Legislature(2003 - 2004)
03/17/2004 01:36 PM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
March 17, 2004
1:36 PM
TAPES
SFC-04 # 46, Side A
SFC-04 # 46, Side B
SFC-04 # 47, Side A
SFC-04 # 47, Side B
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 1:36 PM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice-Chair
Senator Ben Stevens
Senator Fred Dyson
Senator Donny Olson
Also Attending: SENATOR RALPH SEEKINS; SENATOR BERT STEDMAN;
SENATOR GARY STEVENS; SENATOR TOM WAGONER; and SENATOR JOHN COWDERY
Attending via Teleconference: Statewide Public Testimony occurred
in the order reflected in the minutes.
SUMMARY INFORMATION
CONFERENCE OF ALASKANS RESOLUTIONS
PUBLIC TESTIMONY
The Committee heard Statewide testimony regarding the Conference of
Alaskans' resolutions. The Committee took no action.
CONFERENCE OF ALASKANS RESOLUTIONS
PUBLIC TESTIMONY
As adopted by the Conference of Alaskans Feb. 12, 2004
A RESOLUTION
Expressing the sense of the conference that the state should
maintain a prudent balance in the constitutional budget
reserve fund.
BE IT RESOLVED BY THE CONFERENCE OF ALASKANS:
WHEREAS the constitutional budget reserve fund was
established by an amendment to the Alaska Constitution after a
vote of the people held at the 1990 general election;
WHEREAS the constitutional budget reserve not only
provides a contingency fund for the operations of the State of
Alaska, it is also an integral component of maintaining the
state's credit rating and that of the local communities
throughout the state; and
WHEREAS the state relies on the balance of the
constitutional budget reserve fund to meet its financial needs
from time to time.
NOW THEREFORE LET IT BE RESOLVED that the state should
maintain a prudent balance in the constitutional budget
reserve fund.
As adopted by the Conference of Alaskans Feb. 12, 2004
A RESOLUTION
Expressing the sense of the conference whether use of
distributions from the Alaska Permanent Fund should be limited
to five percent of the market value of the fund (POMV) as the
Permanent Fund trustees have proposed.
BE IT RESOLVED BY THE CONFERENCE OF ALASKANS:
WHEREAS the Conference of Alaskans believes that a
Permanent Fund dividend should be annually distributed to
Alaskans;
WHEREAS the percent of market value (POMV) distribution
formula would limit the amount that can be annually withdrawn
from the Alaska Permanent Fund to no more than five percent of
the market value of the fund (POMV);
WHEREAS the board of trustees of the Alaska Permanent
Fund believes that the Permanent Fund is not adequately
protected for the future;
WHEREAS the percent of market value (POMV) distribution
formula is expected to maintain the purchasing power of the
entire Permanent Fund by retaining in the fund enough of the
increase in value to protect against inflation; and
WHEREAS the percent of market value distribution formula
is expected to allow future generations to benefit equally
from the Alaska Permanent Fund.
NOW THEREFORE LET IT BE RESOLVED: The Legislature
should pass a resolution proposing a constitutional
amendment addressing percent of market value (POMV), as
recommended by the Permanent Fund trustees and present it to
the voters for ratification at the 2004 general election
that would change the method of distributing amounts from
the Alaska permanent fund so that distributions are limited
to five percent of the market value (POMV) of the fund.
As adopted by the Conference of Alaskans Feb. 12, 2004
A RESOLUTION
Expressing the sense of the conference that distributions from
the Alaska Permanent Fund for permanent fund dividends be
dedicated in the constitution and that distributions from the
Alaska Permanent Fund for other public purposes should be
determined annually by the legislature.
BE IT RESOLVED BY THE CONFERENCE OF ALASKANS:
WHEREAS the Alaska Permanent Fund was established as an
exception to the dedicated fund prohibition so that enough
revenue could be segregated and protected to provide a source
of money to benefit present and future generations of
Alaskans;
WHEREAS dedication of a part of the distributions from
the Alaska Permanent Fund provides a predictable and stable
means to finance the permanent fund dividend for the
foreseeable future;
NOW THEREFORE LET IT BE RESOLVED: The Legislature should
pass a resolution proposing a constitutional amendment and
present it to the voters for ratification at the 2004 general
election that would protect the permanent fund dividend and
ensure that the dividend would continue to be paid to state
residents.
As adopted by the Conference of Alaskans Feb. 12, 2004
A RESOLUTION
Expressing the sense of the conference that a part of the
income of the Alaska permanent fund should be used for
essential state services, such as education, public protection
and other necessary public services.
BE IT RESOLVED BY THE CONFERENCE OF ALASKANS:
WHEREAS the earnings of the Alaska Permanent Fund exceed
the amount of revenue realized by the state from oil and gas
taxation and royalties;
WHEREAS the fiscal crisis facing Alaska is a clear and
present danger to the adequate provision of necessary public
services;
WHEREAS Alaska must not impose self-inflicted harm; and
WHEREAS Alaska's state spending is inadequate to meet
current needs for public education, public protection, and
many other necessary state services; and
WHEREAS the conference believes that after the dividend
is protected a permanent fund dividend distributed, and any
remaining funds available for distribution are used for
essential government services, additional revenues will be
needed to fully fund and protect those essential government
services.
NOW THEREFORE LET IT BE RESOLVED: A portion of the
distribution of the percent of market value (POMV) of the
Alaska Permanent Fund should be used for essential state
services, such as education, public protection and other
necessary state services. However this recommendation is
subject to the following conditions:
(1) Dividends must be paid out first from the amount
available under the percent of market value (POMV)
distribution method, as recommended by the board of trustees
of the Alaska Permanent Fund, with the remainder available to
fund essential state services; and
(2) The governor and legislature must take action to
balance the state's revenues and expenditures, including but
not limited to consideration of a personal income tax, other
broad-based taxes and other alternative sources of income.
This was the first public testimony hearing conducted by the
Committee regarding the Conference of Alaskans Resolutions.
Co-Chair Wilken noted that the purpose of today's meeting is to
entertain public testimony regarding the Conference of Alaskans
Resolutions and other fiscal planning issues. Testimony would be
limited to five-minute increments until otherwise noted.
ROBERT PRUNELLA, City Manager, City of Wrangell, testified via
teleconference from Wrangell to encourage the Legislature to
continue their serious efforts to develop a State fiscal plan. The
City Council and city residents ask that the Legislature address
community requests regarding State revenue sharing. The City has an
approximate $600,000 revenue deficit this year and received minimal
State revenue. To address the City's deficit, reductions in City
services such as fire and police services, would be required. He
favored utilizing some of the Permanent Fund earnings with some
portion of that being designated for municipalities; and the
implementation of an income tax as well as a Municipal dividend
program. There is no support for a State sales tax. While there is
a local school bond proposition package on an upcoming community
ballot, were it adopted, it's funding would be questionable as the
city has no money to support capital projects.
Senator Bunde encouraged Mr. Prunella to recognize and discuss with
community members the fact that any money the State might generate
to support community revenue sharing or a dividend would be
acquired from State residents.
Mr. Prunella acknowledged this fact, but noted that the source of
the money would be a factor. Due to the fact that the City
currently has a 12-mill property tax and a seven-percent sales tax,
it would be impossible to increase the local tax base in the
economically depressed community.
Mr. Prunella stated that while there is support for using some of
the Permanent Fund earnings to support municipalities, it could
reduce the amount of individuals' Permanent Fund Dividend (PFD)
checks. The receipt of a PFD is not an entitlement. The economy of
the State must be turned around. Such things as education funding
reductions are forcing young people to leave the State.
STAN STEPHENS, Stan Stephens Wildlife and Glacier Cruises,
testified via teleconference from Valdez and urged that a long-term
fiscal plan be developed that would encourage economic
diversification in the State as opposed to continuing the
dependence on one industry. The recommendations of the Conference
of Alaskans should be considered. While some say that the State is
not experiencing a fiscal crisis, he opined that "if survival is
not a crisis then that is probably true." He urged Legislators to
consider the future of the State as a whole rather than limiting
their view to their district.
Co-Chair Wilken acknowledged Mr. Stephens as one of the Conference
of Alaskans' 55 delegates.
RICH KRONBERG, President, NEA-Alaska, testified in Juneau and
shared that NEA-Alaska supports the development of a long range
fiscal plan as well as to acknowledge the efforts to address short-
term K-12 education funding. The differences between the House of
Representatives and the Senate regarding school funding issues
should be resolved, as there is a need to alleviate the pressure
being placed on school districts throughout the State. State
residents would support the development of a fiscal plan that would
provide a long-term fiscal fix and provide adequate funding for
schools. NEA-ALASKA has no formal position on which methodology
should be utilized to address the State's fiscal gap. "We stand
ready to support any plan that would end the annual trauma that
schools and school districts" have experienced for more than a
decade as a result of State funding support "that has not kept pace
with the cost of meeting those needs."
Senator Hoffman asked the testifier to define short-term funding.
Mr. Kronberg responded that short-term funding would be that
specified for the next school year. He reviewed NEA-Alaska's
funding request for the next fiscal year.
Senator Bunde asked the definition of long-term funding.
Mr. Kronberg clarified that a long-term plan would be one that
would get education funding to the point where the standards for
student education could be met.
Senator Bunde asked whether this might require five or ten years.
Mr. Kronberg expressed that since it took the education system a
while to get to the point it is, it would take a while to get to
the required level.
ROGER CREMO, a resident of Anchorage, appeared in Juneau before the
Committee and read his testimony regarding SJR 18-CONST. AM: PF
APPROPS/INFLATION-PROOFING as follows.
Presentation to Senate Finance Committee on CSSJR 18 (3/17/04)
You're considering the POMV method of takeout for the
Permanent Fund. Before you decide whether it's any good, take
a hard look at the constitutional provision you would be
putting it into. And, by the way, I prefer the POMV method to
the one we've got now.
Unlike a statute, which is relatively transitory, a
constitutional provision can be on the books forever. It
should be near perfect - a product of sound analysis, wise
decision and excellent drafting. But the track record of our
constitutional amendments, in the fiscal area, isn't very
good.
Besides Section 15, there have been two amendments of Article
9 since it was written in 1955. Section 16, which limits
appropriations, ignored the first rule of organization - that
authority must be commensurate with duty. Your duty is to do
that which in your judgment will promote the welfare of the
people of this state. The amendment to Section 16 limits your
ability to discharge that duty. Fortunately, the provision is
otherwise so flawed that it has never come into play.
The other amendment, Section 17, established the Budget
Reserve Fund, which has facilitated, if not promoted, deficit
spending in most of the years since 1990. And, its voting
requirements have resulted in end-of-session arrangements
that, over the years, have added hundreds of millions of
dollars to that deficit spending.
That leaved Section 15, which established an endowment - the
Alaska Permanent Fund. Typical of documents that create
endowments, the section has three components. One determines
what money goes into the fund. Another deals with the
investment of the money. And the third determines how much
money is to be taken out for spending.
Twenty-five percent of royalties is supposed to go into the
fund. But Section 15 doesn't nail down that requirement. It
can be circumvented by agreeing to the reduction of royalties
while increasing the production tax. That can, over a period,
divert billions of dollars to the General Fund. Of course,
such a tactic wouldn't even be considered unless fiscal
pressures were compelling.
The only thing that Section 15 requires with respect to
investment is that the fund's principal "can be used only for
those income-producing investments specifically designated by
law as eligible for permanent fund investments." That means
stocks that regularly pay dividends and, of course, bonds.
But the Alaska Permanent Fund Corporation probably has
invested billions in stocks that don't regularly pay
dividends.
This is not to say that the Permanent Fund Corporation doesn't
do a good job investing. It has ably managed the state's
capital. But it has been forced to liberally construe an
inadequate constitutional provision.
Co-Chair Wilken thanked Mr. Cremo for his comments and asked
whether he might be available for further discussion following the
public testimony.
Mr. Cremo commented that he would be available.
Co-Chair Wilken introduced Jessica Crier from Fairbanks and Sarah
[last name unknown} as guest pages.
DR. DOUG STARK, Member, Homer City Council, testified via
teleconference from Homer and noted that the Homer City Council
recently adopted two resolutions: one in support of the development
of a State fiscal plan this year and the other in support of a
municipal dividend program. Homer would experience a budge deficit
in excess of $450,000 this year. He personally supports the
Percent-of-Market-Value program (POMV) although he is concerned
that, were it to go to a Statewide ballot, it would be defeated due
"to misinformation." A defeat of the POMV by the citizens might
then be interpreted by the Legislature that citizens would not
support utilizing Permanent Fund earnings to support the budget. He
personally supported using Permanent Fund earnings to support the
PFD and inflation proofing of the Fund "in the normal manner" and
the use of the remainder of the earnings to fund State operations
and provide municipal assistance. He also supported increased gas
and tobacco taxes.
JOHN VELSKO, concerned citizen, testified via teleconference from
Homer and urged the Committee to support the POMV plan and
municipal revenue sharing with incorporated communities. He would
support having a smaller PFD if it were offset by lowered property
and sales taxes. He does not support an income tax. Last year's PFD
did not offset expenses incurred by increased user fees and other
taxes such as property taxes. He urged that the "free ride"
currently provided to unincorporated communities cease, as all
people should contribute. The POMV would be a step in the right
direction. He noted that when oil prices rise above $30 per barrel
the economic limit factor (ELF) should be cancelled. He also
recalled that when the Permanent Fund was being established, it was
understood that it would provide a Rainy Day Fund.
JOHN DAVID REAGAN testified via teleconference from Fairbanks in
support of a State income tax. He voiced disbelief that "the most
normal customary method of taxation in America in the 20th Century"
is not being considered even though it has widespread support.
There was an income tax in the State in the 1970s and the
Legislature's refusal to reinstitute an income tax is
incomprehensible. He stated that efforts to utilize the earnings of
the Permanent Fund without an income tax being also utilized would
not be supported. State resources, such as the PFD, belong equally
to all Alaskans. The PFD has a significant impact on low-income
families and communities. Republicans are attempting to shift the
tax burden to low-income people and "the rich get richer." There
should be a progressive income tax.
ANDY HARRINGTON testified via teleconference from Fairbanks and
pointed out that there has been a shift in the dialogue in that the
people who once stated that the Permanent Fund earnings should
never be touched or that taxes should never be imposed are now
talking about a combination of things. He urged that a moderate
approach be adopted: moderate spending controls, moderate use of
the Permanent Fund earnings, and moderate taxes. It is important to
note that the Conference of Alaskans not only answered the four
questions they were charged with, but that they also urged that
consideration be provided to other options including the
implementation of an income tax. Noting Governor Frank Murkowski's
recent testimony regarding the negative affect of alcohol on the
State, he voiced support for the implementation of a "sin" tax on
such things as alcohol and tobacco. He supported the POMV program,
was reluctant on Constitutionalizing the Permanent Fund Dividend,
approved of using the earnings of the Permanent Fund, and approved
of maintaining a prudent balance in the Constitutional Budget
Reserve (CBR).
CARL EVERTSBUSCH, President, Key Coalition, testified via
teleconference from Anchorage on behalf of the State's
developmentally disabled and their support groups. Their numbers
are continuing to grow. Funding of essential services has been
limited due to the lack of revenue. Community-based services are
essential services; therefore the Key Coalition is in support of a
long range fiscal plan that includes reasonable spending, the use
of the earnings of the Permanent Fund, and the implementation of a
broad based and fair tax. In a recent conversation with some low-
income people, it was expressed that they were willing to receive a
lower PFD and pay a sales tax if that would be required in order
for the State to support essential services.
KATHY FITZGERALD testified via teleconference from Anchorage on
behalf of her family and, in particular, her disabled daughter
regarding the value of providing a quality community to everyone.
This would include education, recreation, job opportunities, and
other things that are important to our quality of life. She voiced
support of a broad-based income tax and the POMV. She would also
support the reinstatement of the school tax and other taxes to
support essential services that are required for the developmental
disabled and communities that need funding.
BOB WEINSTEIN, Mayor, City and Borough of Ketchikan, testified via
teleconference from Ketchikan and voiced that, as one of the 55
appointees of the Conference of Alaskans he is supportive of the
recommendations that were adopted at the Conference. "Use of a
portion of the excess income or excess percentage of market value"
of the Permanent Fund "would not, under certain circumstances be
sufficient" to fill the current or projected fiscal gap. Under
POMV, excess earnings could be "a major support for essential
services," but additional revenues would be required. Therefore, he
urged Committee Members to recognize that POMV would be one
component of a plan to meet the State's long-term fiscal needs. It
should also be recognized that the high oil prices being
experienced today would not be sustained and that, were a plan in
place, residents "would be assured that critical services would
continue without interruption."
ROSS SCHAEFFER, Mayor, Northwest Arctic Borough, testified via
teleconference from Kotzebue and urged that a long term fiscal plan
be adopted that would utilize some of the earnings of the Permanent
Fund to pay for public services while maintaining and growing the
individual PFD program under the POMV management system. He also
supports the sharing of State revenue through an equitable
municipal dividend program, a low income tax, an education tax and
other taxes. He does not support a Statewide sales tax. He voiced
support for an [unspecified] education bill that is being presented
by the House of Representatives. Communities are struggling and
that revenue sharing is needed. The elimination of the Longevity
Bonus program has created additional problems in that senior
citizens are unable to pay utility bills and other expenses. Fifty
percent of the municipal governments in the State would be unable
to provide sufficient public services within the next years. They
have had to reduce staffing, have raised property and other taxes,
and resorted to other measures to address their budget problems.
Municipal assistance is necessary.
SANDY SHOULDERS, Resident of Talkeetna and Representative, Parent
Teacher Association (PTA), testified in Juneau that a long-term
fiscal plan is essential and is long overdue. One of the PTA's
positions on education funding is that it must be stable funding.
Trauma to teachers, schools, and students is the result of annual
budget "scrambles" in regards to staffing, supplies, and other
important school components. She is "too old" to continue to deal
with this "rollercoaster ride." She urged the Committee to
stabilize the State's fiscal program not only for education, but
also for the good of the State in general.
Co-Chair Wilken asked regarding the new Talkeetna elementary
school.
Ms. Shoulders responded that it is a vast improvement over the
"abominable" other school. She acknowledged the efforts of Co-Chair
Green, local parents, and others who worded hard to make the school
a reality.
Senator Dyson opined that the goal of stabilizing the State's
fiscal situation is difficult due to the fact that the State is so
dependent on the price of oil, which fluctuates dramatically. The
two options available to reduce this dependency and provide
stability would be to either raise taxes to provide a steady income
stream with which to support State government or to reduce spending
to a level that could be supported by oil revenues. People would
not desire to have services reduced or to have taxes increased to a
high level. He asked what method Ms. Shoulders would recommend.
Ms. Shoulders responded that personally, she would support
utilization of the earnings of the Permanent Fund, as that was the
reason it was initially established. She agreed that the
fluctuating price of oil is an on-going issue, and therefore to
continue to fund State government on that basis is ludicrous. While
acknowledging that there are people who could not afford not to
receive their annual PFD, she would forgo her PFD if it were so
required. In addition, people who pay nothing to support State
government should be paying in some manner.
Senator Dyson asked whether she would support using all of the
Permanent Fund earnings to support State government to fill that
gap.
Ms. Shoulders stated that while she would resign her PFD check she
could not answer for others.
Senator Bunde pointed out that in regards to stable education
funding, State support for education has consistently increased,
not decreased, during the time he has been involved in the
Legislature. Therefore, the amount of money that was most recently
budgeted for education would be the base for the next fiscal year.
Ms. Shoulders voiced the hope that as Legislators develop a fiscal
plan, appropriate funding sources would be identified.
Senator Bunde responded that the source would be the same as it has
been. The State either "robs Peter to pay Paul" or a new revenue
source is identified. Judging from letters to the editor of the
[unspecified] newspaper, he lacked the confidence that much new
revenue would be generated from the community of Talkeetna.
Ms. Shoulders responded that there are other opinions aside from
those printed in the newspaper.
MARY HAKALA, Parent of three school age children and Coordinator,
Alaska Kids Count, testified in Juneau that the nonpartisan parent
organization supports schools and children by volunteering and
advocating for increased school funding. While the current $85
million school budget is appreciated, it is inadequate to meet
needs. She understood that new revenue sources would be required to
support the desired level of excellence. Noting that the
organization has urged parents to speak up regarding their
individual funding recommendations to support of education, she
stated that she personally is asking that Legislators revisit ELF
to insure that the State is maximizing its yield by receiving its
fair share of oil profits, especially when oil prices are elevated;
would support the enactment of POMV; the utilization of "a portion
of the Permanent Fund earnings to support critical services such as
education," and the enactment of a broad based income tax. She
urged the Committee to make education a top priority, as schools
need Legislatures "to tackle the thorny issue of the revenue side
of the equation."
Senator Hoffman asked whether the testifier would support an income
tax or a sales tax.
Ms. Hakala responded that a sales tax would be devastating to those
organized boroughs that have existing sales tax programs. Some
utilize their sales tax proceeds to support local education needs.
Co-Chair Wilken acknowledged the value of good volunteers, such as
Ms. Hakala, to organizations.
SFC-04 # 46, Side B 02:21 PM
REVEREND RICHARD OLSON, Parent, testified via teleconference from
Homer to speak on behalf of those people to whom the PFD is of
tremendous importance, especially those people who live in Rural
Alaska. A PFD check to people who earn more that $100,000 annually
is incidental. He opined that the 55 Alaskan delegates who were
appointed by Governor Frank Murkowski to the Conference of Alaskans
represent rich people as proven by their reluctance to support an
income tax while supporting efforts to reduce PFD levels. He
professed that a graduated income tax, beginning at a minimum
annual income of $50,000 should be considered, especially as this
tax would capture money from those people who move to the State,
earn big money, and then move away without contributing anything to
the State. All other states have income taxes, so why not should
Alaska. He argued that the PFD should be left alone as people
depend on it. He also spoke against a State sales tax, but
supported the re-implementation of a school tax. Implement a
graduated income tax, and tax tourists before changing the PFD
program. He also suggested that the Permanent Fund investments be
conducted in a different manner.
Senator Bunde commented that numerous states do not have an income
tax. The Commissioner of the Department of Revenue recently
testified that those states that depend on revenues generated from
income taxes, rather than a sales tax, to support state government
are experiencing economic downturns. He also addressed the myth
regarding the substantial amount of money that leaves the State
because of non-resident workers. 90-percent of the wages earned in
the State are earned by Alaskans. The average salary earned by the
remaining ten-percent non-residents is $13,000 and therefore would
not be remitting any income tax were a graduated income tax program
in place.
Co-Chair Green asked whether there is a bill being proposed that
would eliminate the PFD as referenced by the testifier.
Co-Chair Wilken asked the testifier whether his comments were meant
to indicate that there is legislation being presented to eliminate
the PFD program.
Reverend Olson responded that while there is no bill being proposed
to eliminate the PFD, the POMV would remove some of the excess
earnings. He professed that the entirety of the excess earnings
should be distributed to Alaskans. An income tax should be the
first consideration.
MARY GRISWOLD, testified via teleconference from Homer and voiced
support for a combination of SJR 32 and a committee substitute for
SJR 18 that would establish a POMV program established at a five-
percent market value payout of the Permanent Fund with 80-percent
of that amount being allocated to pay PFDs. This would serve to
preserve the Permanent Fund through inflation proofing, as only the
principal is currently inflation-proofed by an annual appropriation
authorized by the Legislature, "subject to available funds." In
addition, the POMV program "would prevent the erosion" of the
Fund's value by" limiting spending "in times of plenty." The
proposed payout method would also comply with general accounting
principals, which are appropriate to the current diversified fund
structure consisting of stocks, bonds, and real estate. The current
payout method is no longer valid as the Fund is no longer solely
invested in income producing bonds. The POMV should remain simple
and comparable to the current dividend system in order to gain
voter approval. While not generally accepting of dedicating
appropriation language into the State's Constitution, the POMV
method would be worthy of consideration. It is imperative that this
issue be addressed in order to allow the State to address its
fiscal dilemma. She reiterated that after inflation proofing, the
remaining portion of the five-percent of the earnings as specified
in the POMV plan, should be divvied out at an 80/20 percent payout,
with 80 percent of the payout being dedicated to the dividend
program and 20 percent being dedicated to support essential
government services. This performance model would also be a more
trusted model that one based on projections and short-term look-
backs.
TABER REHBAUM testified via teleconference from Fairbanks on behalf
of herself and voiced support for the Conference of Alaskans
resolution regarding the Constitutional Budget Reserve (CBR). She
noted that the question evoked by this resolution is where would
the funding come from with which to stabilize the CBR. She also
spoke in support of the POMV while pondering whether the voters
would approve it because it is a confusing issue and voters might
ascertain that it would be an attack on the Dividend rather than
actually preserving it. She suggested that in order to gain
acceptance, after the PFDs are paid this year, the remaining
earnings should be used to balance the budget and to build up the
CBR. This might further clarify how the POMV would work. She noted
that the last phase in the CBR resolution is worthy of mentioning
as it reads, "Whereas Alaska must not impose self-inflicted harm."
This phrase could be understood that State funding of essential
services should not be reduced to a point where harm would result
rather than finding ways to increase revenue. An income tax should
be considered as one of the areas from which revenue could be
generated. People are willing to pay their way and a graduated
income tax would be a good option. Addressing the fiscal gap, and
particularly addressing the need to adequately fund education, is
long overdue.
DWIGHT MORRIS testified via teleconference from Fairbanks and
voiced his support for the Resolutions of the Conference of
Alaskans. He voiced that the earnings of the Permanent Fund alone
would not be sufficient to balance the budget this year. He also
supported an income tax, but not a sales tax, as it would promote
Internet purchases that would drive money out of the State. It
would be disastrous to communities that already have local sales
taxes. He urged the Committee to balance the State budget and
establish a tax plan, an income tax plan, and a budget plan. He
warned that without a budget plan, the State would face a crisis
similar to that currently being faced by education.
Senator Bunde clarified that he would also desire "to fix the roof
before it rains rather than have it rain on our parade
financially." However, he avowed that the impression that the
earnings of the Permanent Fund would be insufficient to address the
State's fiscal gap is inaccurate as between $600 million and one
point two billion dollars in earnings have annually been realized
in the last few years. Therefore, due to the fact that this year's
fiscal gap is projected to be approximately $500 million, the
earnings would be sufficient. Were a POMV plan in affect, according
to the Department of Revenue, there would be enough earnings to
provide both a dividend and close this year's fiscal gap. Other
year's ability in this regard would depend on that year's financial
market.
JERRY MCCUTCHEON testified via teleconference from Anchorage and
asked what the State would depend on for income in the future when
there were only 100,000, 250,000 or 500,000 barrels of oil being
produced, were it to dip into its Permanent Fund earnings now.
Actions today will affect tomorrow. The Permanent Fund's $28.6
billion went to $21.3 billion during the most recent financial
market downturn before it turned around. Were the State to have
invested for a modest rate of return, the balance would currently
be $31.5 billion. While the Permanent Fund value has returned to
$28 billion, it has lost one-third of its purchasing power.
Therefore, it is really only worth about $19 billion today. When
compared to gold, it's value is even less. Those managing the Fund
are "asleep at the switch." Alaska's oil taxes are based on an $18
per barrel price and the formula provides oil companies less money
when the price is less than ten dollars per barrel. There is no
consideration to the tax in regards to when the price exceeds $18.
OPEC has raised its barrel taxes several times to keep in line with
current conditions and is today based on a $36 dollar a barrel
price. Every dollar per barrel increase over $18 equates to $365
million in revenue, of which the oil companies receives $300
million and the State receives $65 million. "A real poor split."
When oil prices increase from $18 to $33 per barrel, the oil
company receives $5.5 billion in un-taxed revenue and the State
receives $950 million. When the price is $36, the total revenue is
$6.5 billion: oil companies would receive $5.4 billion "to go play
elsewhere in the world and have a good time and prospect" and the
State would receive $1.1 billion. Elsewhere in the world, "those
numbers would be reversed." We need to do something about this.
ERIC WOHLFORTH testified via teleconference from Anchorage and on
behalf of himself and fellow convener, Arliss Sturgelewski, it was
an honor to participate in the Conference of Alaskans. In his view,
changes should be made incrementally rather than to be implemented
within a one-year timeframe. In addition, it would be acceptable to
further an adequate plan and amend it as needed rather than to
delay action due to the position that an ideologically perfect plan
must be developed. The Conference of Alaskans actions proceeded
with that understanding and view in mind. The delegates adopted
what could be referred to as a "comprehensive solution." He
declared that the POMV should be specifically considered and
adopted as "a separate stand-alone" methodology through which to
provide a payoff from the Permanent Fund. He urged that, "the plan
be adopted because it is an efficient and effective way of giving
the Legislature a maximum percentage each year of amounts that can
be spend each year from the Permanent Fund." He supported the
notion that "an incremental plan is better than none; looking at
the proposition of spending this year some amounts of Permanent
Fund earnings through Legislative action;" and that, were it to be
legally allowed and approved by a vote of the people, that the
monies that could be spent from the Permanent Fund be utilized and
prioritized to support education. This would be the first step in
developing an ultimate fiscal plan. He does not support the
Conference of Alaskans' Resolution in support of
Constitutionalizing the Permanent Fund Dividend. He stressed that
inadequate funding of education is a major issue that "will
substantially detract from the future of the State." If we are
looking for advancing economic development, support of education at
the local and university level would be required. He also supported
the implementation of broad based taxes such as tobacco and alcohol
taxes.
Co-Chair Wilken thanked Mr. Wohlforth for his service to the State.
AL JUDSON, testified in Juneau and voiced that the issue of
education funding is the most important issue facing the State. In
addition, he questioned the continuance of the tax breaks that are
afforded to oil companies. Appropriate taxation would provide
needed revenue to the State. [NOTE: The quality of the recording of
this testimony was substandard and therefore the testimony was
difficult to understand.]
Senator Stedman responded to a comment by Mr. Judson by stating
that the forthcoming move of the Marine Highway System operations
staff to Ketchikan from Juneau would enable the children of the
affected families to receive a qualify of education equal to or
exceeding that provided in the City and Borough of Juneau. The move
would also be in the best interest of the State, as it would
enhance the economy of the Ketchikan region and save the State
money.
KEVIN RITCHIE, Executive Director, Alaska Municipal League,
testified in Juneau that the League supports the POMV program as it
could adequately provide PFD funding, inflation proofing, and money
to support State government. In addition, the League and the
Conference of Mayors would support furthering concepts that would
provide education funding, the development of a municipal dividend
program, and other public service programs from the earnings of the
Permanent Fund. There is also support for a minimal State income
tax and other taxes; however, he reminded that sales taxes are one
of the primary revenue sources for many local government entities,
especially those small communities that have no property tax base.
Testimony in support of developing a long-term fiscal plan has been
noted, as the current situation is alarming to many people
including the developmentally disabled, senior citizens, and
essential service providers. In the 2002 election, when the State
tax cap issue was on the ballot, two out of three voters supported
maintaining existing taxes as they recognize the value of what they
support.
Senator Dyson expressed delight that the League is now in support
of Legislators' abilities to address the State's fiscal gap as
opposed to their earlier position of "no confidence."
MIKE NAVARRE former Legislator and former Mayor, Kenai Peninsula
Borough, testified via teleconference from Kenai and voiced that,
while he was originally ambivalent about it, he is honored to have
been one of the 55 participants in the Conference of Alaskans. The
Conference served to generate a lot of discussion and a focus on
the issues. "That, in and of itself, is tremendous." He voiced
appreciation for the efforts of the Legislature to address the
issues, and he urged them "to get on with it." He opposed any
reduction of residents' PFDs, opposed using any of the earnings of
the Permanent Fund to support State government, opposed an income
tax and a State sales tax, opposed increasing taxes on the oil
industry, opposed an increase in motor fuel taxes, but understood
that all or some combination of these would be necessary. He urged
that the POMV "with no attachments" be put before the citizenry for
a vote, as it is an absolute no-brainer. Acknowledging that there
is support for tying the POMV to such things as a Permanent Fund
dividend guarantee or a spending limit would guarantee its failure
as the issue is "confusing enough" as a stand alone proposal.
Rather than allowing access to the earnings of the Permanent Fund,
the POMV really would limit the Legislature's ability to get into
the Fund. Inflation proofing of the Fund as the first course of
action makes "absolute sense." He urged the Committee to support
this program, as, in his opinion, those in opposition to the POMV
are "just wrong."
Mr. Navarre voiced support for being able to access the earnings of
the Permanent Fund and the implementation of an income tax. As a
former participant in the Conference of Mayors, he had begged the
Legislature in 1999, without success, to include mayors and the
Municipal League in the process of developing a fiscal plan.
SFC-04 # 47, Side A 03:06 PM
Mr. Navarre concluded that the POMV should be the first step in
developing a State fiscal plan and that once the public understands
it, it would be embraced and supported. One of the real tragedies
in this State has been the undermining of the institution of State
government branches. The public does not understand the responsible
job that the Legislature has conducted in regards to the Permanent
Fund. Two-thirds of the Fund balance is the result of Legislative
action that deposited discretionary funding into it. The public
should congratulate the Legislature for their actions regarding the
Fund. While acknowledging that the earnings of the Permanent Fund
should be accessed, he declared that the PFD program should
continue, "as it is an economic engine" in the State. He reminded
that while subsurface mineral rights are the property of the State
of Alaska, this is not the case in other states whose citizens
utilize their assets and contribute to their state's economy. The
State of Alaska utilizes the PFD program to contribute to the
economy. He stated that the Resolution regarding the Constitutional
guarantee for the CBR was the hardest vote for him to make at the
Conference as he could appreciate arguments on both sides of the
issue…the higher the amount is set, the more he disagrees with it.
MARIE LAVIGNE testified via teleconference from Anchorage to
encourage the Legislature to consider a diversification of measures
through which to address the State's funding crisis. The goal would
be to insure that essential public services are continued. Even
though there is a focus on Missions and Measures, the budget being
proposed for FY 05 would be harmful to Alaskans, particularly in
the health care area. Other components that would be negatively
impacted would be municipal funding, education, public safety,
senior services, alcohol assessment programs, and mental health
care. Continuing oil revenue as the primary source of State revenue
would only result in more severe budget reductions. Things such as
the POMV, a tourism tax, an increase in the tobacco and alcohol
tax, an income tax, and others should be considered to generate
revenue for the State. The Legislature must take a leadership role
in the effort to develop a long-term fiscal plan.
RON COWAN testified via teleconference from Anchorage to urge, as a
long-term care ombudsman, for increasing rather than reduced
support for senior citizen services. He expressed that services
could be increased without increasing funding were programs re-
evaluated for the long-term. It must be acknowledged that the State
is experiencing a growth in its senior citizen population as well
as its special needs population. As a citizen who is interested in
maintaining essential services, he would be willing to have the PFD
program altered, would pay an income tax, would not support a sales
tax, but would be willing to make sacrifices. Now is the time to
take some personal action to help the State. He voiced dismay at
hearing that people might leave the State to get their children a
better education. While oil and other natural resources are
important to the State, children, seniors, and other citizens are
also important resources. He urged the Committee to address the
issue of balancing the budget.
CLEM TILLION, Former Legislator, testified via teleconference from
an offnet site in Halibut Cove and noted that when he was a member
of the Legislature he was the only person who voted against
repealing the State's income tax. While he would support a sales
tax or an income tax, he preferred a sales tax that would be
contributed in its entirety back to the community from whence it
was collected to insure every area of the State would contribute. A
small income tax levy would be acceptable were it based on a
person's federal income tax amount. While he supported the POMV
proposal, he warned that it might not be approved were it a stand-
alone issue. He suggested that up to five percent of the earnings
be distributed as a PFD and that each recipient's check be subject
to a specified tax withholding percentage. This would provide
sufficient revenue to the State.
PAM LABOLLE, President, Alaska State Chamber of Commerce, testified
in Juneau, that the Chamber supports the POMV proposal. The
challenge of addressing the State's fiscal imbalance is daunting,
however, by utilizing a variety of different revenue sources, a
sound fiscal plan could be developed. The Chamber urges that a
prioritization list be followed. First, a budget discipline with
reasonable spending controls should be developed as were new
revenue generated without this control it could compromise the
effort. A portion of the Permanent Fund earnings should be
allocated to support government services and provide for the PFD.
As a last resort, implementation of a broad-based statewide tax
could be considered. However, she warned that a tax could harm the
competitiveness of Alaska businesses over time. She urged the
Committee to address the budget this year.
Senator Dyson asked whether the Chamber would support an increase
in the business tax.
Ms. LaBolle responded that the Chamber would support a broad based
tax rather than targeted taxation, as the citizens of the State
should support services.
Senator Dyson stated that a definitive analysis of the downside of
any new tax should be reviewed. A tax increase in California
actually resulted in a net decrease in revenue as people moved out
of the state in order to avoid the taxes. He asked whether there
are any tools available through which the effects of how a tax on a
specific group could be gauged.
Ms. LaBolle stated that the Council on State Taxation has recently
conducted a fifty-state study on the affects of business taxes in
each state. The Internet address is www.statetaxation.com.
Co-Chair Wilken noted that testimony would now be limited to three
minutes in order to compete testimony before the teleconference
network terminates at 4:00 PM.
JEANNETT GRASTO, Member, Alaska Mental Health Board, testified via
teleconference from Fairbanks and urged the Legislature to develop
a long term fiscal plan now rather than waiting until the situation
is more desperate and State services are further curtailed. She
would rather pay a tax than witness some vulnerable individuals
being negatively affected by service reductions. Reductions have
negatively impacted proven long-term programs such as the Mental
Health Board and parent support services. She supported continuance
of the PFD program as many people depend on it and it contributes
to the State economy.
SUSAN STITHAM testified via teleconference from Fairbanks and
pointed out that education funding is the absolute responsibility
of the State. It is also an economic engine as it attracts business
to a community and enhances the quality of life. There is also a
moral obligation to the next generation. Funding reductions that
have occurred have "whittled away funding until there is no more
fat left and we are down to the marrow." Funding reductions have a
negative affect each year on children. Reduced opportunities and
increased class sizes is shortsighted and will short change
education. She urged that legislation to increase the foundation
formula funding be supported.
Ms. Stitham voiced support for the continuation of the PFD and for
broad based taxes such as an income tax. She, like Mr. Tillion,
would have voted against the discontinuation of the State's income
tax. Sales taxes should be a local issue. The results of a recent
AARP survey on taxation indicated, "that half of all Alaskans feel
that the cost of human services should be shared between the
individual and the State government." That is an astonishing fact
in that half of Alaskans think the services should be free. Some of
these people pay practically nothing to support State services.
ROSELYNN CACY, Director, Adult Learning Center, University of
Alaska Anchorage, testified via teleconference from Anchorage and
urged the Legislature to continue K-12 and University funding. She
noted that the Adult Learning Center plays a role in furthering
educational opportunities for those Alaskans who do not hold a high
school diploma. She voiced appreciation for the $300,000 general
fund allocation that was combined with grant monies to fund the
Center. Investing in education is a true investment.
JEFFREY TODD BROWN testified via teleconference from Anchorage in
opposition to using the earnings of the Permanent Fund to support
State government as the Fund belongs to the people. While other
states utilize tax revenues to pay their debt, Alaska's oil
revenues should be viewed as a taxation methodology that supports
Alaska's debt. There would be no fiscal problem were oil companies
charged the appropriate taxation rate on oil production. ELF should
also be re-evaluated. It makes him "wonder" why the Legislature
does not address this issue.
JUDY TOLBERT, Retired Teacher, testified via teleconference from
Fairbanks to note that since retirement, she has been active in the
University and has assisted in local classrooms. She is appalled
that the smaller classroom sizes, one-on-one student assistance,
and teacher training achievements that have been accomplished would
be undermined by the proposed budget reductions. She would support
an income tax. People are spoiled by the services that are provided
in this State and should be willing to contribute to support them.
EDDY BURKE, Chairman, Alaskans Just Say No Committee, testified via
teleconference from Anchorage in opposition to POMV, as it would be
a raid on the Permanent Fund Dividend. This type of proposal has
been defeated before. Other options that could be considered would
be consolidating such things as the Alaska Industrial Development
and Export Authority (AIDEA) and the Alaska Housing Corporation;
tourism taxation; and re-evaluation of ELF. There is reluctance on
the part of the Legislature and Governor Frank Murkowski to further
these options. He stated that the Alaskans Just Say No Committee
has developed a form that would allow those citizens who wish to
donate their PFDs to the State to do so. The majority of the
testifiers today are those who are "in the take trough." These
mayors, city council people, PTA people, chamber of commerce
members, and others just want more money for their programs.
Eighty-three percent of Alaskans, or the average citizen, are not
speaking today. Were they to testify, they would be saying "no",
that rather than there being a fiscal crisis, "there is an
allocation problem". The spending gap is being reduced. The
Democratic Party should let the Republican Party "run off the
cliff" and be remembered as the political party "that raided the
Dividend or implemented the largest tax increase in Alaska's
history" … a sales tax.
SOREN WUERTH, Treasurer, Alaskans Just Say No Committee, testified
via teleconference from Anchorage and stated that someone told him
that his organization's goal of protecting the Permanent Fund would
lead to an economic train wreck. However, he countered that if it
would take a train wreck to clear the rails of irresponsible
leadership, let it happen. Our PFD "train has a big engine" and is
morally and socially responsible. Oil and tourism industries take
money out of the State, but the Permanent Fund is an economic
engine that brings money into the State as the people's money is
circulated within the State. The PFD is money from our natural
resources and, as such, is the people's portfolio. We are all
shareholders on this train and "Legislators are worried that the
PFD train will come hurling down the track toward the framework of
government" and without outside special interests would run the
show, contrary to the situation in which Legislators want to run
the show with full control. The Permanent Fund stands in the way of
how the Legislative leadership wants to run the show. "Let the
train wreak come." 83-percent of the citizens in the State "wish to
preserve the Permanent Fund far into the distant future" and the
misleading propaganda distributed by the Legislature would not
work.
GEORGE VAKALES, Chair, Board of Directors, Anchorage Chamber of
Commerce, testified via teleconference from Anchorage that the
Chamber supports the development of a fiscal plan that would
include budget discipline, the use of Permanent Fund earnings, and
the "institution of a broad-based tax."
Co-Chair Wilken asked whether Mr. Vakales would consider a sales
tax a broad-based tax.
Mr. Vakales affirmed that he would.
Senator Hoffman asked whether the Chamber would prefer an income
tax to a sales tax.
Mr. Vakales stated that the Chamber has not taken a position on
this issue. It would best be determined by public opinion and the
Legislature.
FRANCINE HARBOUR testified via teleconference from Anchorage and
stated that she is a "consumer of mental health services" and that
rather than being characterized as a person who just wants more
services, she is simply concerned about living. She shared some of
the negative affects that have occurred from reductions in mental
health services. The services that are being provided help keep
people alive. She asked the Committee to develop a fiscal plan that
would provide adequate funding of services for vulnerable Alaskans,
including the elderly, the young, and especially the one-in-four
Alaskans who suffer from mental health issues.
SFC-04 # 47, Side B 03:51 PM
CLAUDIA CRISS testified in Juneau and urged that a fiscal plan be
developed that would support health services, mental health
services, and education. A broad-based tax would support necessary
services. In addition, consideration should be given to increasing
the tax levy on oil companies so that when oil prices increase, the
State would receive more revenue. Efforts should also be exerted to
diversify the economy, expand the State's Pacific Rim business
relationships, and attract more industry in order to provide more
job opportunities for our youth. This would encourage them to
remain in the State.
BRAD FLUETSCH, Charter Financial Analyst, testified in Juneau and
expressed that to further the focus of these hearings, which is to
develop a fiscal plan facing the State, a framework or process must
be identified. Were the State his client, he would first determine
the goals and objectives to include such things as what level of
education, mental health, and public safety were desired. Quality
of life and standards of living could be equated to dollars. What
budget level would be sufficient? The next step would be to review
and identify sources of income in the future with realistic levels
and timeframes. Revenue sources currently include the CBR, taxes,
oil revenues, the Permanent Fund, resource revenue, federal
government and others. The next step would be to review the budget
including State assets, their projected growth rate, and the rate
of inflation. Once all this information is compiled, a
determination could be made as to whether the budget goals would be
achievable. Were it not, adjustments could be made and plotted into
the future, to include asset risk tolerance and liquidity needs.
Mr. Fluetsch informed that he does not support POMV as the Fund
consists of money that has been acquired by utilizing consumable
resources. Were POMV implemented, a low payout of approximately
three-point-five percent and a [indiscernible] and volatile minimal
balance should be identified. The current system is currently the
vehicle of choice to protect family assets from the government,
spendthrift descendants, and financial scams. He supported the use
of trusts.
Co-Chair Wilken asked Mr. Cremo to continue the testimony he had
begun earlier in the meeting.
Mr. Cremo reiterated his support for the POMV proposal. He also
stated that, to date, the State has not done too well in the fiscal
area with its Constitutional amendments. He continued his comments
as follow.
Incidentally, the "income-producing" requirement expressly
applies to principal. Section 15 is silent with respect to the
investment of accumulated income.
Another thing. Section 15 lacks a prohibition against
investment in the obligations, properties and enterprises of
the state. How could the Permanent Fund Corporation resist a
request from a fiscally strapped legislature and governor that
the fund buy back and lease back a government building or buy
state bonds that brought no bids from investment bankers?
The greatest fault, however, of Section 15 is that it doesn't
require that all of the oil money go into the Permanent Fund.
Endowments have two main purposed. One is to perpetuate the
flow of money to an operating entity, such as a university, a
foundation or a government. The other is to stabilize the flow
of money to the operating entity.
The Alaska Permanent Fund provides a good example of an
endowment with the first-mentioned purpose - perpetuation.
Revenue from the fund's investments continues to flow after
the natural resource is exhausted.
A university's endowment provides an example of an endowment
with the other purpose - stabilization of income. Wealthy
alumni die and leave large amounts of money to the university.
The flow of that money to the university is irregular. It
could be more than a million dollars a year for a period of
several years. Then, for another period, it could fall off to
much less than that. If that money were treated as income, the
fluctuations wouldn't be easy to manage.
In the case of the state, the oil revenue is extremely
volatile. Yet the state isn't using its endowment to stabilize
that revenue. Only 15-20% of the oil money goes to the
Permanent Fund. With the rest going into the General Fund, the
state has been fiscally unstable for years.
But the state can stabilize the flow of that oil money by
routing it through the Permanent Fund. Income produced by
investment would be much more sustainable than the oil money
itself.
There is a proposed constitutional amendment, not on your
plate, that would put all of the oil money into the Permanent
Fund and cure the other defects of Section 15 as well. It
would provide you with a new and simple system for funding the
government.
[NOTE: Mr. Cremo's proposed amendment and transitional language
regarding the Alaska Permanent Fund read as follows.
ARTICLE IX, SECTION 15 - ALASKA PERMANENT FUND.
(a) The money derived by the state (A) from the disposition of
minerals and land by the state or the United States and (B)
from taxation of (1) production, transportation and
reservation of minerals, (2) property used in exploring for,
producing and transporting minerals and (3) income from
production and transportation of minerals shall constitute the
Alaska Permanent Fund.
(b) Money in the fund shall be invested and reinvested, for
income and capital gains, in accordance with restrictions,
prescribed by law, that emphasize preservation of the fund's
assets. No investment shall be made in the obligations,
properties and enterprises of the state.
(c) No money, or other asset, shall be removed from the fund
except, in order to provide the state with revenue, a
noncumulative amount of money that in a fiscal year does not
exceed 4.30 percent of the average market value of the fund's
net assets at the end of each of the six full calendar years
immediately preceding that fiscal year. The revenue shall not
be dedicated to any special purpose.
ARTICLE XV, SECTION 30 - ALASKA PERMANENT FUND (TRANSITION)
(a) The percentage prescribed in Article IX, Section 15,
amended in 2004, for determining the amount of money that can
be removed from the Alaska Permanent Fund, shall not apply
until fiscal year 2016. the applicable percentage shall be
9.36 percent in fiscal year 2006 and, in each intermediate
fiscal year, 0.9257 times the percentage in the immediately
preceding fiscal year.
(b) The assets of the Alaska Permanent Fund prior to the
effective date of the amendment of Article IX, Section 15, in
2004, are assets of the fund after the amendment.
(c) The amendment of Article IX, Section 15 in 2004 and this
section shall be effective July 1, 2005.
Mr. Cremo continued his comments.
The revenue from the fund, supplemented with revenue from
conventional sources in whatever amount you consider adequate,
would go into the General Fund. It would fund government in an
orderly fashion.
The constitutional provision wouldn't dictate to you how the
revenue is to be spent. You would allocate it to all
governmental services, including the one we call dividends,
according to the priority you assign them.
Mr. Cremo discussed his proposed amendment as follows.
At the start of a ten-year transition the rate of withdrawal
for the Permanent Fund, which would use the POMV method, would
be high enough to provide revenue that, when combines with
conventional revenue, would fund spending at the current
level. During the transition the rate would decrease
gradually. At the end of transition it would be at a
sustainable level.
There is also a proposed constitutional amendment, not on your
plate, of Section 17 of Article 9.
[NOTE: Mr. Cremo's proposed amendment regarding the Budget Reserve
Fund and an accompanying amendment that would provide the
transitional language read as follows.]
ARTICLE IX, SECTION 17 - BUDGET RESERVE FUND
(a) The money deposited into it in accordance with (c)
constitutes the Budget Reserve Fund.
(b) Money in the fund shall be invested and reinvested, for
income, in accordance with restrictions, prescribed by law,
that emphasize the liquidity and preservation of the fund's
assets. No investment shall be made in obligations,
properties, and enterprises of the state.
(c) The amount by which money actually available for
appropriation in a fiscal year exceeds, or is less than, the
amount appropriated for that year shall, correspondingly, be
deposited into or withdrawn from the fund.
(d) Money in any amount may be appropriated directly from the
fund for meeting natural disasters.
ARTICLE XV, SECTION 31 - BUDGET RESERVE FUND (TRANSITION)
(a) The assets and liabilities of the budget reserve fund
(Article IX, Section 17) that are in excess of three hundred
million dollars in value, if any, shall be transferred to the
Alaska Permanent Fund (Article IX, Section 15) on the
effective date of this section.
(b) The assets of the Budget Reserve Fund prior to the
effective date of the amendment of Article IX, Section 17, in
2004, except those assets transferred to the Alaska Permanent
Fund in accordance with (a), are assets of the fund after the
amendment.
(c) This section shall be effective July 1, 2005.
Mr. Cremo's testimony continued.
That section created the Budget Reserve Fund. It would
transfer the bulk of the assets of that fund to the Permanent
Fund. The amount retained would be used for funding actual
deficits and, incidentally, meeting natural disasters. Thus,
it could not be used to bridge projected fiscal gaps. And it
would not be used for inter-fund "borrowing". Revenue
anticipation financing would be available for that.
I've told you what I think is wrong with Section 15 of Article
9 of our constitution. And I've told you what I think should
be done about it. But I'm not naïve enough to suggest that you
do it now.
I am suggesting, however, that you refrain from making any
changes in Section 15 until the time comes that it can be done
right.
The people aren't in the mood to touch Section 15 except with
respect to dividends. But that mood could change if you mount
a massive campaign to tell them the unspun FACTS about the
state's fiscal condition
Co-Chair Wilken thanked Mr. Cremo for the efforts exerted in the
development of his remarks.
Senator Dyson also voiced appreciation for Mr. Cremo's comments. He
voiced concern that the Legislator might look back in fifteen or
eighteen years and wish that they had paid attention to what Mr.
Cremo had recommended. He was disappointed that the public
officials who had supported Mr. Cremo's remarks were viciously
attacked the next election cycle by some "demigods" and defeated.
The acquisition was that following Mr. Cremo's counsel was a raid
on the dividend. This was a very unfortunate distortion of what he
considered Mr. Cremo to be saying. Furthermore, he recalled a
conversation in which it was discussed that were some of the budget
restraints proposed by Mr. Cremo adopted, the Permanent Fund might
be valued at an $80 billion to $100 billion level. Mr. Cremo
commented that, were his recommendations followed, the endowment
fund might have approached similar magnitude.
Mr. Cremo agreed that, according to calculations he had conducted
in the middle 1990s, had his proposal been adopted when North Slope
oil began to flow into the Alaska Pipeline the Fund "was
approaching $100 billion dollars." He wondered what it would be
today were these calculation conducted. Five-percent of $100
billion is a lot of money.
Senator Dyson agreed.
Senator Bunde thanked Mr. Cremo. He stated that currently, oil pays
approximately 70 to 80-percent of the State's operating expenses
and other taxes contribute 20 to 30-percent. Were Mr. Cremo's
proposal enacted with the Fund's current balance, 70 to 80-percent
of the State's funding would be generated from taxes and 20 to 30-
percent would be derived from the earnings of the Permanent Fund.
He asked whether this would be an unfair interpretation of the
scenario.
Mr. Cremo stated that this is incorrect. Going forward, a 9.36
percent withdrawal of money from the Fund would be required to
support a flat General Fund State budget. In the year 2006, a
relatively small amount of conventional funding would be required
to be combined with the Fund amount. He stated that he could
provide a spreadsheet depicting the formula.
Senator Bunde understood that the 9.36 percent withdrawal of funds
would be a temporary level, as withdrawal of that amount of money
could not be sustained.
Mr. Cremo concurred. He reiterated that his amendment would provide
for a ten-year transition period in which the 9.36 percent
withdrawal would, over time, lower to four-percent. "The rub is
that during that time, as the fiscal gap grows, the dividends
grow." In the beginning, there would be a substantial affect on the
dividends, but, over time, their amount would increase. He
suggested that the dividend program be considered a separate
program. The legislature would need to make that determination.
Senator Bunde stated that he is inundated with comments from people
stating that they want their PFD to continue untouched.
Mr. Cremo stated that upon cross-examination, these positions would
change.
Senator Bunde stated that over-time the funding generated from the
Permanent Fund to support State government would increase to
approximately 50-percent.
Mr. Cremo stated that the proposal does not dictate how the money
would be expended. It is only a funding mechanism.
Senator Bunde stated that were only four-percent of the earnings
available, rather than the five-percent payout that would be
available through POMV, the amount would equate to approximately
$600 million.
Mr. Cremo stated that in ten years, the amount would be
substantially more.
Senator Bunde asked for further discussion regarding the faults
with the POMV proposal as earlier referenced by Mr. Cremo.
Mr. Cremo stated that rather than utilizing a five-year average, a
six or seven year cycle would be more in line with investment
cycles. In addition, the proposed five-percent payout must jive
with the investment objective, and a public endowment, unlike
private endowments, "has to preserve the Fund." There is no
investment objective currently required in Section 15. He
understood that the target should conservatively be 7.5 percent. A
three-percent rate of inflation factor would therefore, provide a
4.5 percent "real rate of return." That is the extent of the
Permanent Fund Corporation's reasoning in regard to the POMV
proposal. However, the real rate of return does not equate to the
rate of withdrawal, as it must be lower than the real rate of
return. He stated that a study has been done that reflects that any
fund that withdraws five percent "would eventually erode." He
reviewed the calculation formula for rates of withdrawal.
Mr. Cremo stated that other fault in the proposal would be that a
fiscal year rather than a calendar year should be utilized as the
calendar year terminates just prior to the Legislature's convening.
Also missing from the current proposed Section 15 language is the
distinction between cumulative and non-cumulative in that five
percent be derived from a four-percent withdrawal one year and six-
percent the next year.
Co-Chair Wilken thanked Mr. Cremo and other testifiers for their
participation.
RECESS 04:15 PM / 08:30 PM
[NOTE: Due to technical difficulties, the adjournment of this
meeting was not recorded.]
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 8:30 PM.
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