Legislature(1999 - 2000)
02/10/2000 01:40 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
GENERAL SUBJECT(S): Commonwealth North
Alaska's Asset Portfolio
Permanent Fund Earnings
The following overview was taken in log note format. Tapes
and handouts will be on file with the House Finance
Committee through the 21st Legislative Session, contact 465-
2156. After the 21st Legislative Session they will be
available through the Legislative Library at 465-3808.
Time Meeting Convened: 1:40 p.m.
Tape(s):
PRESENT:
X
Representative G. Davis
X
Co-Chair Therriault
X
Representative Foster
X
Co-Chair Mulder
X
Representative Grussendorf
X
Vice Chair Bunde
X
Representative Moses
Absent
Representative Austerman
X
Representative Phillips
X
Representative J. Davies
Absent
Representative Williams
ALSO PRESENT: Duane Heyman, Executive Director, Commonwealth North;
Nancy Bear Usera, Vice President and Co-Chair, Managing for Maximum
Return Study Group, Commonwealth North; Joe Griffith, Co-Chair,
Permanent Fund Earnings Phase II Study Group, Commonwealth North
LOG
SPEAKER
DISCUSSION
TAPE HFC 00 - 31
SIDE 1
031
Co-Chair Mulder
Convened the meeting at 3:40 p.m.
121
Nancy Bear Usera,
Co-Chair, Managing
for Maximum Return
Study Group,
Commonwealth North
Observed that Commonwealth North's
mission is to educate its members and all
Alaskans on relevant public policy issues
and to assist in their resolution.
248
Ms. Usera
Noted that she co-chaired a study group,
Managing for Maximum Return and provided
members with handout #1, Managing for
Maximum Return (copy on file). Observed
that the Alaska Housing Finance
Corporation (AHFC) and the Alaska
Industrial Development and Export
Authority (AIDEA) were set up to assist
in economic development. The group looked
at the broad range of state assets to
determine if there were additional ways
that they could be used to generate
revenues.
421
Ms. Usera
Noted that the study group based their
work on a series of assumptions. The
first assumption was that the assets,
which are derived from Alaska's land
grant, should be managed consistent with
the constitutional mandate to maximize
their use and benefit to the people of
Alaska.
438
Ms. Usera
The second assumption was that the
constitutional prohibition against
dedicated funds is recognized as a policy
principle, which provides that the public
interest is served when all state
revenues, regardless of source, are
available for appropriation by the
legislature to meet Alaska's total needs.
550
Ms. Usera
The third assumption was that there are
two types of returns derived from an
asset's management: financial and
beneficial, and each must directly or
indirectly benefit all the people by
serving a public purpose.
578
Ms. Usera
Observed that corporations for specific
purpose pay dividends, but that the
Permanent Fund itself makes no
contribution back to the state of Alaska.
672
Ms. Usera
The fourth assumption was that asset
management is most effective within a
structure, which provides flexibility for
maximizing returns while assuring
accountability to the state and its
people.
690
Ms. Usera
Observed that there is a tendency for the
legislature to micro manage.
720
Ms. Usera
The fifth assumption was that performance
measures for determining efficiency,
results and returns are essential for
public accountability. Noted that more is
better tends to be the measurement.
Recommended that similar benchmarks be
established.
826
Ms. Usera
The sixth assumption was that private
enterprise should be the first option for
obtaining expertise, goods and services
to develop public assets. To the extent
that public sector programs compete with
the private sector, their activities
should proceed in a manner, which
minimizes adverse effects on private
sector competition. Pointed out that the
Department of Corrections sells furniture
at the market rate.
876
Ms. Usera
The last assumption was that maximizing
returns for all assets will enhance
revenue to the state as well as provide
greater diversity and stability of state
revenues. Examples can be found to better
manage the state's real estate. Many
attempts to establish a better management
are dealt with individually without cross
communication. Noted that there are a
dozen bills before the legislature
dealing with management of state assets.
None deal with the whole picture.
1028
Ms. Usera
Discussed the study group's findings in
relationship to missions and goals.
Observed that vague mission statements
leave activities and management of assets
subject to individual interpretation.
1068
Ms. Usera
Observed that activity rather than
returns frequently defines goals. She
maintained that there is a tendency to
shift funding and responsibilities off
budget.
1090
Ms. Usera
Noted efforts to have AHFC be
responsible for deferred maintenance at
the university. She questioned if this is
central to their mission.
1150
Ms. Usera
Cautioned that assets are not loaded up
with things that are convenient.
1173
Ms. Usera
Reviewed the study group's findings
regarding performance standards and
accountability. There is no monetary
value assigned to or reported on
beneficial returns.
1211
Ms. Usera
Questioned how subsidy programs, such as
the railroad, can be tracked. Concluded
that the public's interests are not
defined or reported. Part of the
railroad's purpose is to provide a
transportation corridor. Pointed out that
the dividend is a great example of a
subsidy program. She questioned what is
the overall benefit of the dividend.
1271
Ms. Usera
Performance measures, where they exist,
are often tied to activities rather than
to mission or returns.
1294
Ms. Usera
Discussed the study group's findings
regarding structure. Regulatory and asset
management functions within a single
agency are often incompatible for
achieving optimum results. She noted that
it is hard to develop something while
being the gatekeeper. Public corporations
are "halfway houses to privatization".
Lines between development and regulatory
responsibility are clearer.
1331
Ms. Usera
Operational mandates created in statute
and regulation do not allow for the
flexibility necessary to efficiently
adapt to evolving missions and
priorities. She questioned if we are
managing assets well when managers' hands
are tied. Policy makers should focus on
policy.
1379
Ms. Usera
Independent agencies have greater
flexibility than executive branch
departments in operations and funding.
1406
Ms. Usera
Assets are managed independently, with no
portfolio integration that would ensure
diversification of risk and return,
compatibility in objectives, performance
standards and measures, and coordination
of activities and reporting. Pointed out
that the Alaska Marine Highway System is
not necessarily considered in the greater
context of being part of the
transportation infrastructure.
1442
Ms. Usera
Discussed the study group's findings.
Noted that the state's annual budget
process does not provide effective
integrated review of asset management,
does not promote a long-term view of
returns, and instead focuses on
operational activity as opposed to
results.
1451
Ms. Usera
The vagaries of the annual appropriation
process and the volatility of state
general fund revenues influence asset
development potential. Noted that
schools are being funded this year, while
waterwater systems were funded in the
previous year. Political priority
determines investment dollars.
1462
Ms. Usera
Availability of, and access to,
alternative funding sources influence
operational activity.
1471
Ms. Usera
Politicization of management appointments
creates personnel turnover, which impairs
continuity and returns. Stable management
increases efficient operations.
1512
Ms. Usera
There are few management or budgetary
incentives for maximizing returns.
Stressed the need to create incentives
for other corporations.
1583
Ms. Usera
Long-term plans, and the accumulation of
capital to meet long-term needs, may be
used for political purposes, which
creates a disincentive for strategic
asset management. Pointed out that it is
the nature of beast to be subject to
political influence.
1615
Ms. Usera
Observed that special interests
significantly influence returns and
allocation of returns.
1652
Ms. Usera
Reviewed recommendations of the study
group. Noted that roles and
responsibilities need to be clarified.
1672
Ms. Usera
Noted that management performance and
agency operations should be measured.
Acknowledged that AHFC should not be
measured in the same manner or have the
same standards as ASTF.
1703
Ms. Usera
Stated that the dilemma is, what is the
right amount. What are the expectations
of Wall Street in regards to bonds? She
stressed that the same measures as for
other bonds should be used.
1743
Ms. Usera
Concluded that assets should be managed
as a portfolio. Recommended that assets
should be viewed in light of their total
potential and risk and reward be weighed.
1774
Ms. Usera
Recommended that returns be paid to the
general fund. Emphasized that subsidizes
are wonderful, but that the general
welfare should be served.
1807
Ms. Usera
Concluded that a system needs to be
created to achieve the recommendations,
using the best pieces of the existing
model.
1853
Vice Chair Bunde
Acknowledged the need for help to
translate Alaska's budget situation to
the public. Pointed out that the
permanent fund dividend comes from the
general fund. Noted that ASTF doesn't
give the state a dividend. Maintained
that the permanent fund dividend
encourages growth through the demand for
public services. Questioned if income tax
is part of the equation.
2026
Ms. Usera
Agreed that the permanent fund dividend
comes from the general fund. Acknowledged
that ASTF investments provide no return.
Suggested that grants could bring
ownership interest of patents to the
state of Alaska.
2092
Ms. Usera
Observed that Commonwealth North has
serious concern about the lack of growth
in the state's economy. Pointed out that
$800 million dollars of the state's cash
economy comes from a dividend program.
Pointed out that withdrawal of the
permanent fund dividend could create a
problem. Emphasized the need for
increased state productivity.
2146
Representative
Foster
Pointed out that there is a paradox in
that there is a large constituency that
works for government.
2243
Ms. Usera
Observed that some things have to be run
as a public service. Stressed that
maximizing federal returns does not
necessarily help build a credible
economy.
2333
Representative
Foster
Another paradox is that a healthy economy
hurts the state's budget. The healthier
the economy, the more people and the more
services are needed; while no one pays
for any thing.
TAPE CHANGE, HFC 00
- 31, SIDE 2
31
Ms. Usera
Responded that the state needs to look at
jobs that will be productive and create
wealth for the state and for individuals.
70
Representative
Phillips
Referred to pages 6 and 7 of handout #1.
Noted the difference between financial
returns and beneficial returns. Pointed
out that mission creep is important to
consider.
212
Ms. Usera
Discussed the difference between
financial returns and beneficial returns.
Beneficial returns benefit individuals
directly through program subsidies.
Beneficial returns serve a public purpose
and individuals benefit from using the
service. The holder of an AHFC mortgage
receives beneficial returns. Financial
returns are paid to the state and are
available for appropriation for the
general welfare. Stressed that it is
difficult to measure specific returns.
347
Representative J.
Davies
Quoted Albert Einstein "Everything that
counts can't be counted and everything
that can be counted doesn't necessarily
count."
461
Representative J.
Davies
Pointed out that basic resource
industries don't benefit the state in
relationship to the cost to the state.
Used the example of mining as an industry
that is disconnected from the state
economy, which could be connected with an
income tax.
569
Representative J.
Davies
Spoke in support of ASTF. Emphasized that
ASTF tries to diversify the economy.
There is a payback requirement with every
grant.
652
Representative J.
Davies
Disagreed that AHFC does not pay a
dividend.
689
Ms. Usera
Emphasized that activities are sometimes
measured instead of output. Need to do a
better job raising money. Pointed out
that the issue with an income tax is
which pocket it will come out of and what
mechanisms will be used.
813
Representative Moses
Emphasized that a large dividend would
attract people to the state and create
further demand for services.
861
Ms. Usera
Maintained that one of the unfortunate
aspects of dividend program is that so
many children's dividends are being
wasted. Suggested children's permanent
fund dividends should be held in trust to
the age of majority.
938
JOE GRIFFITH, CO-
CHAIR, PERMANENT
FUND EARNINGS PHASE
II STUDY GROUP,
COMMONWEALTH NORTH
Noted that he co-chaired a study group
considering the Permanent Fund Earnings.
He provided members with handout #2,
Commonwealth North - Permanent Fund
Earnings Phase II - A cornerstone for
fiscal certainty (copy on file).
1004
Mr. Griffith
Maintained that the disconnect between
the health of the state of Alaska's
economy and the funding of needed
services is the most difficult thing
faced by legislators.
1067
Mr. Griffith
Noted importance of an education package.
Summarized proposals and recommendations
of the study group. Concluded that
permanent fund earnings must be
considered as part of a total state
fiscal package that includes getting the
most from money spent for state
government.
1121
Mr. Griffith
The corpus of the Permanent Fund should
be fully protected by preservation of the
principal.
1141
Mr. Griffith
The current individual Permanent Fund
Dividend Program should continue, using a
portion of the Permanent Fund's earnings,
although not necessarily on the same
scale.
1175
Mr. Griffith
The biggest single departure from current
practice is that Commonwealth North
recommends using 30% of Permanent Fund
earnings derived from an endowment
concept to support state government and
for additional purposes as outlined
below. This 30% should be funneled
through the Constitutional Budget Reserve
account.
1221
Mr. Griffith
Twenty percent of the Permanent Fund's
earnings should be used to provide a
means for local communities to meet
capital needs. The closer that decisions
can be brought to the people involved,
the more efficient and responsive those
decisions will be. Creation of a
Community Dividend Program would meet
this policy objective.
Ten percent of the Permanent Fund's
earnings should be used to fund statewide
capital needs and deferred maintenance
that provide and maintain infrastructure
to support economic sustainability and
growth.
1266
Mr. Griffith
Start state taxes at some point when
necessary.
1274
Mr. Griffith
Observed that calculations were based on
an oil price that is $7 to $8 dollars a
barrel lower than currently exists.
1309
Mr. Griffith
Noted that under their recommendations
the personal dividend stays about $1,000.
1330
Mr. Griffith
Recommended that a community dividend
program be created and that 20% of the
Permanent Fund's earnings be used by
local communities to meet their capital
needs.
1365
Mr. Griffith
Proposed support for a statewide capital
program using 10% of the Permanent Fund's
earnings.
1430
Mr. Griffith
Maintained that the plan would not
bankrupt the dividend. Acknowledged that
the dividend would be smaller.
1458
Representative
Grussendorf
Questioned why the Constitutional Budget
Reserve would be used.
1494
Mr. Griffith
Explained that the Constitutional Budget
Reserve is a handy place for working
capital. Pointed out that their working
capital is needed to take up variations
in the price of oil.
1546
Representative
Grussendorf
Expressed concern that the Constitutional
Budget Reserve would be used as an easy
out to avoid difficult questions.
1573
Mr. Griffith
Acknowledged some difficulties with the
use of the Constitutional Budget Reserve,
but emphasized that it has functioned as
it was crafted.
1604
Representative
Grussendorf
Pointed out that the Constitutional
Budget Reserve was created to provide
working money.
1619
Mr. Griffith
Stressed that the Constitutional Budget
Reserve would continue to serve its
purpose of allowing state access to
funds.
1642
Representative J.
Davies
Questioned if money placed into the
Constitutional Budget Reserve would be
treated general funds.
1658
Mr. Griffith
Presumed it would be invested.
1671
Representative J.
Davies
Referred to a market value approach.
1740
Mr. Griffith
Noted that the members would be hearing
more about market value approach in the
future.
1756
Representative G.
Davis
Stated that he would like to see the
Community Dividend Program included. He
asked what is the right thing to do
versus the correct political thing to do.
He thought that state resources should be
shared with the municipalities.
1820
Representative
Phillips
Spoke to inflation proofing and the total
earnings and agreed with the market
approach.
1837
Representative
Foster
Stated that he appreciated the testimony.
He noted that no one from Bush Alaska was
included in the Commonwealth North study
group. He asked if there was an attempt
to get individuals outside of Anchorage
involved.
1892
Mr. Griffith
Stated that there was not adequate time
last spring to reach that individuals in
rural Alaska. He acknowledged that
Representative Foster had a valid
complaint. He assured members that they
were trying their best to represent rural
Alaska.
1954
Representative
Foster
Offered to help find a rural
representative.
1963
Vice Chair Bunde
Stated that the municipalities have held
people immune from the reductions. He
stated that there is a disconnect.
People have not felt the impact of a
reduction in revenue sharing. He stated
that he was having a difficult time
understanding that complaint. Pointed out
that taxes go up and the economy goes
down. He asked the impact of any change.
2043
Mr. Griffith
Noted that the issue has been debated at
length. The general consensus throughout
the group was that it was better to take
some portion for the local government
good than to put in the pocket of the
individuals. In the long run the greater
good would be served that way. Pointed
out that there could be problems because
transitions are always difficult.
2106
Representative Moses
Noted that the public did not dream up
the issue of "no taxes". Maintained that
politicians are the ones that have
created the situation. Stressed that the
damage is done. He spoke to the municipal
dividend. It is important to take into
consideration that Alaskan wages are
being taken out of state without being
taxed.
2216
Representative
Phillips
Agreed with comments by Representative
Moses. She noted that a lot of
legislators are not interested in a long-
range plan.
2240
Vice Chair Bunde
Expanded that it is an educational
challenge to gain approval for a long-
range plan.
2269
Ms. Usera
Commonwealth North recognizes the need
for a long-range plan. The dilemma is to
present it to others. The reports focus
on mechanisms that can be used.
Commonwealth North recognized the need to
talk about the political reality. Pointed
out that their plan has something for
everyone. Stressed that the public vote
was not addressed.
TAPE CHANGE, HFC 00
- 32, SIDE 1
65
Ms. Usera
As long as the responsibility is deferred
to a vote of the people it is unrealistic
to find a plan.
107
Representative
Phillips
Questioned if Commonwealth North has
plans to lobby legislators.
130
Ms. Usera
Noted that they are encouraging that
activity. Pointed out that the political
reality is that it is an election year
and it is unlikely that there would be
action.
178
Representative
Grussendorf
Pointed out that Alaska Marine Highway
System users pay 50 percent of the cost
of operation.
308
Representative J.
Davies
Stressed that the "no" vote by the public
came for a variety of reasons. He
stressed that there were people that
voted no because there were no taxes
included or they felt that it adversely
affected rural areas.
433
Ms. Usera
Noted that a "yes or no" choice is not
necessarily a variable option.
598
Representative Moses
626
Vice Chair Bunde
Acknowledged that there were lots of
reasons for the "no" vote but that in the
face of a negative vote that it is
difficult to act otherwise.
762
Representative Moses
Suggested that legislators allow voters
to decide what services should not be
provided.
783
Co-Chair Therriault
Observed that there are a lot of services
that the state provides for local
governments without credit. Pointed out
that there are things that local
municipalities cannot do. He gave
examples of state supported services.
926
Representative Moses
Agreed, but maintained that there are
things that the state can stop doing such
as maintaining streets. Maintained that
money should be given directly to the
municipalities.
1062
Ms. Usera
Thanked committee, next report a study of
rural/urban issues that will focus on
unity issues.
1117
Vice Chair Bunde
ADJOURNMENT
The meeting adjourned at 3:45 p.m.
HOUSE FINANCE COMMITTEE
LOG NOTES
February 10, 2000
House Finance Committee 1 02/10/00
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