03/17/2004 07:02 AM House W&M
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 17, 2004
7:02 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Bruce Weyhrauch, Vice Chair
Representative Vic Kohring
Representative Dan Ogg
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Paul Seaton
Representative John Harris
COMMITTEE CALENDAR
HOUSE BILL NO. 236
"An Act imposing a tax on employment; and providing for an
effective date."
- MOVED CSHB 236(W&M) OUT OF COMMITTEE
HOUSE BILL NO. 298
"An Act relating to the distribution of appropriations from the
Alaska permanent fund under art. IX, sec. 15(b), Constitution of
the State of Alaska, and making conforming amendments; and
providing for an effective date."
- MOVED CSHB 298(W&M) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 236
SHORT TITLE: EMPLOYMENT TAX FOR EDUCATION
SPONSOR(S): REPRESENTATIVE(S) WILSON
04/02/03 (H) READ THE FIRST TIME - REFERRALS
04/02/03 (H) W&M, FIN
04/10/03 (H) W&M AT 7:00 AM HOUSE FINANCE 519
04/10/03 (H) -- Meeting Canceled --
04/16/03 (H) W&M AT 7:00 AM HOUSE FINANCE 519
04/16/03 (H) Heard & Held/Subcommittee assigned
04/16/03 (H) MINUTE(W&M)
01/28/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
01/28/04 (H) Heard & Held
01/28/04 (H) MINUTE(W&M)
02/11/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
02/11/04 (H) -- Meeting Canceled --
02/13/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
02/13/04 (H) -- Meeting Canceled --
03/10/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
03/10/04 (H) -- Meeting Canceled --
03/17/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
BILL: HB 298
SHORT TITLE: DISTRIBUTIONS OF APPROPS FROM PERM FUND
SPONSOR(S): WAYS & MEANS
05/05/03 (H) READ THE FIRST TIME - REFERRALS
05/05/03 (H) W&M, FIN
05/06/03 (H) W&M AT 7:00 AM HOUSE FINANCE 519
05/06/03 (H) Heard & Held
05/06/03 (H) MINUTE(W&M)
05/08/03 (H) W&M AT 7:00 AM HOUSE FINANCE 519
05/08/03 (H) Heard & Held
05/08/03 (H) MINUTE(W&M)
05/14/03 (H) W&M AT 7:00 AM HOUSE FINANCE 519
05/14/03 (H) -- Meeting Canceled --
03/17/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
WITNESS REGISTER
DAN DICKINSON, Director
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Testified during the discussion of HB 236
and answered questions.
MARY HAKALA, Member
Alaska Kids Count
Juneau, Alaska
POSITION STATEMENT: Testified during the discussion of HB 236.
ROGER GAY
Big Lake, Alaska
POSITION STATEMENT: Testified during the discussion of HB 236.
BOB BARTHOLOMEW, Chief Operating Officer
Alaska Permanent Fund Corporation
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Testified during the discussion of HB 298
and answered questions.
KEVIN RITCHIE, Executive Director
Alaska Municipal League
Juneau, Alaska
POSITION STATEMENT: Testified during the discussion of HB 298
and answered questions.
ACTION NARRATIVE
TAPE 04-13, SIDE A
Number 0001
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 7:02 a.m. Representatives Hawker,
Samuels, Kohring, Weyhrauch, Wilson, Moses, and Ogg were present
at the call to order. Representatives Rokeberg and Gruenberg
arrived as the meeting was in progress. Representatives Seaton
and Harris were also present.
HB 236-EMPLOYMENT TAX FOR EDUCATION
Number 0150
CHAIR HAWKER announced that the first order of business would be
HOUSE BILL NO. 236, "An Act imposing a tax on employment; and
providing for an effective date."
CHAIR HAWKER informed the committee of his intent to move both
HB 236 and HB 298 out of committee and on to the [House Finance
Committee] after discussion and public testimony today.
Number 0219
REPRESENTATIVE WILSON, sponsor of HB 236, moved to adopt the
proposed committee substitute (CS) for HB 236, Version 23-
LS0921\V, Kurtz, 3/16/04, as the working document. There being
no objection, Version V was before the committee.
CHAIR HAWKER noted the arrival of Representative Gruenberg.
REPRESENTATIVE WILSON read from the sponsor statement for CSHB
236. For many years ... Alaska had [a school tax] that was paid
by all employed persons in the state. She continued to read:
The money went into the general fund and became a
portion of the dollars legislators earmarked for
education. However, when Alaska thought that they
were rich beyond their wildest dreams and the supply
of oil money, of course, would never end, the school
tax was repealed, and so, this is just trying to bring
back a school tax.
This bill imposes a $100 education tax to be paid by
all employed persons, self-employed or regularly
employed, who earn more than $600 in Alaska. This is
a way to assure that all persons who earn money in
Alaska pay something for the services that they all
receive. It's a way to collect some money from the
18.2 percent of workers who work in this state, earn
their living here, but reside and spend it somewhere
else.
This bill contains a trigger. We talked about several
different things last time. The education tax would
be imposed only in calendar years following the June
30 fiscal year end when the cash balance in the
Constitutional Budget Reserve Fund [CBRF] is less than
$1.5 billion. The tax would be suspended in
subsequent calendar years following the June 30 fiscal
end, when the cash balance of the CBRF is greater than
$2.5 billion. So, the trigger is if it falls below
$1.5 billion it goes into effect, and if money's
coming in and we've replenished that fund, which we're
supposed to be doing, which we have not been doing up
to this point, but, when that happens, then it would
be automatically suspended until a time would come
when we would need it again.
The tax would be deposited into the state's general
fund and accounted for separately. The legislature
may then appropriate the amounts collected under this
section for education. The Department of Revenue
[DOR] projects that the annual earnings from this
would be approximately $43 million.
Number 0536
CHAIR HAWKER noted that there is a new fiscal note from DOR and
asked that it be distributed to the members. He said the
sectional analysis provided is a more technical analysis of the
individual sections of the proposed CS.
Number 0555
REPRESENTATIVE WEYHRAUCH directed a question to Representative
Wilson about employees such as students who live outside the
state but return to work for seasonal employment in the summer,
who don't make in excess of $600 a year. He asked if they would
be taxed on earnings made outside the state.
REPRESENTATIVE WILSON answered that the tax would be on earnings
made in Alaska at a rate of zero percent on the first $600 they
would earn, 10 percent on the next thousand, and zero percent on
any other earnings. If they were making $650, it would be 10
percent of that amount, which would be $65, she explained.
CHAIR HAWKER clarified the issue in terms of nexus [the power of
a state to tax extraterritorial entities]. If the student has
nexus to Alaska, if there is an Alaska nexus to the taxpayer,
then the tax would be collected, he said.
REPRESENTATIVE WILSON added that if the student is a resident,
the tax would be collected.
Number 0737
CHAIR HAWKER reviewed the major changes in the bill from the
previous version. He stated that wages were easy to quantify
for state residents, but a mechanism was needed to capture
earnings from self-employment: fishers, doctors, lawyers, and
others who operate as independent contractors, sole proprietors,
or subchapter-S corporations or partnerships. He explained that
after much deliberation, a simple definition of "self-employment
net income" was determined, which is a clearly defined term in
the Internal Revenue Code (IRC) under Title 26, Chapter 2,
Section 1402(a), "Net earnings from self-employment". Net
earnings from self-employment means "if you've got to fill out a
social security self-employment form in a federal 1040, the net
earnings from self-employment, which is gross income derived by
an individual, less allowable deductions, become the taxable
line." That would include independent contractors and
partnership income. A key point of the net earnings from self-
employment Internal Revenue Service (IRS) definition is that it
has extensive provisions that take partnership income and back
off passive income such as rents, royalties, and interest, he
explained. He said it was a tried and tested definition and
opined it was a good basis for capturing [income] from self-
employed individuals. He emphasized that that was the major
change in [the proposed CS].
Number 1027
CHAIR HAWKER explained some of the smaller changes to the bill.
The "collars" were defined at $1.5 and $2.5 billion. The
employers will continue to be responsible for collecting from
wage-earning employees. A new section provides for a sanction
by DOR to make employers post a bond to assure payment for the
withholding, if an employer is not good at remitting the payment
in a timely fashion. The [proposed CS] indicates that self-
employed individuals must remit individually to themselves. If
any individual subject to this tax pays more than $100 by
operation of multiple employers or by their own contributions,
DOR shall refund [that amount of overpayment], he said. There
is a provision that requires anyone hiring a self-employed
individual who has to file with the federal government
informational reports, the 1099 reporting, to file copies with
DOR for cross-checking and audit purposes. The bill clearly
indicates that the disposition is for education, which is very
timely, he opined. Last, definitions have been cleaned up and
referenced to specific sites of the IRC, he said.
CHAIR HAWKER noted the arrival of Representative Rokeberg.
Number 1244
REPRESENTATIVE WILSON expressed her appreciation for the work
done by Representative Hawker on the proposed CS, especially for
making it understandable to taxpayers.
CHAIR HAWKER thanked Representative Wilson for her assistance on
the bill.
Number 1319
REPRESENTATIVE WEYHRAUCH inquired about the "kick-in" in the
proposed CS, and wondered why it just doesn't say, "When it is
less than $2.5 billion."
REPRESENTATIVE WEYHRAUCH, in reply to a request from
Representative Wilson, restated his question and said it is now
written as having a floor and a ceiling. He suggested just
having a floor.
REPRESENTATIVE WILSON replied that part of the reason is to let
the people of the state realize that [Alaska] can reach a point
where the tax is no longer needed, and that is a better selling
point. It also helps the legislators realize that there is some
leeway because the CBRF is supposed to be replenished during
good times, she added.
REPRESENTATIVE WEYHRAUCH said, "So, this is an educational
provision rather than a management provision."
REPRESENTATIVE WILSON said it is both.
CHAIR HAWKER compared it to a thermostat regulating temperature
in a room. He said, "There is a point at which the furnace
kicks on, but there is also a zone, in there, where the heat
fluctuates before the furnace kicks off again. In this case,
it's providing a window of area there that allows for the fact
that this is a very dynamic world with a lot of other economic
variables in it." He acknowledged Representative Rokeberg's
term of art, "It's a collar on ranges subject to judgment."
Number 1539
CHAIR HAWKER noted specifically that when money is taken from
the CBRF in this state, as Representative Wilson said, it is
owed back to that fund by the general fund. It is a receivable
of that fund, and that is why the language [in the proposed CS]
very carefully chooses the words "cash balance" in the CBRF,
because the CBRF has a cash balance of $8-plus billion at all
times, made up of a combination of cash and receivables from the
general fund, he explained. "So, in this case, we are truly
tying to the cash balance in the CBRF, rather than the
accountant's value balance in the CBRF," he stated.
REPRESENTATIVE WEYHRAUCH asked, "Could, then, you go through a
process of selling equities to bring that cash balance up prior
to, well, to determine the June 30 balance, either to avoid the
tax or, alternatively, put it into an illiquidity to cash out
from the CBRF to make an illiquid cash balance to impose the
tax?"
CHAIR HAWKER deferred to Mr. Dickinson.
Number 1705
DAN DICKINSON, Director, Tax Division, Department of Revenue,
said he believes that in the CBRF, most of the money is in cash
or cash equivalents and is held in a way such that it will be
liquid. "There is a special account which is held in other
securities. To be more precise, it could be defined as current
asset balance," he explained.
CHAIR HAWKER noted that "cash and cash equivalents" is the
commonly used term.
Number 1800
REPRESENTATIVE ROKEBERG said he appreciates the statements about
cash and cash equivalents, but opined that CBRF does have other
investments and securities. He said he isn't sure that a short-
term bond is equivalent to a cash equivalent.
CHAIR HAWKER noted that idea is found in the Statement 312 [of
the 2003 "Comprehensive Annual Financial Report" (CAFR)].
REPRESENTATIVE ROKEBERG continued to say that there is a
provision for longer-term investments that is statutorily
enacted. He recalled several years ago when there was a higher
balance in the CBRF and DOR was directed to look at a portion of
the CBRF for a longer-term investment to boost the yield
somewhat. He said there could also be other securities.
CHAIR HAWKER added, "Requiring the five-year investment
horizon."
Number 1900
MR. DICKINSON noted that in Statement 311, which is the
combining balance sheet that includes the CBRF, the categories
that make up the assets are "cash" and "investments," at $2
billion, and "due from other funds", at $5-plus billion. He
suggested a more accurate way of reconciling this would be to
say "cash investments." He made the point that the bill does
not refer to the CAFR, which does not come out until December
15. He said the language Chair Hawker inserted says that the
commissioner will certify [the cash balance] based on the cash
balance that is there. He advised looking at the latest KPMG
audit to see how those funds are characterized.
Number 1945
REPRESENTATIVE WEYHRAUCH suggested it may just be semantics,
because if it is going to be imposed, it is going to be imposed
by regulation, not by legislation. He said that the
administration is given the authority, once they know what is in
the CBRF in the calendar year, and then, in the following year,
DOR follows the statutory requirements and sends out the forms
for the education tax.
MR. DICKINSON said he believes the conditions are being
established by legislation.
REPRESENTATIVE WEYHRAUCH agreed. He explained that the
legislature sets the policy and delegates to DOR to send out the
tax forms. He emphasized that the legislature does not have to
make another legislative determination for delegating to the
agency when the CBRF limit goes below $1.5 billion.
MR. DICKINSON said that is correct.
REPRESENTATIVE WEYHRAUCH mentioned that that was his idea on the
sales tax, also.
Number 2104
REPRESENTATIVE OGG remarked:
I kind of like this thought process you've put in of
having two levels, one when [the cash balance] drops
below a certain level, the legislature making that
draw knows that they are now moving to impose a school
tax - "income tax," or 10 percent of income - and that
the only way to move away from that is to start making
those deposits to get that fund back up to $2.5
billion.
Number 2203
REPRESENTATIVE ROKEBERG thanked the chair for his recognition of
the collar methodology, which would benefit the people in the
state if the oil prices and natural resources revenues reached a
point where there would be an automatic stay of that particular
taxation. It is a policy statement to the people that the
legislature recognizes that there should be tax relief when
there are other revenue sources available. He said it could be
comforting for people to know that there won't be taxes just for
taxes' sake.
Number 2316
REPRESENTATIVE ROKEBERG asked for clarification about the cash
balance definition as it relates to the statutory revisions of a
few years back, concerning the boosting of yield. He wondered
if the broader term, "current assents", could be used.
MR. DICKINSON replied that the cash and investments listed in
the category used in the CAFR would include both the main fund
and the "sub" fund, which has been specially designated to be
invested for a longer-term horizon and for a higher rate of
return. He said he wanted to look at the audit report issues
regarding cash holdings. He said, "I believe if we use cash and
investments, or maybe cash and liquid investments, or maybe even
specifically, went off and said, investments other than the
receivable from the general fund -- there may be a cleaner way
of doing it."
Number 2431
CHAIR HAWKER noted that the term "current assets" is not used in
government accounting anymore. He suggested coming up with some
expansion of that term, and making a conceptual amendment to
have "and investment" incorporated in the three necessary
places, before the bill goes to the [House Finance Committee].
REPRESENTATIVE WEYHRAUCH asked if that includes cash investment.
CHAIR HAWKER replied that it does. He said the KPMG standalone
report of the CBRF may use a slightly different word, and he
would like to compare the two and find a balance between the
words.
Number 2540
REPRESENTATIVE GRUENBERG reported that HB 466 would eliminate
the sub account and if it passes, there would be money in only
one account. He asked if Representative Hawker could reference
the money in the account as established by statute.
MR. DICKINSON replied that it could be done, but care would have
to be taken because accounts in the budgeting system are not
like bank accounts.
Number 2636
REPRESENTATIVE SEATON said the collar mechanism is a good idea,
but he expressed concern if there was a situation where there is
$2 billion in the CBRF and, at one time, at that amount, the tax
is in effect and, at another time, it is not in effect. He
said:
It is confusing if you've been below $1.5 billion, and
now you're at $2 billion in the CBRF, you're taxing
people. If you, at some point in time, have been
above $2.5 billion, you take the tax off, and now
you're down to $2 billion and you're not taxing
people. You go to $1.8 billion -- you're not taxing
people. It seems to me that the idea of having the
trigger is a good mechanism, but I'm not sure about
the confusion that you get about sometimes taxing
people, and sometimes not taxing people, on the same
amount of money in the CBRF.
Number 2745
MR. DICKINSON responded that if there was a single point instead
of a collar, it would be equally confusing. If the CBRF hovered
around that balance, a tax in year one, no tax in year two, a
tax in year three, et cetera, in other words, if the CBRF
bounced around the trigger point, it would be more frustrating
to people, he opined. If there is a $1-billion collar and the
CBRF stays within that collar, there won't be those kinds of
changes, he predicted.
CHAIR HAWKER used the thermostat example again to show that,
during the range in which the temperature is declining, the
furnace is off until it hits the trigger point. It comes on
until it reaches a higher point and then kicks off, so at any
given time at the mid-range of the setting, the furnace may be
on or off. He termed it a smoothing mechanism. If there was a
single point, one penny less than the trigger point would
trigger the tax; one penny more, and the tax would go off. He
said he found that concept harder to justify than a range in
which the revenue mechanism would be applied.
Number 2914
REPRESENTATIVE ROKEBERG offered the wording for a potential
amendment which changes, on page 2, line 12, the amount of the
floor trigger to $1 billion rather than $1.5 billion. He
explained the change creates a lower threshold for the
imposition of the tax, which would create less tax on the people
and create a greater spread between $1 billion and $2.5 billion,
which should overcome some of the concerns raised by
Representative Seaton. He noted that the governor has spoken on
this issue, the Conference of Alaskans discussed using the $1
billion trigger, and the public understands that figure better.
He said [the committee] needs to look at the current cash
balances, the cash flow, and what may be done in terms of
entering the CBRF. He suggested that [the committee] should
look at the structural fiscal gap in the $1-billion range, not
the $1.5-billion range. He remarked that this was supposed to
be the "shock absorber" for the future economy. He referred to
Mr. Corbus's testimony during the Conference of Alaskans which
indicated that the state requires between $300 million and $400
million a year just for cash flow needs. Even if the state were
flush with money in terms of revenue collection, there needs to
be that extra cushion because the cash flow has variable
requirements, notwithstanding the fiscal situation, he opined.
Number 3146
CHAIR HAWKER explained that the rationale behind the $1.5
billion was recognized in the governor's $1 billion-floor in the
CBRF because of the six-month lag period between the measurement
date and the effective date of a revenue mechanism. There is
the presumption that if there is a continuing draw into the
CBRF, that draw would continue for another six months, so that
by the time the revenue mechanism actually takes effect, [the
amount in the CBRF] may be substantially below the $1 billion at
the time of the draw, he explained. At any given time the
"checkbook float" for the state is about $0.5 billion, and the
incremental amount of $500 million would give the assurance
that, at any given time, there would be a $1-billion cushion in
the bank, he surmised.
REPRESENTATIVE ROKEBERG said he appreciated that information,
but maintained that there is a difference between $300 million
and $500 million, and a few million here and there starts adding
up. He asked Mr. Dickinson why the cash balance analysis of the
CBRF is on June 30 and not July 1. He also asked when the FY 04
budget will be reconciled to see what type of draw will be
needed from the CBRF.
Number 3400
MR. DICKINSON answered it is his understanding that there are no
cash transfers that occur between June 31 and July 1, and said
[the date] is purely an accounting measure. He explained that
when DOR prepares the CAFR they can say, "Here, to the penny,
was the draw in the CBRF." He said there is a memorandum of
understanding between the treasury and the administration to set
up a cash efficiency management to make sure there is always
enough money in the general fund to make payments. [The general
fund] is kept within a $100 million to $200 million range, and
if it looks as if there will be cash over $200 million for over
30 days, money from the general fund will be put back into the
CBRF. If it looks as if the amount will go below $100 million,
money is taken out of the CBRF. There is no cash difference
between June 30 and July 1, and nobody makes a deposit or
withdrawal on the last day of the fiscal year or the first day
of the new fiscal year, he concluded.
REPRESENTATIVE WEYHRAUCH said, "Didn't we do that last year?"
MR. DICKINSON said he believed a financial adjustment was made
on the books.
REPRESENTATIVE ROKEBERG stated that he was mystified by Mr.
Dickinson's testimony because he felt there should at least be a
year-end date, which would be June 30, when all of the
accounting and balance sheets are reconciled to that date to
determine if any draws are needed. He said there should be a
notional amount, anyway, which is what the Alaska Permanent Fund
Corporation uses, and what he calls "windage." He emphasized
that the bill needs to be very clear as to the amount of the
trigger, and whether or not the draw for that current fiscal
year, presumably June 30, has an impact on the balance that is
in the CBRF.
Number 3721
CHAIR HAWKER replied that June 30 was chosen because then it
does become very empirical and, ultimately, an audited number,
which would give the public the greatest assurance and
confidence that the books have been reconciled at that point in
time.
MR. DICKINSON responded that there are several things going on.
For everyone's convenience the tax needs to on a calendar-year
basis, and there needs to be, for software purposes, a five-
month notice period. He explained that on July 31, the [DOR]
commissioner will estimate the balance that will show up five
months later. He said the money is not segregated in different
bank accounts.
REPRESENTATIVE ROKEBERG returned to his original question
whether the draw was attributable to June 30 or July 1. He
said:
It seems to me that you're actually making the
drawdowns on a cash flow basis as you identify what's
actually happening as a practical matter. This
particular legislation would have you jump another
hurdle here, in terms of that, is all I'm getting at.
I was wondering if the effect is if the amount that we
want to use as a trigger would take into effect that
current fiscal year of June 30 impact on the draw of
the CBR [Constitutional Budget Reserve]. That's what
I'm driving at.
MR. DICKINSON replied that he thought it would be fairly
immaterial which [date] is used, and the reason that June 30 is
used is, "Five months later you could say, here's the CAFR,
there's the date, June 30."
REPRESENTATIVE ROKEBERG said, "If you're going to use a notional
amount at the end of July to make the calculation, it may not be
consistent with the report anyway, though, right? And that
would just expose your judgment, good or poor, because it
wouldn't necessarily be consistent with the audit."
MR. DICKINSON said that was a good point. He added, "It
probably won't hit exactly on, but hope would be that it would
be very close. You'd probably have a lot of explaining to do
about why it wasn't exactly on, especially if the difference
moved it from one to the other."
REPRESENTATIVE ROKEBERG added, "Or you missed it by $50 or $100
million like you mentioned."
MR. DICKINSON added, "Or if it flipped you on one side or the
other of a measuring line."
CHAIR HAWKER suggested the committee move on if Representative
Rokeberg was finished with his comments.
REPRESENTATIVE ROKEBERG replied that he would be offering an
amendment soon.
Number 4100
REPRESENTATIVE OGG asked for clarity about how much tax someone
with an income of $650 would pay.
REPRESENTATIVE WILSON explained that $600 is cut off as if it
didn't exist, and then $601 would be taxed at 10 percent of $1,
or 10 cents, and [the tax on $650 would be $5].
REPRESENTATIVE OGG said that clarifies one point. He said he
appreciated the time and effort put into getting the self-
employed people into the bill. He wondered about the "coupon
clippers, dividend folks, or people who are just landowners."
Number 4219
MR. DICKINSON answered, "We haven't gotten coupon clippers
unless they owned part of the company whose coupons they were
clipping through a subchapter-S-type arrangement. That is
correct. People who are living off of pure investment income
would not qualify."
CHAIR HAWKER said that was by intent of the bill drafters.
MR. DICKINSON said it would just be earned income.
REPRESENTATIVE OGG said it appears that someone who received a
permanent fund dividend would be excluded, as well as people who
just receive rental income. He asked if that was the intent of
the bill.
MR. DICKINSON replied that was the effect of the bill. He
suggested if a person formed a subchapter-S corporation to hold
rental properties, there might be a payment, but said,
generally, for pure rental, there would not [be a tax payment].
REPRESENTATIVE OGG asked if a dividend would be taxed if it was
a person's sole income.
MR. DICKINSON said it would not be taxed.
CHAIR HAWKER noted that was the intent of the bill and explained
that is why the "net earnings from self-employment" definition
was chosen, which keeps to earned income as an active services-
type income excluding rentals from real estate, from personal
property, et cetera. The idea was not to go after the passive
retirement income of elderly folks, nor the bank account income
and permanent fund income of children. It was designed for
income-generating activities in the state, he concluded.
Number 4400
REPRESENTATIVE OGG remarked that he wanted that information to
be clear on the record because he had heard earlier comments
that some children should pay a portion of their education if
they were receiving a dividend. He said he appreciates the
clarity which shows that is not the intent [of the bill].
CHAIR HAWKER opened the meeting to public testimony. He
referred to a paragraph in the members' packets from Don Rulian,
head of the Alaska Society of CPAs, which expressed Mr. Rulian's
comfort, from an accountant's perspective, with the [proposed
CS] version of the bill.
Number 4521
MARY HAKALA, Member, Alaska Kids Count, said she is working
actively with a large network of concerned parents advocating
for increased funding for schools. She said her organization is
nonpartisan, parent-initiated, based in Juneau, but a statewide
network. She reported that the members of the organization were
asked to consider the revenue side of the education equation and
voice their preferences to legislators. Parents want excellence
in their schools, and to reach that goal it will require even
more than the $80 million-plus that is currently under
consideration by the legislature, she opined. She said they
realize that new revenue measures are necessary to make that a
reality in Alaska. She noted that today she was speaking as an
individual, and has a concern with the $600 threshold in the
bill because of the burden it places on college kids and young
people who have limited earnings in the summer months.
TAPE 04-13, SIDE B
MS. HAKALA continued to say that this population would pay a
disproportionate share of the tax. She added, as an adult, she
has no problem paying the tax, but would prefer an amendment be
made to change the trigger point. She suggested, though she
supports the bill, that there are more effective ways to fund
education such as revisiting the economic limit factor (ELF) to
ensure that Alaskans truly maximize their fair share of oil
profits, enacting the percent of market value (POMV) method to
utilize a portion of the permanent fund earnings for services
such as education, and initiating a broad-based state income tax
that is not regressive. She thanked the committee for their
time.
Number 4502
REPRESENTATIVE SEATON said he has heard many comments from
people who are willing to pay taxes for education, and pointed
out that the way the bill is structured now, the tax would not
be collected because there is a $1.5 billion cutoff and [the
CBRF] is above that. He asked Ms. Hakala if she thinks the
situation the state is in now would benefit from a tax for
education.
MS. HAKALA said her opinion is that there must be some mechanism
put into place so that income begins to be generated in the near
term.
Number 4354
ROGER GAY from Big Lake testified as follows:
Article 1, Section 1, of the state constitution states
that all persons have the natural right to life,
liberty, the pursuit of happiness, and the enjoyment
of the rewards of their own industry; that all persons
are equal and entitled to equal rights, opportunities,
and protection under the law; and that all persons
have corresponding obligations to the people and to
the state. HB 236 not only deprives the worker of the
enjoyment of the rewards of his own industry, but it
also imposes an unequal obligation to the people and
to the state. Under the equal protection clause,
everyone should be subjected to the same tax
regardless of their age or their source of income. I
don't understand why you want to pick on workers,
instead of nonworkers, and turn them into second-class
citizens.
Furthermore, this bill is obviously an attempt to
circumvent the constitutional provision prohibiting
the dedication of funds under Article 9, Section 7.
As to this bill suspending the taxes if the CBR
exceeds $2.5 billion, HB 236 basically ensures that
the government will never allow the CBR to exceed $2.5
billion. The government has no incentive to suspend
any tax. [HB 236] is not an employment tax, it is an
employment penalty. Thank you.
Number 4209
REPRESENTATIVE KOHRING responded, "Amen, thank you, good job,
and I agree with you."
CHAIR HAWKER asked if there was any further public testimony.
Hearing none, he announced that public testimony was closed. He
asked for consideration of amendments.
Number 4100
REPRESENTATIVE ROKEBERG moved to adopt Conceptual Amendment 1,
on page 2, line 12, after the word "than", to change $1.5
billion to $1 billion.
CHAIR HAWKER objected for purposes of discussion.
REPRESENTATIVE ROKEBERG stated that he thinks the $1-billion
amount is a more realistic floor trigger mechanism, given the
current amount in the CBRF, and given the prospective demands
for the CBRF in the near term. It also would lower the trigger
point at which the tax would be imposed. He said he believes,
from testimony he has heard on other occasions, that the $1-
billion figure is a fair approximation of the amount of shock-
absorber cushion the state needs, structurally, as well as for
cash flow management issues.
CHAIR HAWKER asked Representative Rokeberg if he envisioned
lowering the top end of the collar or keeping it at the same
level.
REPRESENTATIVE ROKEBERG replied it is fine as it is.
Number 3936
REPRESENTATIVE SAMUELS, continuing the discussion of the collar
issue, predicted that eventually this legislature, or a future
legislature, will fix the funding mechanism so the CBRF is not
dependent on a cash flow. When that time comes, when money is
not being drawn out of the CBRF, he suggested that the tax could
be collected for 10 to 15 years at $43 million a year, not
counting the compounded interest, and yet not be needed. He
said, "If you never need it, why would you collect the tax?"
REPRESENTATIVE ROKEBERG said it was a good point and he would
support an amendment to lower the amount to $2 billion.
REPRESENTATIVE SAMUELS deferred to those who know the numbers
better than he does.
CHAIR HAWKER asked Mr. Dickinson to comment.
Number 3743
MR. DICKINSON replied that it would take many years to build up
to $1.5 billion. He said it is a judgment call, that there are
other bills being considered that have the same trigger
mechanism in them, and that this tax could never carry the
burden. He said he hopes that all the "tools" would have
similar triggers.
CHAIR HAWKER said it could be argued that this component, at the
current fiscal note of $40-plus million, would be one of those
elements that would keep the budget balanced and allow the state
to not have to draw from the CBRF, which is why a collar is
needed.
REPRESENTATIVE ROKEBERG emphasized that this particular bill is
only one of a number of pieces of legislation. The primary
amount of build-up and return from the CBRF, if the POMV were to
pass, would be from excess amounts of money spun off from the
permanent fund, but more importantly, natural resource revenues
that don't have to be utilized. That would be a primary source
of funding for any reloading or build-up of the CBRF, he opined.
He said a collar speeds up the process and he would not object
to an amendment for the $2-billion amount.
Number 3540
REPRESENTATIVE SAMUELS said he did not mind either lowering it
or keeping it and letting the [House Finance Committee] take
care of making the triggers all the same.
CHAIR HAWKER asked Representative Samuels if he would like to
propose an amendment to [Conceptual Amendment 1].
REPRESENTATIVE SAMUELS replied that he did not know what the
numbers would be and suggested that the [House Finance
Committee] make all of the trigger points the same.
Number 3514
REPRESENTATIVE SEATON said he was confused because the
discussion seems to be saying that the tax is a CBRF-refill tax,
rather than an education tax. He characterized the comments he
has heard from constituents as being pro-education funding. He
said the tax was not quite a dedicated tax and yet was primarily
for education, but what he is hearing today is that Alaska does
not need money for education, because there is enough money in
the CBRF, so Alaska doesn't need the tax. He argued that to
take the amount down to $1 billion means that even if there is
less money than is there today, and the CBRF is even drawing
less than $1.5 billion, the tax wouldn't be needed. He said the
design of the tax is to fund education, which people have
repeatedly said needs more funding, so he suggested raising the
floor, instead.
Number 3309
REPRESENTATIVE WILSON asked what the trigger points in the other
bills were.
CHAIR HAWKER said he didn't know, and suggested following
Representative Samuels' suggestion to have the [House Finance
Committee, or House Rules Standing Committee] identify
consistent parameters.
REPRESENTATIVE WILSON said she agrees with Representative
Seaton's comments and is not comfortable with waiting [for the
amount] to get below the $1-billion amount, because at least
that much is needed in the CBRF for insurance for emergency
expenses.
Number 3141
REPRESENTATIVE ROKEBERG noted that the idea is to try to develop
confidence about taxation between the legislature and the
people. He said this bill is not an income tax and is intended
to generate additional revenues for the state; the fact that it
is a "soft tie" to education is, in part, to alert people to the
need for those monies. "The fact is, there has to be a balanced
approach in this bill, by delaying its impact until the money is
really needed, rather than rushing out when the price of oil is
at $36 a barrel and start laying taxes on people," he opined.
He said the legislature has to be very careful not to lose
support from the public.
Number 3022
CHAIR HAWKER asked if there was any further discussion of the
amendment. He maintained his objection and requested a roll
call vote. He said the question before the committee is whether
to pass Conceptual Amendment 1, which would change on page 2,
line 12, the $1.5 billion to $1 billion.
A roll call vote was taken. Representatives Weyhrauch, Kohring,
Samuels, Rokeberg, and Hawker voted in favor of Conceptual
Amendment 1. Representatives Ogg, Moses, Wilson, and Gruenberg
voted against it. Therefore, Conceptual Amendment 1 passed by a
vote of 5-4.
Number 2844
REPRESENTATIVE OGG moved to adopt Conceptual Amendment 2 to also
include passive income such as rentals from real estate,
royalties, and dividends in the bill.
CHAIR HAWKER objected for discussion purposes.
REPRESENTATIVE OGG first declared a conflict of interest because
he is a landlord, and then opined that it is not right to let
some folks who make money and pay taxes to the federal
government not pay this education tax. He stated that the
intent of the bill is to have citizens of the state contribute
toward education through a school tax. He noted that sometimes
employment is passive, but that does not mean a person is not
making money. As a landlord, he said he makes repairs, which is
physical labor, but because it is passive income it is not going
to be included [in the bill]. He concluded by saying, "If you
make money in this state, and we're going to go forward with
something like this, you should participate."
Number 2731
CHAIR HAWKER stated that the amendment would be, in his opinion,
a substantial change of intent in the manner in which the bill
was drafted. He remarked, speaking as an accountant, that it
would be a fairly complicated and difficult provision to
enforce. He questioned what would be targeted: corporate rent
payers, or individual citizens' interest earnings, or exemptions
for those over 65 years old whose only source of income might be
a rental property. He said those issues were considered, but
the focus of the bill is on people working for remuneration.
Number 2606
REPRESENTATIVE ROKEBERG agreed that the intention of the bill is
for "1099 incomes," or those incomes that are reportable. He
mentioned that there currently is no tax on rentals and that
[Conceptual Amendment 2] would be a huge change in public
policy, and he argued against that change. He said that by
pursuing [Conceptual Amendment 2] in this form, business income
is not being considered. If there is a business formation above
a sole proprietorship or family partnership, there would be 1099
income that would be reportable under this bill, which he said
he considers to be adequate.
Number 2446
REPRESENTATIVE GRUENBERG spoke in favor of the amendment. He
said the issue is one of fairness, and arguments against the
amendment have been fairly technical. He argued that the
concept of personal income, as opposed to corporate income, is
fairly well defined in the IRC, and it could be drafted to
change the definition to include personal income. He called it
a drafting issue. "The justification that was given for
excluding this type of income was that you don't want to tax
elderly people and children," he said. "I'm not sure,
constitutionally, if you can draw that distinction, or if there
is a question of denial of equal protection."
REPRESENTATIVE GRUENBERG emphasized it was a question of
fairness because the means of not taxing children and the
elderly is being addressed in the bill by not taxing passive
income. He pointed out that there are elderly who work and are
getting taxed. The people who are not getting taxed are people
who don't work, and they could be people who are not elderly and
not children, so the means that is being used is overbroad, he
opined. There are people who are escaping the tax who are
neither elderly nor children, such as the wealthy who do not
work. He said that is not fair and he supports the amendment.
He suggested the taxing of rental property is not the issue
here, but an education tax is, and the two should not be
confused.
Number 2139
REPRESENTATIVE SAMUELS asked Mr. Dickinson about the
relationship between rental property and limited liability
corporations (LLCs), and whether an LLC would be responsible for
paying the $100 education tax.
MR. DICKINSON replied:
If you have multiple sources [of income] and one of
them is taxable, you'll get the $100 taken out. So,
in some ways, it's very hard for us to figure out who
would just have rental income and who wouldn't have
anything else. So, I think, in some senses, the
notion that folks who have multiple sources, one of
them may qualify, the others may not, makes that a
very hard number to estimate.
REPRESENTATIVE SAMUELS asked if it was only for the individual.
He said:
If I owned a series of apartments and a couple of
duplexes or something, and my LLC was the company that
got the rent checks, the company is not on the hook
for the $100, so, to me, it is kind of a moot point,
almost. We're not talking about that many people that
... have nothing else other than rental income.
MR. DICKINSON suggested that federal filers could be checked to
see how many had only Schedule F income. He guessed it would be
a fairly small number.
Number 2010
REPRESENTATIVE ROKEBERG noted that self-employed individuals are
going to pay tax under this bill if they have an LLC because
they would have self-reporting income under a 1099.
MR. DICKINSON said that was correct for LLCs that opted to be
partnerships.
REPRESENTATIVE ROKEBERG asked if, typically, the vast majority
[of LLCs] select self-employment income.
MR. DICKINSON said he didn't have the numbers in front of him.
REPRESENTATIVE ROKEBERG replied, "I would be surprised if 95
percent of LLCs in the state are S-corps and didn't take it as
individual incomes."
CHAIR HAWKER added that was the reason most entities exist. He
noted the arrival of Representative Harris, co-chairman of the
House Finance Committee.
Number 1700
CHAIR HAWKER strongly maintained his objection to [Conceptual
Amendment 2]. He restated the question before the committee:
Shall we adopt a Conceptual Amendment 2, which would
be to restructure this bill, and Representative Ogg, I
will call attention to the title of the bill which was
a limited tax on wages and net earnings from self-
employment, to include, in some manner, taxing the
folks that earn income solely from real estate
investments.
REPRESENTATIVE OGG said his intent was to target employment
income that individuals, and not corporations, made. He said it
would be in the area of self-employed individuals, and would
exclude folks who received income from real estate. He
explained that the tax would be determined from federal income
tax.
CHAIR HAWKER clarified the amendment: "Your amendment is to
restructure the bill to eliminate or change the tax base here
from wages and self-employment income, to all income earned by
individuals."
Number 1606
REPRESENTATIVE OGG said he was not an accountant, but if that is
how it reads from adding in [other self-employment wages], that
is his intent.
REPRESENTATIVE GRUENBERG said, as he understands the amendment,
it is to include the concept of personal income as defined in
the IRC, which would include rental income and other forms of
passive income such as dividends.
REPRESENTATIVE OGG added, "And royalties."
Number 1518
CHAIR HAWKER suggested that Representative Ogg's intent is to
eliminate the concept, in this bill, of having the revenue base
be wages and self-employment income, and change it to being the
much broader concept of personal income, the entire federal
taxable income.
REPRESENTATIVE ROKEBERG replied, as a point of order, that the
amendment is inappropriate because it is so far-reaching that it
almost rewrites the whole bill. He said he was not sure that
was Representative Ogg's intention.
CHAIR HAWKER concurred with Representative Rokeberg's point that
the amendment would be a complete rewriting of the bill, and
asked the maker of the amendment to reconsider it.
Number 1307
REPRESENTATIVE OGG restated his intent, saying it appears to him
that people who own real estate are getting by without paying
this tax, and spoke of his own personal experience as a
landlord. He opined that passive income - rental from real
estate, royalties, and dividend income - should be included. He
said those who pay federal income tax should also pay an
education tax.
REPRESENTATIVE GRUENBERG responded to Representative Rokeberg's
point of order. He said he believes the amendment is in order
according to Mason's Manual. The fact that it expands the bill
is not a valid point of order, he opined.
CHAIR HAWKER asked that the amendment be reduced to writing.
REPRESENTATIVE OGG said he would be happy to write out his
amendment and submit it to the chair and perhaps the [House
Finance Committee] would take it up.
REPRESENTATIVE OGG withdrew Conceptual Amendment 2.
CHAIR HAWKER announced that Conceptual Amendment 2 by
Representative Ogg is withdrawn with the concurrence of the
objector.
Number 1027
REPRESENTATIVE ROKEBERG responded to Representative Gruenberg's
point and defended his point of order on the basis that the
amendment would have taken the head tax, or employment tax, and
turned it into an income tax. "It would be removing the bill
from the committee and totally changing it," he said.
Number 0940
REPRESENTATIVE WEYHRAUCH moved to adopt Conceptual Amendment 3,
page 2, line 11, where the words are "cash balance". He said he
is not sure those words adequately cover the intent of the bill.
He asked for help with additional wording.
CHAIR HAWKER objected only for discussion purposes, stating he
thought it was a good amendment. He suggested the words "and
investment" be added to the three places where "cash balance" is
mentioned. He suggested the bill drafters find a succinct
definition that would "capture the amount of money that appears
on the top line in the CAFR."
Number 0830
REPRESENTATIVE WILSON suggested those words be added to lines
11, 15, and 18 [of the proposed CS].
REPRESENTATIVE WEYHRAUCH said it was okay to add it wherever it
says "cash balance" in the bill.
Number 0808
CHAIR HAWKER acknowledged the amendment to the amendment and
noted that there were no objections. He explained that the
amendment would expand the words "cash balance" to be a more-
encompassing, technically correct description of "something that
gets us to that amount that appears on the first line of the
CAFR." He removed his objection to the amendment. He repeated
Conceptual Amendment 3, "which is to have in three locations
identified, line 11, line 15, and line 18, page 2 of the V
version of the bill, where the words 'cash balance' appear, have
the concept of cash and investment incorporated into those
lines, the specific verbiage to be worked out in coordination
with DOR."
CHAIR HAWKER, hearing no further objections, announced that
Conceptual Amendment 3 [as amended] was adopted.
REPRESENTATIVE ROKEBERG said there is an intent by the committee
and the bill to focus on education, but nothing in the title of
the bill seems to indicate that.
Number 0651
REPRESENTATIVE ROKEBERG offered Conceptual Amendment 4, which
would add a new Section 1, short title, "Alaska Education and
Employment Tax", and then renumber accordingly.
REPRESENTATIVE GRUENBERG objected for purposes of discussion and
offered a friendly conceptual amendment to also change the
wording in the title of the bill. [The title in Version V read,
"An Act imposing a limited tax on wages and on net earnings from
self-employment; relating to the administration and enforcement
of that tax; and providing for an effective date."]
REPRESENTATIVE ROKEBERG said he has no objection to that idea,
but that the amendment was intended to be for a statutory short
title so that the people understand the intent [if it becomes
law].
Number 0523
REPRESENTATIVE WEYHRAUCH wondered if the words "self-
employment", which are contained in the title of the bill now,
would change to "employment", or if "self-employment" would be
used in the proposed short title.
REPRESENTATIVE ROKEBERG replied that "employment" is both
employment and self-employment, and he didn't think the issue
needed to be confused in the short title. "We don't want a long
title in the short title," he added. "We don't want 'Alaska
Self-Employment' in the short title."
REPRESENTATIVE WEYHRAUCH said he understands that, but that the
title says self-employment.
REPRESENTATIVE ROKEBERG replied that is why there is a
distinction between a short title and a legal, constitutional
one.
REPRESENTATIVE GRUENBERG removed his objection to Conceptual
Amendment 4.
REPRESENTATIVE OGG asked why it couldn't say "Alaska Education
Tax".
REPRESENTATIVE ROKEBERG replied that it was an employment tax
requiring money for education.
Number 0410
REPRESENTATIVE OGG moved to adopt an amendment to Amendment 4,
to delete the word "Employment" and just have "Alaska Education
Tax".
CHAIR HAWKER asked Representative Rokeberg if he would accept
that as a friendly amendment.
REPRESENTATIVE ROKEBERG said he would.
Number 0304
CHAIR HAWKER replied that now Conceptual Amendment 4 says to
adopt a short title, "The Alaska Education Tax", as Section 1,
and renumber accordingly.
REPRESENTATIVE ROKEBERG mentioned, "We run the risk of a truth-
in-advertising claim, if we're not careful. That's the only
problem I have with that, because we have a dedicated fund for
education."
CHAIR HAWKER asked Representative Ogg if, upon the acceptance of
his friendly amendment, he wanted to withdraw his objection.
REPRESENTATIVE OGG withdrew his objection to Conceptual
Amendment 4 [as amended].
CHAIR HAWKER clarified that before the committee now is
Conceptual Amendment 4, a short-title amendment, which adds a
new Section 1 and renumbering accordingly, referring to the bill
as "The Alaska Education Tax."
CHAIR HAWKER, hearing no further objections, announced that
Conceptual Amendment 4 [as amended] was adopted.
Number 0122
REPRESENTATIVE KOHRING addressed Representative Wilson and
voiced a concern about out-of-state workers. He used North
Slope workers as an example, and asked what benefits they are
getting from state services that would justify this tax. He
asked Representative Wilson if she had any research on this
issue.
REPRESENTATIVE WILSON replied, "They use our airports."
REPRESENTATIVE KOHRING responded that they are paying for that
use through the tickets they purchase.
Number 0003
REPRESENTATIVE WILSON remarked that [the North Slope workers]
were not the only out-of-state workers. She maintained that the
workers in other parts of the state far exceed the numbers that
work on the North Slope.
TAPE 04-14, SIDE A
CHAIR HAWKER added, "Use our services and extract our wealth."
Number 0042
REPRESENTATIVE KOHRING replied, "You said, 'far exceed', how
does that break out, then?"
REPRESENTATIVE WILSON said she did not have the figures in front
of her, but could get them.
REPRESENTATIVE KOHRING requested information about how many
dollars would be generated for this tax from out-of-state
workers.
Number 0100
CHAIR HAWKER answered Representative Kohring's question by
saying, based on the most recent Department of Labor & Workforce
Development information, there are approximately 70,000
employees who are not Alaska residents per year in the state.
The average salary is around $15,000 per person, so $100 from
each of the 70,000 would be extracted for the state treasury, he
said.
REPRESENTATIVE KOHRING thanked Representative Hawker for the
information.
REPRESENTATIVE ROKEBERG asked Representative Hawker if he has
discussed this bill with the governor's office, because he
understands that they have an amendment for the bill.
CHAIR HAWKER said that it is not "ready for prime time."
Number 0224
REPRESENTATIVE WILSON moved to report CSHB 236, Version 23-
LS0921\V, Kurtz, 3/16/04, as amended, out of committee with
individual recommendations and the accompanying fiscal notes.
REPRESENTATIVE KOHRING objected.
Number 0400
A roll call vote was taken. Representatives Weyhrauch, Ogg,
Moses, Wilson, Samuels, Rokeberg, Gruenberg, and Hawker voted in
favor of reporting CSHB 236, as amended, out of committee.
Representative Kohring voted against it. Therefore, CSHB
236(W&M) was reported out of the House Special Committee on Ways
and Means by a vote of 8-1.
HB 298-DISTRIBUTIONS OF APPROPS FROM PERM FUND
[Contains discussion of HJR 26]
Number 0440
CHAIR HAWKER announced that the final order of business would be
HOUSE BILL NO. 298, "An Act relating to the distribution of
appropriations from the Alaska permanent fund under art. IX,
sec. 15(b), Constitution of the State of Alaska, and making
conforming amendments; and providing for an effective date."
[HB 298 was sponsored by House Special Committee on Ways and
Means.]
CHAIR HAWKER explained that HB 298 is a companion bill
supporting the POMV constitutional amendment [HJR 26]. He said
the last time the bill was before the committee was during the
last legislative session.
Number 0456
REPRESENTATIVE WEYHRAUCH moved to adopt the proposed committee
substitute (CS) for HB 298, Version 23-LS1075\S, Cook, 3/15/04,
as the working document. There being no objection, Version S
was before the committee.
CHAIR HAWKER explained the changes in Version S by referring to
the sectional analysis. He explained:
[The proposed CS] looks at existing statute, places
where it refers to things like the Earnings Reserve
Account or using income as a basis for the money
available from the permanent fund, and modifies and
adapts that language to the POMV concepts of having
the value of the fund be the basis for the amount
available for general appropriation each year.
Number 0607
CHAIR HAWKER continued to explain that in Section 1 the Alaska
jury list is currently defined as coming from the list of people
who apply for "a distribution of Alaska Income," which is an
archaic term. The actual list is from the permanent fund
dividend (PFD) files, and Section 1 cleans up the language, he
said.
CHAIR HAWKER explained that Section 2 defines the statutory
duties of the Joint Committee on Legislative Budget and Audit
(LB&A). One of the previous duties was to provide investment
policy guidance for the "income" from the permanent fund, which
had been previously segregated into an earnings reserve account.
Now LB&A provides investment policy guidance for the permanent
fund, and the income account has been merged into the permanent
fund itself, he said.
REPRESENTATIVE GRUENBERG announced that he is "flagging for the
committee" Section 2 because he is going to offer an amendment
to Section 10, which says this Act only takes effect if the
[POMV] amendment to the constitution passes. He said it seems
to him that there are sections in the proposed CS that are not
dependent upon the passage of the [POMV] amendment. He said
Section 1 is not [dependent]. He asked if that would also apply
to Section 2. He wondered if they were standalone sections that
could be passed even if the [POMV] amendment does not pass.
Number 0810
CHAIR HAWKER concurred that they could stand alone on their own
merits.
REPRESENTATIVE GRUENBERG asked if there are any more standalone
sections.
CHAIR HAWKER suggested walking through the sections and keeping
that idea in mind. He said it is an excellent observation.
CHAIR HAWKER explained that Section 3, subsection (a) is the
most operative section in the bill as it relates to the POMV
method. He voiced a concern raised by many as POMV was
discussed. People had asked what would happen if the state goes
into a period of protracted declining markets and the 5 percent
that would be made available under the POMV method actually
exceeds the real rate of return for some long period of time.
He noted that [Section 3(a)] addresses this issue in statute and
creates the statutory limit that "if the average 10-year real
rate of return falls below 5 percent, the amount that is
appropriated from the fund, which the constitutional amendment
states may be up to 5 percent, is limited to the real rate of
return that is less than 5 percent." He called it a sidebar in
statute that grants relief.
Number 0956
REPRESENTATIVE OGG remarked that he was pleased to see [Section
3, subsection (a)] in [the proposed CS to HB 298]. He asked, in
the worst-case scenario, what percentage, under this limitation
factor, would be removed from the principal of the permanent
fund.
CHAIR HAWKER called on Bob Bartholomew to come forward to
testify and help answer questions.
Number 1050
BOB BARTHOLOMEW, Chief Operating Officer, Alaska Permanent Fund
Corporation, Department of Revenue replied:
What [Section 3, subsection (a)] was intended to do
was try to look at when the real rate of return, which
is the return after we retain enough income to offset
the effects of inflation, if we don't meet what would
become the constitutional spending limit of 5 percent,
if over a 10-year period we started to have a real
rate of return, this, for example, was 4 percent, that
the spending for that year would drop. The spending
limit would drop from 5 percent of the market value of
the fund to 4 percent.
CHAIR HAWKER remarked, "To the amount we could appropriate."
MR. BARTHOLOMEW continued:
To the amount that could be appropriated out of the
permanent fund. And, so, when we talk about what's
the worst-case scenario and how would that affect
eating into the corpus of the principal of the fund,
we would just have to make some estimates to say, you
know, right now there is approximately -- the
permanent fund is in three components. There's the
accounting record we make of the historical principal
contributions into the fund and special appropriations
by the legislature and inflation proofing. Today,
that's about $23 billion. Then, there's two other
components, currently, of the permanent fund. There's
what's called the unrealized earnings account that has
about $3.5 billion in it; then there's the realized
earnings, and that has about $1 billion in it. So,
there's three components, and the first two, which is
the $23 billion, the accounting principal number and
the unrealized gains, which by the attorney general's
opinion is a part of principal -- those two are $26.5
billion. Then, we said we have $1 billion in the
realized earnings reserve.
Number 1300
When you look at things today, you would have $1
billion available for appropriation - it's in the
realized earnings account - and then that $3.5 billion
can go, if they sell investments, ... into earnings.
When you do an assessment of "when would you be eating
into the fund," some people use the $23-billion figure
and say you've got to spend down to $23 billion before
you're eating into the corpus. That means we'd have
$4.5 billion available today. So, when you say, "Give
me an example," you would have to spend in excess of
your real income, $4.5 [billion], before you would eat
into the corpus - what was considered originally under
the constitution as far as the original deposits of
oil and what they've earned.
I think the intent of this section is to not allow you
to eat into that, so the intent is, over a 10-year
period, if we've made enough income, we would only
spend what we've made. So, I think the intent here is
not to eat into the corpus. I could create a scenario
that says, in the short term, you might eat into it,
but I think, for most practical purposes, this would
be the guardrails that that prevented. So, I think
for a high percentage of the options or the
probabilities of what would be the income of the
permanent fund moving forward, you really wouldn't be
eating into the corpus of the fund. I don't want to
give a specific number, but it is possible, in the
short term, if the markets went down fast enough, that
you might spend into that original corpus, or that
original $23 billion. I do think that, with this
provision in here, the likelihood of that happening is
greatly reduced. I think the worst-case scenario
would be fairly small, but it could happen.
Number 1522
REPRESENTATIVE OGG said a lot of folks talk about a market that
keeps going down, and that is the great fear. He said he's been
in meetings where "you run the averages, we should be okay, and
you can take care of those little blips." He said it was his
understanding that [Section 3, subsection (a)] is in place so
that when there is a long-term slide, money stops being drawn
off of the principal. He reminded, "If you're in the short
term, you draw into the principal and, of course, you bounce
back up." He asked how it figures in during a long period of
time, if it was in place all the time, or if the state has to
wait for the full 10 years of decline.
Number 1620
MR. BARTHOLOMEW pointed out that it would be in place
immediately and a 10-year average would be used. He pulled out
a slide as an example to show that if next year there is a down
market and the permanent fund loses income for the entire year,
which has happened twice in the history of the fund, that loss
would be figured in, but it would go to a 10-year average, he
explained. The history of the financial market is extremely
volatile from year to year, but over the longterm, it is fairly
stable, he suggested. He referred to a rolling 10-year real-
return graph to show a red, stable line at 5 percent, the target
at which the constitution will set the spending limit.
CHAIR HAWKER interjected, "Real return."
MR. BARTHOLOMEW continued, "That's the income after we've
accounted for inflation and retained that in the fund." He
explained that the last bullet [on the graph] shows where the
rolling 10-year period was on June 30, 2003, about 5.3 percent.
He said, next year, if that percent moved a whole percent in one
year, down to 4.3 percent, the spending limit would immediately
drop. There would be a 4.3 percent spending limit under this
provision.
MR. BARTHOLOMEW explained that what happened for the 12-month
spending period ending December 31 [2003] is the 10-year average
was raised by 1 percent to over 6 percent. "That means there is
currently a 5 percent spending limit, so the permanent fund is
retaining more than it earned, so that in the future years when
it goes down, there could be a pretty good down year before it
would take us below the 5 percent," he explained. He noted that
the effect is immediate, but not dramatic. Each 1 percent is
about $250 million, he concluded.
REPRESENTATIVE OGG thanked Mr. Bartholomew for the
clarification.
Number 1947
REPRESENTATIVE ROKEBERG asked why five of the six years
immediately preceding the fiscal year are used.
MR. BARTHOLOMEW replied that there are two measurements in
[Section 3]. The measurement just mentioned is "when should you
spend less than 5 percent, so that's the trigger for that 10-
year average of income. He added, "There's a second provision
in here which tells you how to calculate the market value that
you're going to base your 5 percent against." That is a 5-year
average of the total market value of the fund, and the
individual volatility of one year doesn't affect it as much when
a 5-year average is used, he explained. The clause states to go
back six years and then come forward for five years, computing
the average. The reason for the "look back" provision is so the
legislature will know what is available when they convene in
January. Under the current rules where a 5-year average is
used, the June 30 date, which hasn't been reached yet, is
included, so when the legislature passes the budget, they are
basing it on an estimate of how much income is available, he
said. This method eliminates projections, he concluded.
CHAIR HAWKER added that the language is identical to, and
conforms to, the POMV proposed constitutional amendment.
REPRESENTATIVE ROKEBERG requested spreadsheets and calculations
regarding this provision, and suggested that they be part of the
bill packet. He voiced a concern about the "rate of inflation"
definition. He asked which definition is being used.
Number 2250
MR. BARTHOLOMEW replied that the definition of inflation that is
used by the permanent fund is defined in statute and will have
to be added to the definitions section of the bill. He noted
that Section 9 [of the proposed CS] where AS 37.13.145 is being
repealed is where the current definition of inflation proofing
resides and will need to be added back in. He said the finance
director of DOR has been asked to write up a definition for the
national Consumer Price Index (CPI). Since this is an Alaska
fund, people have asked why a national CPI is being used. He
responded that how the permanent fund is invested is greatly
affected by the investments across the United States as well as
across the world. He emphasized that using a national CPI is an
important piece that DOR recommends adding into the definitions
section.
Number 2424
REPRESENTATIVE ROKEBERG said he understands that the attorney
general's opinion and/or position now is that the unrealized
portion of the permanent fund is available for appropriation.
He asked if that is correct.
MR. BARTHOLOMEW replied that it is just the opposite. The
opinion of about a year ago regarding the original intent in the
definitions of the word "principal" and "what is available for
appropriation" stated that it was really driven by the realized
income, he explained. He continued:
When we have unrealized gains -- I'll just give you an
example: if you own a share of stock in IBM, you
bought it for $50, it's gone up to $100, and you
haven't sold it yet, you have $50 of unrealized
income. Prior to the attorney general's opinion, that
money was available for appropriation. And when they
did their research, they felt that the original intent
when the [provision of the] constitution was adopted
by the citizens in 1976 [was] that the definition of
income was what we call realized, and that it wouldn't
be available for appropriation until you sold that.
So, their definition would be, unrealized income is
not available for appropriation.
But one of the reasons we recommend changing from the
current system to a value-based system is the only
difference between that being available and not
available is whether the manager that we've hired
sells that stock. So, if he sold it tomorrow, it's
available. That number of what's available can really
vary, and modern accounting principles have said to
get away from that concept of realized and look at the
total value of the fund every year, including those
unrealized gains, and then make a determination of
what you want to make available for appropriation.
Unrealized gains or losses are not available for
appropriation.
CHAIR HAWKER emphasized that this legislation is effective if,
and only if, the POMV endowment method is adopted, and it does
not address how the fund currently operates.
Number 2650
REPRESENTATIVE ROKEBERG asked if Chair Hawker is indicating that
the market-value determination would make moot the definition of
realized and unrealized [gains] when making the calculation.
MR. BARTHOLOMEW answered, "That is correct. We would now look
at everything based on the total value of the fund." There
wouldn't be a separate pool for principal, unrealized gains, and
realized gains, he explained. Now, all of that money is
invested the same way, and generally accepted accounting
principles (GAAP) account for it all the same way, he said. "We
would be getting rid of a 25-year-old archaic statute, in going
to the modern endowment accounting," he added.
REPRESENTATIVE ROKEBERG remarked that the definition of
"available for appropriation" still has to be dealt with.
MR. BARTHOLOMEW replied that would be Section 3, titled
"Appropriations from the fund." This is the section that says 5
percent is going to be spent of the 5-year average of the fund,
unless the realized income for that period was not 5 percent, he
noted.
Number 2814
CHAIR HAWKER clarified that the constitutional amendment, which
is a separate piece of legislation [HJR 26] that was passed out
of the House Special Committee on Ways and Means months ago, now
sitting in the House Finance Committee, potentially on its way
to the House Rules Standing Committee, is the vehicle that
defines the 5 percent appropriation authority. That legislation
would be a constitutional authority which states that up to 5
percent may be appropriated annually. [The proposed CS] before
the committee creates a statutory sidebar, a parameter that
allows for times where the state may choose not to appropriate 5
percent, he said. He emphasized that the bill does not define
or make the provision for the 5 percent appropriation.
Number 2900
REPRESENTATIVE ROKEBERG said he understands that information but
is trying to get at the definition of "available for
appropriation".
MR. BARTHOLOMEW pointed to the first sentence in [Section 3,
subsection (a)] where it specifically says the amount available
for appropriation is determined under the constitution, and said
that is going to be the 5 percent limit, or up to 5 percent of
the value of the fund. The guardrails are where it says there
is an exception to the 5 percent spending limit if a 5 percent
real rate of return has not been earned.
REPRESENTATIVE ROKEBERG asked if the realized gains and
unrealized gains were included when calculating the rate of
return.
Number 3020
MR. BARTHOLOMEW replied, "No, going forward we would no longer
look at it as realized versus unrealized. We would look at,
under GAAP, what was the total income of the fund. So, it would
be both the cash flow income as well as the appreciation of the
assets...."
REPRESENTATIVE ROKEBERG asked, "Why are we going to GAAP rather
than GASB [Governmental Accounting Standards Board] here,
because the permanent fund acts more or less as a private
financial institution?"
MR. BARTHOLOMEW replied that all professional accounting
organizations come under GAAP, of which GASB is a subset, and
the official rules that determine investment accounting come
under GAAP.
CHAIR HAWKER replied that the capstone definition is GAAP and
GASB is a subset within it.
REPRESENTATIVE ROKEBERG said it has gotten the permanent fund
corporation in trouble before, which is why he was making it
clear.
CHAIR HAWKER said, "That is why we are trying to give them the
most sheltering umbrella in our definitions."
Number 3159
REPRESENTATIVE WEYHRAUCH remarked that this is a very important
bill. He referred to it as up-front pricing because it shows
the people what the legislature plans to do if POMV passes. He
emphasized that the bill needs to move forward even if the
constitutional amendment stalls, because it could be debated on
its own merits. He said it is tied to the POMV debate, but it
serves as an educational process, as well. He suggested
adopting portions of the bill even if the constitutional
amendment is not adopted. He said the bill needs to be amended
in Section 10 so that Sections 3, 4, 7, and 8 only take effect
if the constitutional amendment passes. The other sections
should be adopted notwithstanding, he said.
CHAIR HAWKER noted that Representative Gruenberg has expressed
those same concerns and has been working on a list of [the
sections] for a specific amendment.
Number 3327
REPRESENTATIVE GRUENBERG addressed Representative Samuels and
Mr. Bartholomew and asked, if the constitutional amendment does
not pass, whether they would still like LB&A to advise
concerning the investment policy for the entire fund. He added
he thought it was a good idea.
Number 3409
MR. BARTHOLOMEW replied that he thought the [Alaska Permanent
Fund Corporation] has always felt it was important to have a
good working relationship with the legislature, and LB&A
provides the process for that relationship, so he said he
supports maintaining it.
REPRESENTATIVE GRUENBERG responded, "Not just the income, but
everything."
MR. BARTHOLOMEW replied, "That is correct."
REPRESENTATIVE SAMUELS concurred and said it is a good mechanism
for the [Alaska Permanent Fund Corporation] to get its
information to the legislative body.
Number 3433
REPRESENTATIVE GRUENBERG said he supports a lot of the concept
of POMV, but is not sure he wants it in the constitution. He
suggested proposing a statute to achieve the same ends. He
wondered if this legislation might be such a statute. He asked
Mr. Bartholomew whether provisions in [the proposed CS] could be
effected to achieve some of those ends, if they are adopted even
if the constitutional amendment does not pass. He asked
Representative Hawker if he should propose a conceptual
amendment or work on a written amendment to be taken up at a
later date.
Number 3635
CHAIR HAWKER replied that it would be more appropriately
introduced as a standalone bill. He explained that [HB 298] is
a companion piece specifically for the proposed constitutional
amendment [HJR 26].
REPRESENTATIVE GRUENBERG suggested that [HB 298] could serve
that purpose and have sections that achieve a standalone
provision.
CHAIR HAWKER said his personal preference would be not to alter
[HB 298] to that extent.
REPRESENTATIVE GRUENBERG asked Mr. Bartholomew, aside from
Sections 1 and 2, if there were any other sections that could go
into effect even if the constitutional amendment does not pass.
MR. BARTHOLOMEW answered, "Section 5 would be a section that
would work unrelated to POMV."
REPRESENTATIVE GRUENBERG asked Mr. Bartholomew to explain what
Section 5 does.
MR. BARTHOLOMEW explained:
Section 5 currently has language that assumes ... that
we basically expense our entire operating budget the
first day of the fiscal year, and then we get to the
end of the year, and whatever we really didn't spend,
we add that back to income. How that really works is,
at the end of each month we expense our actual
expenditures. It makes it clear that the source of
revenue for the budget will be the investments, and it
deletes the sections of the statutes that talk about
adding unused budget back to income.
Number 3877
REPRESENTATIVE GRUENBERG referred to the section as a
housekeeping section and asked if there were any other [sections
that could go into effect on their own].
MR. BARTHOLOMEW replied that Sections 7 and 8 seem to relate to
the Permanent Fund Dividend Division and said he was not
familiar with those sections of the statute. He said they
seemed to be related to POMV so he assumed they would not be
necessary.
CHAIR HAWKER concurred.
REPRESENTATIVE GRUENBERG asked for clarification whether
Sections 7 and 8 could be conditional.
MR. BARTHOLOMEW replied that they should be conditional [upon
the passage of the constitutional amendment].
Number 4010
REPRESENTATIVE GRUENBERG asked if the only [sections] that would
not be conditional are 1, 2, and 5.
CHAIR HAWKER said yes.
REPRESENTATIVE GRUENBERG asked about Section 11. He said he
thinks there would need to be a conforming amendment to Section
11.
CHAIR HAWKER concurred and said:
We've got this dual condition here, in Sections 10 and
11, at the moment. The entire Act is conditioned,
which is Section 10, upon the passage, and emphasize,
and a POMV method approved by voters and taking
effect, which is really the ultimate condition here.
Section 11 is that if those conditions precedent are
met, the actual date on which this Act shall take
effect is January 1, 2005. There would be some
conforming language that would, in the condition
precedent, excepting that Sections 1, 2, and 5, and
also in Section 11, indicating that Sections 1, 2, and
5 would take effect immediately.
REPRESENTATIVE GRUENBERG said he would offer that as an
amendment later when amendments are taken up.
Number 4142
REPRESENTATIVE ROKEBERG opined that the committee is wasting its
time right now, because this bill is contingent on the POMV's
passing.
REPRESENTATIVE OGG returned to Section 3 and noted that the
permanent fund is different from most funds because 25 percent
of revenues from mineral sales, royalties, and leases are
included. He asked Mr. Bartholomew how that impacted the 5
percent figure and the 10-year average.
Number 4313
MR. BARTHOLOMEW related that the way it is written now, it
completely excludes the effect of the ongoing oil deposits
coming into the fund. He explained:
We're measuring the investment real rate of return
over 10 years and trying to achieve that 5 percent.
During that 10-year period we've continued to receive
oil deposits. Historically, that's probably about a 1
percent average. It's declining currently; well, it
was declining because production was declining.
Prices are high, so it's staying up near what we've
been getting over the last 5-8 years. It's
approximately between $200 and $400 million a year
that we've been getting from ongoing oil revenues
coming into the permanent fund. Really, what you have
is the fund is also growing by the ongoing revenue
deposits, and that is not being factored in to what's
available for appropriation. That money comes in and
earns income, so down the line there is a benefit,
but, in the short term, the fund has actually probably
grown. Currently, we're at about a 6 percent real
rate of return for the last 10 years. Including oil,
it's really grown by 7 percent, but currently that's
not brought into the equation.
Number 4435
REPRESENTATIVE OGG requested clarification of [Section 3,
subsection (b)].
CHAIR HAWKER related that [Section 3, subsection (b)] does
provide statute consistent with the current statutory provision
that splits the earnings available from the permanent fund, 50
percent to the dividend fund, and 50 percent to the general
fund.
CHAIR HAWKER continued to explain [the proposed CS]. He said
the balance of the bill relates to "housekeeping" matters such
as the market-value provision in Section 4, which provides a
statutory mandate in accordance with GAAP.
REPRESENTATIVE GRUENBERG asked if that provision could be
effective regardless of the constitutional amendment [passing].
He opined it had value independent of the amendment.
Number 4610
MR. BARTHOLOMEW related that, currently, when the monthly
financial statements are done, GAAP is followed to determine
market value.
CHAIR HAWKER interjected that the first sentence [of Section 4]
refers to Article IX, Section 15(b), of the [Constitution of the
State of Alaska]. This section does not currently exist, and
would not exist until the POMV amendment is passed, he pointed
out.
TAPE 04-14, SIDE B
Number 4630
REPRESENTATIVE GRUENBERG suggested excising the first phrase [in
Section 4] and beginning with line 22, "the corporation shall
determine". He asked [Mr. Bartholomew] if that is current
practice.
MR. BARTHOLOMEW replied that it is a requirement under GAAP and
so it is calculated, but not used in any of the statutory
formulas to determine what is available for appropriation. He
said, "It is what we do."
Number 4600
REPRESENTATIVE GRUENBERG asked if there would be any value in
having that language in the law, independent of the amendment.
CHAIR HAWKER relayed that the current statute, which would be
deleted in this bill, provides that the fund shall be computed
annually on the last day of the fiscal year, in accordance with
GAAP, excluding any unrealized gains or losses. He emphasized
that there could be conflicting statutes if the new section was
added without deleting the old one. He mentioned that AS
37.13.140, the income section which is no longer relevant under
a market-value approach to distribution, would become archaic.
REPRESENTATIVE GRUENBERG remarked that he thought this was one
of the sections that could be kept in, regardless of the
constitutional amendment.
CHAIR HAWKER termed the section a housekeeping measure that
could work either way.
MR. BARTHOLOMEW pointed out in Section 5 that all of the
operating costs for the permanent fund for the 32 staff that are
employed, the investment manager fees for the external equity,
and bond managers that cost between $45 million and $50 million
a year would come out of the 5 percent spending limit.
Number 4310
CHAIR HAWKER characterized that decision as being an honest way
to show the public that the fund was not being invaded behind
closed doors, in any way. All operating funds come out of the 5
percent, he said.
REPRESENTATIVE GRUENBERG he asked if this dialogue is relating
to the constitutional amendment.
CHAIR HAWKER replied that Representative Gruenberg is correct.
It is statutory clarification to make it very clear that there
are "no back doors."
REPRESENTATIVE GRUENBERG said, "Understood, and that's clear on
the record."
Number 4232
CHAIR HAWKER related that Section 6 is a housekeeping matter.
He explained that the permanent fund also manages the portfolio
of the Alaska Mental Health Trust Authority (AMHTA), and because
the archaic section, AS 37.13.140, is being deleted, a new
section is needed to take its place. He reported that Jeff
Jessee [executive director of AMHTA] is in full agreement with
this portion of the bill.
REPRESENTATIVE GRUENBERG said he assumed that AS 37.14 is the
mental health trust chapter.
CHAIR HAWKER said that is correct.
REPRESENTATIVE GRUENBERG asked Mr. Bartholomew if he thought
there was anything in that chapter now that requires the use of
GAAP, and if it could be a standalone provision.
MR. BARTHOLOMEW said, "This is similar to the recent provision.
Right now we're required to account for mental health the same
way we account for the permanent fund. If you don't change the
permanent fund, then we wouldn't want to change the way we
account for mental health, so this one would want to be subject
to the POMV."
Number 4059
CHAIR HAWKER continued to explain the sections of the proposed
CS. He said, "Section 7 is a conforming to the change from
income being used and transferred to the dividend fund account,
to the money appropriated from, ergo, the amount calculated
under a market-value approach." Section 8 is disclosures that
are currently required by statute to be included on the stub of
a permanent fund check, again, with the language conforming to a
market-value approach, he explained.
CHAIR HAWKER noted that in Section 9, the repealors, the three
current sections of statute whose operation would conflict with
the POMV operation, are very important. The whole purpose of
the bill is to replace those three sections, he emphasized. He
said AS 37.13.140 defines income and net income of the permanent
fund for the purposes of making distributions, and he pointed
out that the bill changes to market value, not income. AS
37.13.145 defines the disposition of the income of the permanent
fund, inflation proofing, and transfers to the dividend account,
which has been superseded by Section 3 of [the proposed CS]. AS
37.13.300(c) is the mental health trust reference that becomes
archaic as a result of the operation of the POMV, he concluded.
Number 3905
REPRESENTATIVE SEATON asked about Section 3, subsection (b), and
the graph on the rolling 10-year real return. He said he is
concerned that additional money deposited into the fund is not
counted as return. He posited that there could be high
inflationary pressure at some point in time that would greatly
influence the rate of return, and suggested that money from oil
resources should be [considered], because the fund could be
growing well, and yet drop below the 5 percent line. He said he
doesn't think the intent [of the bill] is to look at how
particular investments do, but how the fund is doing. He opined
that it would be better to include the royalty deposits and any
other deposits made from settlements, et cetera, into this
calculation.
Number 3728
MR. BARTHOLOMEW reported that he has had many discussions with
other legislators on this topic. The question is, "Should we
have the spending limit be not only the real rate of return of
the investments, but the growth of the fund through the mineral
or oil deposits?" He termed it a policy decision of looking at
the total value of the fund changing, including deposits, versus
just looking at the investment income.
CHAIR HAWKER said, when drafting the bill, he did not want to
consider the new money coming in as part of the return on the
invested funds, which would allow for substantial investment
losses and still appear as if money is being made. He said that
idea is inconsistent with the intent of the bill, which is to
give the greatest possible assurances of the continued growth of
the fund.
REPRESENTATIVE ROKEBERG stated that it is not inconsistent with
the market value, market-to-market consideration, if the cash
flow of the fund is actually staying level or growing. He said
Representative Seaton does have a point. It is a policy call,
he added.
CHAIR HAWKER said, "The argument that the idea of the additional
25 percent being deposited each year was that it should, in
fact, always be an increment rather than something that we could
be using to offset investment losses in determining the amount
available." He agreed it is a policy call.
REPRESENTATIVE ROKEBERG added, "Particularly if you're looking
at the market value of the whole total fund, rather than just
the discrete elements of it."
Number 3515
CHAIR HAWKER pointed out the real issue, saying:
Do we wish the fund only to grow through returns in
excess of a real rate of return of 5 percent, or do we
want to have the incremental money coming in each year
under the 25 percent constitutional provision to the
part of fund growth. I think it is a good question.
Do we want to prioritize the fund growth or prioritize
our ability to access the money in the fund?
REPRESENTATIVE ROKEBERG said the money might be needed to offset
Section 3, subsection (a).
CHAIR HAWKER called that section "conservative sidebars."
Number 3440
REPRESENTATIVE SEATON voiced a concern that the discussion is
about POMV, and then a sidebar is added to say it is not POMV,
it's a percent of investment growth. He said POMV refers to the
value of the fund, which includes deposited money. If that
money is excluded and the sidebar is added to say the
expenditures can only be related to the 10-year rolling average
of the investment percentage, minus the inflation, the fund
could be growing even though it appears to be below the 5
percent limiting number. He concluded that it seems to be
inconsistent.
CHAIR HAWKER clarified that every year when the new money is in
the fund, it becomes the basis for the market value for the
following year. The money that comes in during the current year
is not termed "income of the fund" for purposes of return on
investment until the next year when the market value is
measured, he explained.
Number 3259
KEVIN RITCHIE, Executive Director, Alaska Municipal League,
speaking on behalf of the Alaska Council of Mayors, thanked the
committee for its efforts and said a lot more information is
filtering down through communities. He reported that the mayors
and leaders of Alaska's communities are behind the development
of a comprehensive, long-range fiscal plan. He said the
committee should have received a letter from the communities
encouraging the legislature down this path. He noted that three
times as many groups as three months ago signed the letter and
that the breadth of the groups is widening. He mentioned the
following groups: AARP, Association of Developmental Disability
Providers, Alaska Coal Association, League of Women Voters of
Alaska, and virtually every group in Wrangell, which he surmised
is a good example of a community that gets together and talks.
MR. RITCHIE related that people of the state, given something to
work with, will have very positive discussions to help solve
problems. He suggested letting the public know what will get
worse if no action is taken, and what will improve if action is
taken. He referred to HB 236, the education tax the committee
just moved out, and said it clearly states a way of making a
moral dedication or commitment to what will get better. He
encouraged the committee to continue to think about that.
REPRESENTATIVE OGG thanked Mr. Ritchie for coming and asked for
his comments about the 50/50 split and the idea of approaching
the bill as a statutory process as opposed to a constitutional
process.
Number 3000
MR. RITCHIE said he thinks the 50/50 split concept is what is in
most people's minds. He called it a "have your cake and eat it
too" situation where the permanent fund dividend, at least for
the next two years, doesn't go down, but goes up, and then stays
stable in an amount that most Alaskans would think would be
fairly substantial. At the same time, it provides a very
substantial amount of money for doing things in communities that
are very important, he noted. He related that [the Alaska
Municipal League] does not have an opinion about the statutory-
versus-constitutional process.
REPRESENTATIVE OGG inquired if POMV is perceived as a limitation
on the legislature's ability to utilize revenues of the
permanent fund.
MR. RITCHIE said it seems to him that it is both. It is
utilizing revenues not being utilized and, at the same time,
placing limits on the utilization of those revenues, which, he
opined, are already there to utilize if the legislature so
chooses.
Number 2843
REPRESENTATIVE ROKEBERG said there has been some discussion
within the committee, particularly by Representative Moses,
about a community dividend program. He asked for Mr. Ritchie's
opinion as to why the legislature should consider this idea in
light of the lack of vote of confidence by the mayors.
MR. RITCHIE replied he believes that action was in regard to
solving the fiscal gap, and he suspects there are a number of
legislators, as well, who wonder if the legislature is going to
take action on that issue. He said it was not a broad-brushed
lack of confidence, which is what got reported. He explained
the intent was to stimulate action on the fiscal plan. In terms
of the municipal dividend, that concept has been discussed by
many people, among them former-Governor Hickel, who believe very
strongly in putting authority to make decisions about
communities in the hands of people in communities, he related.
He said the concept of community dividends is all about taking
money that belongs to all Alaskans and allowing them to make
decisions on how that money will best benefit their communities.
REPRESENTATIVE ROKEBERG said he assumed that the mayors in the
state were having fiscal difficulties along with everyone else.
Number 2637
CHAIR HAWKER agreed that the vote of no confidence was broad-
brushed on the legislature and noted that that very morning the
committee was meeting at 7:00 a.m., actively involved in
addressing [fiscal] issues.
REPRESENTATIVE WEYHRAUCH called the vote of no confidence a
"lingering eye-poke" for legislators who have worked hard and
long, and he stated his appreciation for the "old-timers." He
said he was digressing, and he would like to move this bill.
CHAIR HAWKER asked Mr. Ritchie to take a message back to the
mayors and tell them that they were a bit shortsighted and
"caused us some grave disappointment and, perhaps, a little loss
in confidence in them, as well."
REPRESENTATIVE GRUENBERG addressed his friends in the
legislature and asked them to work with the mayors, saying that
"we are all Alaskans, and to solve our problems, we must work
together."
Number 2330
MR. RITCHIE said he agrees, and the reason he is before the
committee today is to say that the legislature is moving forward
in the right direction and the communities are supportive of
those efforts. He mentioned that communication is critical and
does not always work well. He spoke about the number of small
communities that have been in existence for well over a thousand
years, that now are feeling a great deal of pain. He encouraged
keeping communication open to work together to solve problems.
Number 2234
REPRESENTATIVE KOHRING asked why those communities that have
been around for a thousand years are now in such dire need of
money now for services, when, as recently as a generation ago,
they did fine. He said he has been [in Alaska] 41 years and
remembers when Alaska was a state that had good roads, good
schools, and public safety at just a fraction of the money
available now. "Suddenly we have a major crisis when we're
spending far more money than we did, say, 35 years ago," he
remarked.
MR. RITCHIE replied that he has thought a great deal about that
as well and thinks it is a valid question. In the last 50 years
there have been amazing changes in the quality of life
throughout Alaska, especially rural Alaska, in terms of
decreases in infant mortality, improvement of education, more
on-site health clinics, and other basic things. He said the
issue is, if those things start deteriorating now, people quite
rightfully have come to expect that quality of life, and without
those things, there is a great likelihood that there's going to
be a exodus out of small communities. He said, "The problem is,
small communities are what we think of when we think of rural
Alaska and what it stands for. From a practical standpoint,
most of our urban communities have as much as a third of their
economy based on commerce and providing services." He said the
relationship among all the communities in Alaska is a very
important part of the economy.
Number 1947
REPRESENTATIVE WILSON told of her experience living in a small
town for seven years, and of the closing businesses and exodus
of people due to fewer jobs. She described the decline of the
hospital as an employer and the chain reaction due to lack of
jobs, and she predicted that the town could become a ghost town.
She said these are real things that are happening to communities
across the state and she imagined the vote of no confidence
stemmed from high levels of frustration. She emphasized that
[the House Special Committee on Ways and Means] has made a
difference for the last two years. She repeated that there is a
lot of frustration in the "real trenches of the real world."
CHAIR HAWKER spoke of viability of communities and, addressing
Mr. Ritchie, said he knew the Alaska Municipal League was
concerned as well. He stated the mission of [the House Special
Committee on Ways and Means], which is cost management and
efficiencies, and opined that the viability of individual
communities would be an important subset of that discussion.
Number 1712
REPRESENTATIVE OGG said he was pleased to hear that Mr.
Ritchie's organization has "opened their eyes," recognizes that
this legislature has been working on, [a fiscal plan], and is
now applauding the legislature for their efforts. He asked Mr.
Ritchie if that is what he is hearing.
MR. RITCHIE replied yes.
REPRESENTATIVE OGG thanked Mr. Ritchie and his organization for
their reflection and support of the legislature's efforts.
Number 1606
CHAIR HAWKER thanked Mr. Ritchie, and asked if there was any
further public testimony. Hearing none, he closed public
testimony.
Number 1552
REPRESENTATIVE ROKEBERG [Started to make a motion to adopt
Conceptual Amendment 1 and then withdrew it in order to consult
with Mr. Bartholomew about the wording about consumer price
index.]
MR. BARTHOLOMEW related that currently in AS 37.13.145(c) the
wording United States Consumer Price Index for all urban
consumers. He supported continuing to use that measure.
REPRESENTATIVE GRUENBERG suggested that statute be read into the
record. He asked if Mr. Bartholomew was referring to AS
37.13.145(c)(1).
MR. BARTHOLOMEW said correct.
Number 1460
REPRESENTATIVE ROKEBERG moved to adopt the aforementioned
Conceptual Amendment 1, but requested clarification of the
wording.
CHAIR HAWKER clarified that Conceptual Amendment 1 is to have
the drafters include as appropriate in this bill, AS
37.13.145(c)(2), paraphrased as appropriate, using the price
index that will be read into the record by Representative
Gruenberg.
REPRESENTATIVE GRUENBERG pointed out that that is a statute that
is going to be repealed in [the proposed CS].
CHAIR HAWKER said correct.
REPRESENTATIVE ROKEBERG said that is why it is a conceptual
amendment and is being put back in.
Number 1350
CHAIR HAWKER objected to Conceptual Amendment 1 for discussion
purposes. He read, "As currently used for inflation proofing
the permanent fund is calculated using the average of the
monthly United States Consumer Price Index for all Urban
Consumers", which he noted is called the CPI-U.
REPRESENTATIVE ROKEBERG added that he has always used the term
"or its equivalent" in case there has ever been a change.
REPRESENTATIVE GRUENBERG asked for clarification of the
amendment. He asked if Representative Hawker is suggesting that
the entire statute not be repealed.
CHAIR HAWKER paraphrased Conceptual Amendment 1:
The amendment before us would be a conceptual
amendment to have the drafters include as additional
language some place as appropriate in this Act,
language that would define, in relation to rate of
inflation as appears on page 3, line 12, that that
rate of inflation, the measure, the index for
determining that rate of inflation, be the CPI-U or
its equivalent and successor index.
MR. BARTHOLOMEW suggested in Section 37.13.900, the definitions
section for this provision of statute, adding the definition of
inflation.
REPRESENTATIVE ROKEBERG agreed that is where the definition
should go so it would be applicable throughout the whole body of
the chapter.
Number 1030
CHAIR HAWKER withdrew his objection to Conceptual Amendment 1.
There being no objection, Conceptual Amendment 1 was adopted.
Number 1020
REPRESENTATIVE WEYHRAUCH moved to adopt Conceptual Amendment 2,
to say that in the conditional-effect portion of the bill,
Section 10, that only those sections that are related to POMV be
included.
CHAIR HAWKER objected for discussion purposes.
Number 1010
REPRESENTATIVE GRUENBERG offered a friendly amendment to make
the motion more detailed.
REPRESENTATIVE WEYHRAUCH agreed.
REPRESENTATIVE GRUENBERG expanded Conceptual Amendment 2 to say,
Sections 1, 2, and 5 would not be subject to Section 10. He
explained, "So, in other words, the conditional effect would be
Sections 3, 4, 6, and 9 of this Act take effect only if an
amendment to Article IX .... " He said that language would go
on page 6, line 12, which would exempt Sections 1, 2, and 5 from
the conditional effect. That is the first part of the
amendment, he noted. The second part would be that there be
another section added, Section 12, that would give Sections 1,
2, and 5 an immediate effective date.
CHAIR HAWKER suggested that Sections 1, 2, and 5 would not be
conditional under either the existing Sections 10 or 11, which
would allow the drafters some latitude.
REPRESENTATIVE GRUENBERG agreed.
Number 0903
REPRESENTATIVE OGG objected. He said the bill was crafted to
match the POMV and he does not want to go down this road because
it all becomes ineffectual if the POMV constitutional amendment
does not go into effect. He said he appreciated Representative
Gruenberg's desire to address these kinds of issues, but
suggested that perhaps there should be separate legislation
which he would support.
REPRESENTATIVE GRUENBERG responded that the issue he raised
about Sections 1, 2, and 5 may not have been completely
considered when this bill was drafted. Those sections are good
changes in the law and whether or not the constitutional
amendment passes, this bill does have merit, and there is no
reason not to move those sections forward anyway.
Number 0649
REPRESENTATIVE ROKEBERG agreed with Representative Ogg and said
Sections 1 and 2 are "here by convenience," and he also
supported separate legislation for those sections because adding
[HB 298] as a companion bill to the constitutional amendment
could cause confusion to the public with extra sections to read.
He said this issue should be considered during the next hearing
of the bill.
CHAIR HAWKER maintained his objection.
A roll call vote was taken. Representatives Weyhrauch, Kohring,
Wilson, and Gruenberg voted in favor of Conceptual Amendment 2.
Representatives Ogg, Rokeberg, and Hawker voted against it.
Representatives Moses and Samuels were absent for the vote.
Therefore, Conceptual Amendment 2 was adopted by a vote of 4-3.
Number 0355
REPRESENTATIVE WEYHRAUCH moved to report CSHB 298, Version 23-
LS1075\S, Cook, 3/15/04, as amended, out of committee with
individual recommendations and the accompanying fiscal notes.
REPRESENTATIVE KOHRING objected.
Number 0237
A roll call vote was taken. Representatives Weyhrauch, Ogg,
Wilson, Rokeberg, Gruenberg, and Hawker voted in favor of CSHB
298. Representative Kohring voted against it. Representatives
Moses and Samuels were absent for the vote. Therefore, CSHB
298(W&M) was reported out of the House Special Committee on Ways
and Means by a vote of 6-1.
CHAIR HAWKER thanked the committee and the permanent fund
experts for their participation.
Number 0212
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:14 a.m.
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