Service                                                                   
          members' Group Life Insurance on behalf of members                                                                    
          of the Alaska National Guard deployed to a combat                                                                     
          zone; and providing for an effective date.                                                                            
                                                                                                                                
          CS HB 122 (FIN) was reported out of Committee with                                                                    
          a "do pass" recommendation and with a new fiscal                                                                      
          note by the Department of Fish & Game, a new zero                                                                     
          note by  the Alaska Postsecondary  Commission, zero                                                                   
          note #1 by the Department  of Commerce, Community &                                                                   
          Economic  Development  and fiscal  note  #2 by  the                                                                   
          Department of Military & Veterans Affairs.                                                                            
                                                                                                                                
HB 187    An  Act  establishing  the  Alaska  capital  income                                                                   
          account within the Alaska  permanent fund; relating                                                                   
          to deposits  into the account; relating  to certain                                                                   
          transfers regarding  the Amerada Hess settlement to                                                                   
          offset  the  effects  of inflation  on  the  Alaska                                                                   
          permanent  fund;  and  providing for  an  effective                                                                   
          date.                                                                                                                 
                                                                                                                                
          HB 187 was HEARD and HELD in Committee for further                                                                    
          consideration.                                                                                                        
                                                                                                                                
HB 188    An  Act establishing  the State  of Alaska  Capital                                                                   
          Corporation;  authorizing the issuance of  bonds by                                                                   
          the State of Alaska  Capital Corporation to finance                                                                   
          capital  improvements in  the state; and  providing                                                                   
          for an effective date.                                                                                                
                                                                                                                                
          HB 188 was HEARD and HELD in Committee for further                                                                    
          consideration.                                                                                                        
                                                                                                                                
2:02:08 PM                                                                                                                    
                                                                                                                                
Co-Chair  Chenault reported  that the  first Alaskan  Marine,                                                                   
Jeremiah Kinchen,  was killed in Iraq  on April 1, 2005.   He                                                                   
requested a moment of silence.                                                                                                  
                                                                                                                                
2:04:37 PM                                                                                                                    
HOUSE BILL NO. 122                                                                                                            
                                                                                                                                
     An  Act relating  to  payment  of premiums  for  Service                                                                   
     members' Group  Life Insurance  on behalf of  members of                                                                   
     the  Alaska National  Guard deployed  to a combat  zone;                                                                   
     and providing for an effective date.                                                                                       
                                                                                                                                
Representative  Weyhrauch MOVED  to  ADOPT amended  Amendment                                                                   
#3.  (Copy on  File).  He pointed out that  the original bill                                                                   
had raised questions regarding  what the State could require.                                                                   
                                                                                                                                
Representative Hawker  had discussed provisions  in Section 2                                                                   
with  legal services.   He  noted the  issues with  potential                                                                   
interference  when  entering   into  contractual  agreements,                                                                   
however, he did not want to discus it further in Committee.                                                                     
                                                                                                                                
2:08:21 PM                                                                                                                    
                                                                                                                                
KELLY   HUBER,   STAFF,   REPRESENTATIVE   NANCY   DAHLSTROM,                                                                   
commented   that    the   sponsor   wanted   to    make   one                                                                   
recommendation.   There  has been  positive  feedback on  the                                                                   
fill, but  concern with  "terminating an existing  contract".                                                                   
She  offered  language  to  "suspend   the  contract"  as  an                                                                   
alternative,  allowing  the  companies  to decide  and  would                                                                   
offer guardsmen some relief.                                                                                                    
                                                                                                                                
Representative  Hawker thought  that could  help but  pointed                                                                   
out  that  the  bill  has  a  long  way  to  go  through  the                                                                   
legislative process.                                                                                                            
                                                                                                                                
Co-Chair Meyer  noted that Legal  Services was okay  with the                                                                   
current language.                                                                                                               
                                                                                                                                
Vice-Chair Stoltze OBJECTED to the amended Amendment #3.                                                                        
                                                                                                                                
Representative  Weyhrauch  WITHDREW  the  motion  on  amended                                                                   
Amendment #3.                                                                                                                   
                                                                                                                                
2:11:08 PM                                                                                                                    
                                                                                                                                
Representative  Weyhrauch MOVED to  ADOPT Amendment #4.   Co-                                                                   
Chair Meyer OBJECTED for purposes of discussion.                                                                                
                                                                                                                                
Representative   Weyhrauch  explained   that  the   amendment                                                                   
clarifies that if  there is a penalty or cost,  someone would                                                                   
have to  be responsible and the  party passing the  law would                                                                   
be responsible.  The amendment  adds language clarifying that                                                                   
if someone  is paying, it would  not fall upon  the shoulders                                                                   
of the private sector or the utility  but rather the State of                                                                   
Alaska.   He pointed out that  Amendment #4 offers clarifying                                                                   
language.                                                                                                                       
                                                                                                                                
2:12:21 PM                                                                                                                    
                                                                                                                                
Ms.  Huber  noted  that  the sponsor  does  not  support  the                                                                   
amendment;  the  part  of concern  is  the  language,  "other                                                                   
heating  fuel".   That had  been added  at the  request of  a                                                                   
member in the previous committee.   The sponsor does not have                                                                   
concerns  on issues  raised  by Representative  Weyrauch  and                                                                   
that higher education already  has an informal policy.  Other                                                                   
reliefs  only provide  time and eventually  they would  still                                                                   
have  to pay  their  bills.   The  legislative  intent is  to                                                                   
stipulate in law that penalties are not imposed.                                                                                
                                                                                                                                
Co-Chair  Meyer  thought  that passing  the  amendment  would                                                                   
change the fiscal note.  Representative  Weyhrauch disagreed.                                                                   
Ms.  Huber  reiterated  that  the  bill  clarifies  that  the                                                                   
companies would not have a penalty.   No one had come forward                                                                   
voicing  opposition  nor  did  the  electric  companies  show                                                                   
concern.   Co-Chair  Meyer inquired  if in  rare cases  could                                                                   
there be additional costs to the  State.  Ms. Huber indicated                                                                   
that  if in  those cases,  the  State picked  up the  penalty                                                                   
costs and the amendment was adopted,  there could be a fiscal                                                                   
impact.                                                                                                                         
                                                                                                                                
2:15:18 PM                                                                                                                    
                                                                                                                                
Co-Chair  Chenault asked  about heating  fuel costs  in rural                                                                   
Alaska.  Representative  Joule noted that he  would have that                                                                   
information  available  for  the  House Floor  session.    He                                                                   
thought it would affect them.                                                                                                   
                                                                                                                                
2:16:07 PM                                                                                                                    
                                                                                                                                
Representative  Croft  disagreed   with  the  intent  of  the                                                                   
amendment.    He  believed  that   large  impacts  should  be                                                                   
compensated.  He thought that  the legislation was relatively                                                                   
minor and  that everyone should  "be in it together".   After                                                                   
reviewing the amendment,  he said it was a  cost that society                                                                   
should bare and that the bill already offers safeguards.                                                                        
                                                                                                                                
Co-Chair  Meyer  asked  how  often   the  National  Guard  is                                                                   
deployed.                                                                                                                       
                                                                                                                                
JOHN  CRAMER,  DIRECTOR,  ADMINISTRATION  SERVICES  DIVISION,                                                                   
MILITARY  AND VETERANS  AFFAIRS, stated  currently there  are                                                                   
180  Alaska National  Guardsmen  deployed.   Since 9-11,  the                                                                   
country has  entered into a  new era of deployment,  becoming                                                                   
more frequent.   It is anticipated  that by FY06,  there will                                                                   
be around 300 Alaskan National Guard deployed.                                                                                  
                                                                                                                                
Representative Weyhrauch WITHDREW Amendment #4.                                                                                 
                                                                                                                                
2:19:29 PM                                                                                                                    
                                                                                                                                
Representative Foster MOVED to  report CS HB 122 (FIN) out of                                                                   
Committee  with  individual  recommendations   and  with  the                                                                   
accompanying fiscal notes.  There  being NO OBJECTION, it was                                                                   
so ordered.                                                                                                                     
                                                                                                                                
CS HB  122 (FIN)  was reported  out of  Committee with  a "do                                                                   
pass"  recommendation  and with  a  new  fiscal note  by  the                                                                   
Department  of Fish &  Game, a  new zero  note by the  Alaska                                                                   
Postsecondary Commission,  zero note #1 by the  Department of                                                                   
Commerce, Community and Economic  Development and fiscal note                                                                   
#2 by the Department of Military & Veterans Affairs.                                                                            
                                                                                                                                
HOUSE BILL NO. 187                                                                                                            
                                                                                                                                
     An Act  establishing the  Alaska capital income  account                                                                   
     within the  Alaska permanent fund; relating  to deposits                                                                   
     into   the  account;  relating   to  certain   transfers                                                                   
     regarding  the Amerada  Hess  settlement  to offset  the                                                                   
     effects of  inflation on the Alaska permanent  fund; and                                                                   
     providing for an effective date.                                                                                           
                                                                                                                                
                                                                                                                                
HOUSE BILL NO. 188                                                                                                            
                                                                                                                                
     An  Act   establishing  the  State  of   Alaska  Capital                                                                   
     Corporation;  authorizing the issuance  of bonds  by the                                                                   
     State of  Alaska Capital Corporation to  finance capital                                                                   
     improvements  in   the  state;  and  providing   for  an                                                                   
     effective date.                                                                                                            
                                                                                                                                
2:20:59 PM                                                                                                                    
                                                                                                                                
CHERYL  FRASCA, DIRECTOR,  DIVISION OF  MANAGEMENT &  BUDGET,                                                                   
OFFICE OF THE  GOVERNOR, commented that in  early March 2005,                                                                   
there  had been  a meeting  discussion in  the House  Finance                                                                   
Committee  about establishing  an account  to use the  funds,                                                                   
while the bills were still in  the House Judiciary Committee.                                                                   
The bills  did pass out of  the Judiciary Committee  and they                                                                   
relate  to  the  same  measures  discussed  that  day.    She                                                                   
commented  this  is the  Governor's  proposal,  as  a way  to                                                                   
leverage interest earnings that  the State is receiving on an                                                                   
account  from   a  1997  settlement  reached   with  the  oil                                                                   
companies.   That proposal was  to leverage average  earnings                                                                   
and the Governor's proposal is  to leverage approximately $30                                                                   
million dollars  in annual interest  earnings to  issue bonds                                                                   
for  financing additional  capital projects  outlined in  the                                                                   
FY06 Capital  Budget.   The ultimate  decision regarding  the                                                                   
projects rests with the Legislature.                                                                                            
                                                                                                                                
Ms.  Frasca  noted  that Devon  Mitchell  would  discuss  the                                                                   
actual  structure  of the  bills.    HB 187  establishes  the                                                                   
Alaska  Capital Income  Account, the account  into which  the                                                                   
annual earnings  would be appropriated.   HB 188  establishes                                                                   
the State of Alaska Capital Corporation,  which would provide                                                                   
the way to leverage earnings to  issue bonds.  Alaska Housing                                                                   
Finance  Corporation (AHFC)  was online  to address  concerns                                                                   
and bond  counsel would address  specific concerns  with bond                                                                   
issuance.                                                                                                                       
                                                                                                                                
2:24:12 PM                                                                                                                    
                                                                                                                                
DEVON  MITCHELL,  EXECUTIVE  DIRECTOR,  DEBT  MANAGER  ALASKA                                                                   
MUNICIPAL  BOND   BANK  AUTHORITY,  DEPARTMENT   OF  REVENUE,                                                                   
limited his remarks to questions  that have come up regarding                                                                   
how  the bills  would  be  enacted.   He  referenced  back-up                                                                   
material offered in member's packets.  (Copies on File).                                                                        
                                                                                                                                
2:24:48 PM                                                                                                                    
                                                                                                                                
Mr. Mitchell  acknowledged that there  was no reason  why the                                                                   
two pieces of legislation could  not be passed independently.                                                                   
He  responded  to  a  question   from  a  previous  committee                                                                   
regarding  what would  happen  with potential  leveraging  if                                                                   
there  were inflation  proofing in  the fund  balance of  the                                                                   
Amerada Hess settlement  money.  He claimed  that there would                                                                   
be about  a 37%  reduction in  annual revenue  that would  be                                                                   
available  to the Legislature.   As  time goes by,  inflation                                                                   
proofing  would fund the  balance and  eventually, the  State                                                                   
would  receive the  full  $29 million  dollars.   The  result                                                                   
would be  a 36% reduced  project list,  an action  that would                                                                   
provide quicker  leveraging but would have a  dramatic short-                                                                   
term impact.                                                                                                                    
                                                                                                                                
2:27:42 PM                                                                                                                    
                                                                                                                                
Mr.  Mitchell   noted  that  the   listed  6%   represents  a                                                                   
conservative  placeholder and  demonstrates the viability  of                                                                   
the  Corporation's ability  to  borrow based  on  anticipated                                                                   
transfers.   He thought that  17-years was indicative  to the                                                                   
strength  and  borrowing  rate   that  the  State  of  Alaska                                                                   
currently has  on corporate funds.   He added that  the ideas                                                                   
had been passed through the rating  analysts that monitor the                                                                   
State of Alaska's  credit.  Initially, it was  indicated that                                                                   
it would  not be  included in  the State's supported  average                                                                   
and was an important  feature of the structure.   Having been                                                                   
reviewed by  a number  of investment  banks, they found  that                                                                   
the structure would work and financing would be feasible.                                                                       
                                                                                                                                
2:28:45 PM                                                                                                                    
                                                                                                                                
MIKE  BARNHILL,  ASSISTANT ATTORNEY  GENERAL,  DEPARTMENT  OF                                                                   
LAW,  offered to  provide a  background of  the Amerada  Hess                                                                   
settlement and/or speak to legal questions.                                                                                     
                                                                                                                                
Ms. Frasca noted  the memo included in the  file from Cynthia                                                                   
Weed, Bond Counsel  with the firm, Preston,  Gates and Ellis,                                                                   
and  dated  4/06/05,  regarding the  appropriateness  of  the                                                                   
projects.                                                                                                                       
                                                                                                                                
CYNTHIA WEED,  (TESTIFIED VIA TELECONFERENCE),  BOND COUNSEL,                                                                   
PRESTON, GATES  AND ELLIS, ANCHORAGE,  noted that she  was on                                                                   
line and offered to answer questions of Committee members.                                                                      
                                                                                                                                
2:31:04 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  asked if the bond  counsel was in  support of                                                                   
the legislation and found the recommendations to be legal.                                                                      
                                                                                                                                
Ms. Weed explained that the bond  counsel had worked with Mr.                                                                   
Barnhill in  review the draft  bills.  Bond counsel  believes                                                                   
that the structure of the corporation  is consistent with the                                                                   
Alaska Constitution.  Her firm  provided a preliminary review                                                                   
of the  initial projects  and found  that they were  eligible                                                                   
for financing.  The proposed tax  exemption structure has not                                                                   
been finalized; it still would  be possible to get bonds on a                                                                   
preliminary basis.                                                                                                              
                                                                                                                                
Co-Chair Meyer  understood that  the Amerada Hess  fund would                                                                   
be a  sub account  and would not  impact the Permanent  Fund.                                                                   
Ms. Weed  thought  that would  be safe to  say but  requested                                                                   
confirmation from the Department of Law.                                                                                        
                                                                                                                                
2:33:16 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  asked about  modifying the suggested  project                                                                   
list.   Ms. Frasca  responded that  if the Legislature  could                                                                   
reduce  it from  $340 million  dollars down  to $200  million                                                                   
dollars and  still fund it, she  would say "go for  it".  Co-                                                                   
Chair Meyer admitted  that there are concerns  dedicating $30                                                                   
million dollar  dividends over  a 20-year period  to purchase                                                                   
two  years  worth  of  capital  projects.    He  mentioned  a                                                                   
reduction  to 10-years  and asked if  there was  flexibility.                                                                   
Mr. Mitchell  replied that  there definitely is  flexibility,                                                                   
which  could make  the  financing  more "do-able".  The  less                                                                   
leveraging  of the  potential revenue,  the easier  it is  to                                                                   
attain high ratings.                                                                                                            
                                                                                                                                
2:35:32 PM                                                                                                                    
                                                                                                                                
Representative Weyhrauch  pointed out that the  legal opinion                                                                   
was prepared  two years  ago and that  the percent  of market                                                                   
value had changed.   He asked if it would still  be legal and                                                                   
if the use of  the Amerada Hess settlement funds  to bond the                                                                   
projects  would  create a  taxable  event  for the  State  of                                                                   
Alaska for the Permanent Fund.                                                                                                  
                                                                                                                                
Mr.  Burnhill   thought  that  Representative   Weyrauch  was                                                                   
referring to  the Johnson opinion  case, which  addresses the                                                                   
extent  to which  the Permanent  Fund is  subject to  federal                                                                   
income tax.   The  proposed legislation  takes the  stream of                                                                   
revenue  earnings from  the Permanent  Fund, which  currently                                                                   
are not being used for dividends  and then designates them to                                                                   
finance  the  projects.    It  would  not  create  a  taxable                                                                   
obligation, noting that there is nothing illegal about it.                                                                      
                                                                                                                                
2:37:45 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer  inquired if  instead,  the State  should  be                                                                   
using Alaska Housing Finance Corporation monies.                                                                                
                                                                                                                                
2:38:21 PM                                                                                                                    
                                                                                                                                
DAN  FAUSKE,   (TESTIFIED   VIA  TELECONFERENCE),   EXECUTIVE                                                                   
DIRECTOR, ALASKA  HOUSING FINANCE CORPORATION,  DEPARTMENT OF                                                                   
REVENUE,  stated  that  AHFC was  involved  in  the  original                                                                   
discussion with the Administration  regarding how to create a                                                                   
bonding  proposal  utilizing   general  fund  revenue.    The                                                                   
original  proposal was  to  use AHFC  having  a structure  of                                                                   
using their own  general obligation (GO) credit.   Mr. Fauske                                                                   
advised the  Administration that  AHFC would  not be  able to                                                                   
get a favorable outcome from Wall  Street as they are "tapped                                                                   
out" of  GO credit.  AHFC  originally anticipated  creating a                                                                   
sub corporation  structure similar to what the  Department of                                                                   
Revenue currently  does.  As it  turned out, it  became clear                                                                   
that the  Department  of Revenue  would be  able to meet  the                                                                   
needs.                                                                                                                          
                                                                                                                                
Mr.  Mitchell  added  that the  analysis  has  indicated  the                                                                   
amount  of volatility.   The  Department  wants to  guarantee                                                                   
that if the  revenue stream should fail, it  would not become                                                                   
an obligation of  the State of Alaska.  The  plan proposes to                                                                   
use the  State's moral  obligation for  corporate credit  for                                                                   
the  proposed obligations.   He  stated it  was important  to                                                                   
have  it  near  the  Administration  and  the  Department  of                                                                   
Revenue.                                                                                                                        
                                                                                                                                
2:41:07 PM                                                                                                                    
                                                                                                                                
Mr. Mitchell advised that the Board would consist of:                                                                           
                                                                                                                                
   ·    The Commissioner of the Department of Revenue,                                                                          
   ·    The Commissioner of the Department of Administration                                                                    
        and                                                                                                                     
   ·    The Commissioner of the Department of Commerce,                                                                         
        Community & Economic Development.                                                                                       
                                                                                                                                
The commissioners  would have the ability to  insure that the                                                                   
moral obligation  was honored  and that  they were  sending a                                                                   
message  to  rating  analyst  and agencies,  this  is  a  top                                                                   
priority for the State of Alaska.                                                                                               
                                                                                                                                
2:41:57 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer (inaudible).                                                                                                     
                                                                                                                                
Ms.  Frasca  asked  if  he  was  referring  to  the  interest                                                                   
earnings being used for another public purpose.                                                                                 
                                                                                                                                
Representative  Kelly   voiced  concern  with   the  proposed                                                                   
legislation.  The public has voiced  a grave concern with any                                                                   
invasion  of the Permanent  Fund.   The people  of the  State                                                                   
have responded overwhelming.   He recommended to move forward                                                                   
only with public  inclusion.  He understood  that the Amerada                                                                   
Hess case was a "convenience"  to make sure that judges would                                                                   
not be conflicted when receiving a dividend.                                                                                    
                                                                                                                                
Representative  Kelly  reiterated  caution that  passing  the                                                                   
proposed legislation  puts the  State into  an area  that the                                                                   
voters  do not  want go.   He  thought that  the voters  were                                                                   
smarter than the intent of the bill.                                                                                            
                                                                                                                                
2:46:08 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  state that initially had similar  concerns as                                                                   
Representative    Kelly,   however,    following   a    legal                                                                   
explanation, he had been put at ease.                                                                                           
                                                                                                                                
Ms. Frasca interjected  that the issue for most  Alaskans and                                                                   
is  how much  their  dividends  will be.    She thought  that                                                                   
Alaskans were willing to put out  a little to invest in their                                                                   
communities.   Ms. Frasca  pointed out  that the  legislation                                                                   
would help leverage  dollars to prepare for  Alaska's future.                                                                   
The  intent  is  to  leverage  money to  build  the  type  of                                                                   
infrastructure  needed   to  support  the  gas   line.    She                                                                   
acknowledged that the decision was politically "tuff".                                                                          
                                                                                                                                
Co-Chair Meyer pointed out that  the money was not originally                                                                   
part  of the  actual Permanent  Fund  or the  earnings.   Ms.                                                                   
Frasca  noted  that it  presently  resides in  the  Permanent                                                                   
Fund.    The  earnings  do get  redirected  to  the  Earnings                                                                   
Reserve  Account and  then appropriated  each  year into  the                                                                   
Amerada Hess  account.   Those earnings  are backed  out when                                                                   
the dividend is calculated.                                                                                                     
                                                                                                                                
2:49:15 PM                                                                                                                    
                                                                                                                                
Representative Kelly  understood and maintained  his concern.                                                                   
He reiterated that Amerada Hess  had been an accident and did                                                                   
realize that Alaskans  do demand more services  than they are                                                                   
willing  to  pay  for.   The  Governor  does  not  think  the                                                                   
Permanent Fund should be enshrined  or that there should be a                                                                   
vote of the people.   The legislation is a way  into the fund                                                                   
from a "veiled" perspective and it is not "straight up".                                                                        
                                                                                                                                
2:51:35 PM                                                                                                                    
                                                                                                                                
Representative  Holm  continued with  Representative  Kelly's                                                                   
"farm"   analogy,   stating  that   the   earnings   resemble                                                                   
"fertilizer".   He  understood  the points  delivered by  the                                                                   
previous   speaker  regarding   the  public  perception   and                                                                   
questioned if they would buy the proposal.                                                                                      
                                                                                                                                
Mr.   Barnhill  interjected   that   a  characterization   of                                                                   
segragation  of the  earnings  in the  Permanent  Fund as  an                                                                   
accident is  not correct.   When the legislation  was enacted                                                                   
in 1989, the  Amerada Hess royalty litigation  had been going                                                                   
on for quite some  time and there was a lot  of money in that                                                                   
fund,  well over a  $1 billion  dollars.   The Department  of                                                                   
Revenue realized  that they might  have to litigate  the case                                                                   
and the way to solve that would  be to segregate any earnings                                                                   
into a sub  account so that  no earnings would flow  into the                                                                   
Permanent Fund.                                                                                                                 
                                                                                                                                
Mr.  Barnhill   continued,  without   the  legislation,   the                                                                   
progress of the  litigation was impaired.  The  result of the                                                                   
litigation was $194 million dollars  for the State of Alaska.                                                                   
He said it definitely had value.                                                                                                
                                                                                                                                
In   reference   to  Representative   Kelly,   Mr.   Barnhill                                                                   
maintained  that the  fence could  be  kicked down  but as  a                                                                   
policy  matter that  choice should  be considered  seriously.                                                                   
There could  be a future situation  in which the  State might                                                                   
have major  litigation  and the  judge could  not be able  to                                                                   
preside  as the money  might flow  into a  dividend.   If the                                                                   
same situation  came up in the  future, the solution  may not                                                                   
be persuasive  to a  judge.  It  is within the  Legislature's                                                                   
prerogative  to  do  that, however,  the  Department  of  Law                                                                   
recommends against it.  The bill  proposes the middle ground,                                                                   
putting the earnings to some use for the State of Alaska.                                                                       
                                                                                                                                
Representative  Kelly understood the  reasons not to  do that                                                                   
and believed  there was no  connection between  the examples.                                                                   
The State's reasons are not persuasive.                                                                                         
                                                                                                                                
2:56:29 PM                                                                                                                    
                                                                                                                                
Vice-Chair Stoltze  spoke to the  importance of  the dividend                                                                   
and protecting  that program,  however, he believed  it could                                                                   
be fair game.                                                                                                                   
                                                                                                                                
Representative   Joule  interjected   that  there   are  many                                                                   
proposals "popping  up" around  the building.   Each proposal                                                                   
has something  of concern  regarding either  the planning  or                                                                   
the infrastructure.  He cautioned about the "blendings".                                                                        
                                                                                                                                
2:58:13 PM                                                                                                                    
                                                                                                                                
Representative   Croft   stated  that   there   is  a   "huge                                                                   
philosophical debate"  that will  happen.  He  disagreed with                                                                   
the comment  that it would not  be use of the  Permanent Fund                                                                   
earnings.  They  are clearly Permanent Fund  earnings.  Under                                                                   
the current statutory structure,  it would not have an effect                                                                   
on the dividend.  Mr. Barnhill agreed.                                                                                          
                                                                                                                                
Representative  Croft advised  that  there never  had been  a                                                                   
judicial determination in the  direct line of that case.  Mr.                                                                   
Barnhill countered  that there have been so  many judges that                                                                   
have weight in  on the matter.  He referenced  the chronology                                                                   
of the case included in the packets  and provided an overview                                                                   
of the Amerada Hess chart.  (Copy on File).                                                                                     
                                                                                                                                
3:01:09 PM                                                                                                                    
                                                                                                                                
Discussion  occurred  between  Representative Croft  and  Mr.                                                                   
Barnhill regarding  the chronology of the Amerada  Hess case.                                                                   
Mr. Barnhill  pointed out  that in  1989, the Alaska  Supreme                                                                   
Court  amended  the  court  rule,  both  the  civil  and  the                                                                   
criminal  rule that  the  mere receipt  of  a Permanent  Fund                                                                   
dividend would not  be enough to cause dismissal  of a juror.                                                                   
That  rule is  still on  the books.   He  said that  signaled                                                                   
where  the Alaska  Supreme  Court  rests on  the  issue.   He                                                                   
acknowledged that  the State really does not  know what would                                                                   
happen when a case like this comes forward.                                                                                     
                                                                                                                                
Representative  Croft   interjected  that  there   are  other                                                                   
issues.    He found  it offensive  that to eliminate  Alaskan                                                                   
jurors that  cannot determine  things that affect  an Alaskan                                                                   
fund   because  of   the   possibility   of  hidden   minimal                                                                   
differences.  The debate is attempting  to make sense of that                                                                   
and seems as though the concern should be addressed.                                                                            
                                                                                                                                
3:03:34 PM                                                                                                                    
                                                                                                                                
Representative  Croft  commented  that  using  the  money  on                                                                   
dividend purposes  would impermissibly  prejudice a  judge or                                                                   
jury because  of the  benefit they would  receive.   He asked                                                                   
how it could be spent on capital  projects that would benefit                                                                   
those  same judges  and juries  and  why then  could that  be                                                                   
legal.   Mr. Barnhill  countered that in  using the  fund for                                                                   
capital  projects, the  effect could  be more  diffused.   He                                                                   
suspected  it  had  been  "looted"  by  the  Supreme  Court's                                                                   
amendment.  The  only remaining issue is whether  a judge was                                                                   
biased by receipt of a Permanent Fund dividend.                                                                                 
                                                                                                                                
In  response to  further  concerns voiced  by  Representative                                                                   
Croft, Mr.  Barnhill advised  that the case  is not  going to                                                                   
impact the Permanent Fund dividend.                                                                                             
                                                                                                                                
3:05:50 PM                                                                                                                    
                                                                                                                                
Representative  Croft  asked if  the  rule that  the  Supreme                                                                   
Court adopted  on jurors  would not set  that type  of limit,                                                                   
but  instead states  that the  fact  of the  dividend is  not                                                                   
sufficient to  be disqualified.  Mr. Barnhill  responded that                                                                   
was correct.                                                                                                                    
                                                                                                                                
Co-Chair Chenault asked about  the fiscal note.  He mentioned                                                                   
the averaged annual realized return  rate of 7.61%.  He asked                                                                   
about the  bond rate versus  using straight case  scenario to                                                                   
pay for  the bonding package and  which option would  be best                                                                   
for the State.                                                                                                                  
                                                                                                                                
Mr. Mitchell replied  it would be a policy  question deciding                                                                   
whether to  pay cash  or borrow.   The reasons for  borrowing                                                                   
are rationalized through a couple  different avenues.  In the                                                                   
costs associated  with borrowing money for  capital projects,                                                                   
there  exists  the  ability to  access  tax  exempt  markets.                                                                   
There  is  a  differential  between  a  state  and  municipal                                                                   
entity, depending on the market,  it could be between 1.5% to                                                                   
2.5%.  The State  of Alaska is exempt on the  investment side                                                                   
as well.   The State  can invest  in taxable investments  and                                                                   
does  not have  to pay  income tax  on those  earnings.   The                                                                   
State can  also borrow  on the  tax-exempt rate, where  there                                                                   
would be  a differential.  There  are costs depending  on the                                                                   
issuance  and complexity  of the  issuance  to determine  how                                                                   
expensive it might be.  A general  obligation (GO) bond would                                                                   
be inexpensive  to issue.   In 2003, the average  underwriter                                                                   
spread was under $2 dollars per 1,000 bonds.                                                                                    
                                                                                                                                
3:10:06 PM                                                                                                                    
                                                                                                                                
Mr.  Mitchell   advised  that  the  flexibility   would  cost                                                                   
something but that today's rate  would still be less than 5%.                                                                   
The  6% listed  in  the packet  is  quite conservative.    He                                                                   
admitted that there  would be some risk involved  and offered                                                                   
to  provide some  number runs  for the  Committee.   Co-Chair                                                                   
Chenault requested that.                                                                                                        
                                                                                                                                
Mr.  Fauske related  that  the State  has  an opportunity  to                                                                   
capitalize  on  the one  thing  that the  federal  government                                                                   
gives, the ability  to issue tax-exempt debt.   Over the life                                                                   
of these bonds, there might result  between $30 & $50 million                                                                   
dollars   in  savings   versus  spending   that  cash.     He                                                                   
recommended   that   the   State  take   advantage   of   the                                                                   
opportunity.                                                                                                                    
                                                                                                                                
Representative  Hawker   commended  everyone  who   has  been                                                                   
working  on   the  proposal  and   voiced  support   for  the                                                                   
conclusions.  He  recommended that leverage is  good, as well                                                                   
as being a capital preservation.                                                                                                
                                                                                                                                
Representative Hawker  agreed that the proposal  makes sense.                                                                   
He noted  that the  Committee is  being asked  to tie  up the                                                                   
cash flow stream  for some period of time.   He questioned if                                                                   
members are comfortable  with that idea.  It would  be a one-                                                                   
time  solution without  sustainability  and  inquired how  it                                                                   
could become sustainable.                                                                                                       
                                                                                                                                
Ms. Frasca responded that the  Administration does not have a                                                                   
proposal to address the sustainable  base.  She reviewed goal                                                                   
criteria.  She noted that Representative  Hawker has raised a                                                                   
challenge  to rearrange  the fund  sources.   At this  point,                                                                   
there are no alternative proposals.                                                                                             
                                                                                                                                
3:19:27 PM                                                                                                                    
                                                                                                                                
Representative   Hawker  asked   if  the  Administration   is                                                                   
receptive to suggestions.   Ms. Frasca replied  that there is                                                                   
room to talk.   Representative Hawker termed  the possibility                                                                   
the "verge of a legacy concept".                                                                                                
                                                                                                                                
Co-Chair  Meyer   agreed  with  points  brought   forward  by                                                                   
Representative  Hawker.    Co-Chair  Meyer  asked  about  the                                                                   
science  complex  proposal  assigned  to  the  University  of                                                                   
Alaska-Anchorage (UAA) in the  amount of $21 million dollars,                                                                   
first  phase.   Ms. Frasca  replied  that the  Administration                                                                   
used the University's  capital request list.   In response to                                                                   
comments by Co-Chair  Meyer regarding the road  projects, Ms.                                                                   
Frasca  admitted  that  the  Administration  is  looking  for                                                                   
alternative ways to finance the projects.                                                                                       
                                                                                                                                
3:21:47 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  referenced the  letter from bond  counsel and                                                                   
asked  if that  firm  had anything  to do  with  taxes.   Mr.                                                                   
Mitchell pointed  out the firm  has attorneys  who specialize                                                                   
in tax  issues.  Ms.  Weed interjected  that the firm  is not                                                                   
speaking to the  tax counsel issues but  addressing financing                                                                   
structure concerns and the tax-exempt nature.                                                                                   
                                                                                                                                
Representative Joule pointed out  that the money that sits in                                                                   
the  Permanent Fund  is inflation  proofed.   He thought  the                                                                   
proposed program would not be  and asked the long-term impact                                                                   
of that.   Ms. Frasca replied  that the $424  million dollars                                                                   
in  the settlement  account  would remain  that  amount.   It                                                                   
would  not  change.   Representative  Joule  understood  that                                                                   
inflation proofing  would keep  it at that  value.   He asked                                                                   
what the impact or loss in value could be.                                                                                      
                                                                                                                                
Mr. Mitchell  explained  that the annual  short term  impact,                                                                   
inflation proofing  in year one would be $11  million dollars                                                                   
to qualify under  the 2.6% inflation rate.   The amount would                                                                   
reduce  the transfer  and for  the same  risk tolerance,  the                                                                   
project list would be reduced.                                                                                                  
                                                                                                                                
3:24:46 PM                                                                                                                    
                                                                                                                                
Representative  Hawker referred to  HB 187, the  vehicle that                                                                   
creates the capital  income account.  He pointed  out that it                                                                   
modifies  existing statute  to allow  future legislatures  to                                                                   
direct money for any valid public  purpose.  HB 188 is a bill                                                                   
that creates  the concept.   He believed  that the  two bills                                                                   
were  separate  concepts.   He  wondered  if there  were  any                                                                   
restrictions  in HB  187.   Mr. Mitchell  replied there  were                                                                   
not.                                                                                                                            
                                                                                                                                
Representative  Hawker  asked   if  it  was  intended  to  be                                                                   
unrestricted.  Mr.  Barnhill commented that it  would have to                                                                   
be done  that way  to avoid the  dedicated fund  restriction.                                                                   
Representative Hawker  noted that he was prepared  to pass HB
187 out of Committee but not HB 188.                                                                                            
                                                                                                                                
3:28:56 PM                                                                                                                    
                                                                                                                                
Ms.  Frasca was  concerned  about  the long-term  effects  of                                                                   
separating the two bills.                                                                                                       
                                                                                                                                
Representative  Kelly referred  to sustainability brought  up                                                                   
by Representative  Joule and wondered if the bill  could be a                                                                   
way to address that issue.  Ms.  Frasca replied that was only                                                                   
one piece to the capital budget.                                                                                                
                                                                                                                                
3:31:28 PM                                                                                                                    
                                                                                                                                
Representative  Kelly  discussed  the  temptation  to  forego                                                                   
achieving  the sustainability  for generations  to come.   He                                                                   
added that he was counting on  the House Finance Committee to                                                                   
inflation  proof  it and  felt  that  the proposal  could  be                                                                   
improved.                                                                                                                       
                                                                                                                                
3:32:52 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer referenced  the  letter from  Ms.  Weed.   He                                                                   
asked the  factors which would  make the bonds taxable.   Ms.                                                                   
Weed responded  that  there are  two ways to  make the  bonds                                                                   
taxable.   One would be the  type of projects funded  and how                                                                   
those projects  are used.   The  bonds may  only be  used for                                                                   
capital projects.   You cannot use long-term  debt tax-exempt                                                                   
bonds for ordinary operating and maintenance expense.                                                                           
                                                                                                                                
The second  way in which bonds  end up being taxable,  has to                                                                   
do with the overall  structure of the flow of  the money, the                                                                   
types of money pledged to pay  debt service and the structure                                                                   
on how that money is actually committed.                                                                                        
                                                                                                                                
3:37:18 PM                                                                                                                    
                                                                                                                                
Representative Hawker  asked if a  public entity such  as the                                                                   
State  would  be  exempt from  spending  its'  assets  before                                                                   
engaging in tax exempt financing.   Ms. Weed replied that was                                                                   
correct.   She added that  they would  be better off  if they                                                                   
were not broke and had collateral  to borrow money for a tax-                                                                   
exempt base.                                                                                                                    
                                                                                                                                
3:38:14 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  stated that HB 187  and HB 188 would  be HELD                                                                   
in Committee for further consideration.                                                                                         
3:39:04 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 3:39 P.M.                                                                                          
                                                                                                                                

Document Name Date/Time Subjects