Legislature(2001 - 2002)
04/18/2001 01:39 PM Senate JUD
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ALASKA STATE LEGISLATURE
SENATE JUDICIARY COMMITTEE
April 18, 2001
1:39 p.m.
MEMBERS PRESENT
Senator Robin Taylor, Chair
Senator Dave Donley, Vice Chair
Senator John Cowdery
Senator Gene Therriault
Senator Johnny Ellis
MEMBERS ABSENT
None
COMMITTEE CALENDAR
CONFIRMATION HEARING - Alaska Judicial Council.
SENATE JOINT RESOLUTION NO. 11
Proposing an amendment to the Constitution of the State of Alaska
to guarantee the permanent fund dividend, to provide for inflation
proofing, and to require a vote of the people before changing the
statutory formula for distribution that existed on January 1, 2001.
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
SJR 11 - No previous action to report
WITNESS REGISTER
Ms. Loretta Brown
Staff to Senator Ward
Alaska State Capitol
Juneau, Alaska 99801-1182
POSITION STATEMENT: Introduced SJR 11
Mr. Jim Kelly
Research & Liaison Officer
Alaska Permanent Fund Corporation
PO Box 25500
Juneau, Alaska 99802-5500
POSITION STATEMENT: Opposed to SJR 11
Senator Jerry Ward
Alaska State Capitol
Juneau, Alaska 99801-1182
POSITION STATEMENT: Sponsor of SJR 11
ACTION NARRATIVE
TAPE 01-19, SIDE A
Number 001
CHAIRMAN ROBIN TAYLOR called the Senate Judiciary Committee meeting
to order at 1:39 p.m. Senator Cowdery, Senator Therriault and
Chairman Taylor were present. Senator Ellis arrived at 1:42 p.m.
and Senator Donley arrived at 2:04 p.m. Chairman Taylor announced
the first order of business would be the confirmation of Eleanor
Andrews for the Alaska Judicial Council.
ALASKA JUDICIAL COUNCIL APPOINTMENT
CHAIRMAN TAYLOR said Ms. Eleanor Andrews was confirmed at a
previous hearing for the Alaska Judicial Council, but due to the
way the terms were limited and the reappointment occurred, it is
necessary to hold a second confirmation hearing. He noted that
committee members asked Ms. Andrews questions at the previous
hearing and, being satisfied with her answers, they forwarded her
name to the full Senate for consideration of her appointment to the
Alaska Judicial Council.
SENATOR COWDERY again moved to forward Ms. Eleanor Andrews' name
for consideration. There being no objection, Ms. Andrews' name was
forwarded.
SENATOR ELLIS arrived and Chairman Taylor explained the
circumstances of Ms. Andrews' second confirmation hearing. Senator
Ellis commented that she is an excellent appointment.
SJR 11-CONST AM: PERM FUND INCOME DISTRIBUTION
MS. LORETTA BROWN, staff to Senator Ward, sponsor of SJR 11, said
that SJR 11 proposes an amendment to the Alaska Constitution that
would guarantee the permanent fund dividend program (PFD) by
providing for inflation proofing and requiring a vote of approval
by the people for statutory changes to the PFD formula. The Alaska
Constitution protects the principal of the permanent fund but the
earnings of the fund have no constitutional protection. She said
the next step in taking the wishes of the people seriously is to
protect the earnings as well as the principal and to guarantee
inflation proofing. The adoption of SJR 11 would mean that the PFD
would no longer be at the mercy of the legislature and the
governor.
SENATOR COWDERY asked if SJR 11 would put what is now in statute
into the Alaska Constitution.
MS. BROWN said it would.
SENATOR THERRIAULT asked if the two statutory references on page 2,
line 1, are to the five-year average of earnings to calculate the
dividend.
MS. BROWN responded yes.
SENATOR THERRIAULT asked, if that is the case, how SJR 11
guarantees inflation proofing.
MS. BROWN said that language is on page 1, lines 6, 7 and 8.
SENATOR THERRIAULT said that language only names a section of the
statute. He then noted that SJR 11 contains a reference to AS
37.13.145, which pertains to deposits that offset inflation. He
thought if there was to be a constitutional guarantee, it should be
put into the statute rather than just referencing the statute. He
said there had been years of rapid growth in the earnings of the
PFD and the bar graph for the rolling five-year average had
continued to rise. Now that the earnings have dropped off, a
higher year would be traded for a lower year and the potential for
a lower dividend is very real. He said the trustees want the
legislature to consider some way to smooth that out from year to
year so that if a bear or drastic market fluctuation occurs, people
will not be left wondering what the size of the dividend will be.
SJR 11 proposes to lock in a system that has the potential for a
"gyration" in the amount of the dividend. Senator Therriault
wondered if Senator Ward had come to the conclusion that this would
be the sensible thing to do, that a possible fluctuation of the PFD
would be acceptable to the general population.
MS. BROWN said she believes that Senator Ward considered that and
found it acceptable. As the principal goes up and down, the money
available for dispersal in dividends would also go up and down. If
a particular amount were locked in and the money was not available,
she did not know what would cover that.
SENATOR THERRIAULT commented that the principal going up does not
necessarily guarantee that the dividend would go up.
Number 781
MR. JIM KELLY, Director of Communications, Alaska Permanent Fund
Corporation, said he was concerned that adopting the proposed
amendments might weaken the state's long standing position that the
income of the fund is exempt from federal taxation. Mr. Kelly said
this issue first came up in the mid 1980s with the proposal of a
"40-30-30" distribution of income being put in the Constitution,
but the Alaska Permanent Fund Corporation's (APFC) legal counsel
thought that putting the dividend into the Constitution would
jeopardize the tax exemption.
He said a study was commissioned that determined arguments could be
made for either side but the weight of the argument was on the tax-
exempt side. Putting the dividend in the Constitution would
potentially tilt that in the other direction. This issue resurfaced
again in 1997 and another study was commissioned with the same
results. The APFC has never had any contact with the IRS, but its
legal counsel felt the tax exempt agreement would be weakened if
the legislature's ability to determine how the money was to be
spent was removed and then vested in the people, as SJR 11
suggests.
Number 933
SENATOR COWDERY asked if SJR 11 would eliminate capping.
MR. KELLY said SJR 11 could have that effect. He said the statute
does not cap the dividend and, if the Constitution referenced the
statute, there would not be a cap either.
CHAIRMAN TAYLOR asked if SJR 11 were to pass and the Constitution
was amended, whether that would prevent a future legislature from
passing legislation that would cap or limit the dividend.
MR. KELLY said, "This is the reading you get from looking at the
amendment."
CHAIRMAN TAYLOR said as long as the legislature retains the power
of appropriation over the fund, it is not a dedicated trust in the
eyes of the IRS. He said the closer the state comes to securing in
the people their ownership of this trust amount, individually and
collectively, the more likely the IRS would be to tax those trust
monies. He asked if there was some way the people could be given an
assurance regarding the permanent fund and still retain sufficient
levels of governmental purpose so any possibility of taxation could
be avoided.
MR. KELLY said he did not know of a better assurance than what is
currently in place.
Number 1195
CHAIRMAN TAYLOR told Senator Ward there had been a question about
whether a future legislature could retroactively change what was in
effect. He suggested that instead of referencing the statute, the
actual words should be put in the Constitution.
SENATOR JERRY WARD said he would have no problem with that.
Originally the language was included but the drafters thought a
reference to the statute would work.
CHAIRMAN TAYLOR moved a conceptual amendment to page 1, line 15,
and page 2, line 1. After the language, "distributed as provided
for by statutory formula that existed on January 1, 2001," delete
AS 37.13.140 and 37.13.145 and insert the actual language of those
statutes.
SENATOR THERRIAULT asked if there would be enough latitude for the
drafters to go through those sections of the statutes.
CHAIRMAN TAYLOR replied yes; the intent of those statutes could be
given without the specific wording, accomplishing the limited
purpose set forth in SJR 11.
SENATOR ELLIS asked if the committee would have an opportunity to
look at the new bill before it moved to another committee.
CHAIRMAN TAYLOR responded yes; this is a serious matter that the
committee and public need to look at.
SENATOR WARD said during the Easter break he went back to his
district and his constituents brought SJR 11 up many times. They
were very supportive of the legislation.
SENATOR THERRIAULT asked Senator Ward to speak to the level of his
constituents' understanding about how the current statute works.
CHAIRMAN TAYLOR asked if there was any objection to the conceptual
amendment. There being no objection, amendment 1 passed.
Number 1433
SENATOR THERRIAULT said that most Alaskans expect the statute to
guarantee them a bigger dividend every year but this may not always
be the case, depending on the rate of return that is realized from
the stock market. A bear market or a flat market would have the
potential for the yearly earnings to be less than any one of the
preceding five years so that a higher year would be replaced with a
lower year resulting in a smaller dividend. He wondered what
Alaska's citizens would think about that.
SENATOR WARD said his constituents do not trust legislators. They
feel that legislators have tried to steal their dividends to spend
the money on bigger government. What his constituents understood
from the September 14th vote was that government does not need
their permission to spend money, and that is what prompted SJR 11.
Senator Ward said he works for his constituents and they would like
the government capped before their income is.
SENATOR THERRIAULT asked if Senator Ward's constituents want the
PFD guaranteed with SJR 11 even though the language in SJR 11 would
sometimes trigger a lower dividend or whether they would like to
have a guaranteed dividend with some level of comfort that they
could count on from one year to the next.
SENATOR WARD said he knows they do not want a cap on the dividend.
SENATOR THERRIAULT said he was not asking about a cap but about
fluctuations in the market that would cause a lower dividend.
SENATOR WARD said they might not understand this formula as well as
the legislators but this is the formula they were endorsing - "they
are comfortable with the way it is."
Number 1663
SENATOR ELLIS asked if the language in SJR 11 would preclude the
legislature from setting an upward cap on the dividend.
SENATOR WARD said it clearly does, the legislature would have to
take action to do that and the voters would have to be involved.
He said:
This just simply puts the people of the state of Alaska
between us being able to grab the dividends and the
inflation proofing and the excess money, and spending it
on government. And I'll tell you right now I really do
believe that if we have a spending cap and we have this
mechanism in place, I believe then what we have to do, we
have to be very clear to the people what we want to take
their money for and spend it on and that's not
necessarily going to be some of the things that you and I
may advocate in our districts. It's going to have to be
very specific things, such as new schools or whatever,
but it won't be because 11 or us and 21 of us decided to
do this.
SENATOR ELLIS said he thought it was clear that Senator Ward had
not intended for the legislature to cap dividends in the future
without a vote of the people.
SENATOR WARD responded that once there was a constitutional
spending limit cap, the people might be willing to look at it.
SENATOR COWDERY agreed that this should be strengthened but he was
not certain that SJR 11 is clear about whether future legislators
could cap the dividend.
SENATOR WARD said SJR 11 directly involves the people with their
account.
Number 1756
CHAIRMAN TAYLOR said that was the concern the APFC raised. If the
governmental purpose provision of the fund became a dedicated trust
fund for specific beneficiaries, it could be subjected to IRS
taxation.
SENATOR WARD said that was simply not correct. He said:
I've called the IRS, I've talked to them, and the
existing law that we have now will be the existing law,
there is nothing that changed and it doesn't alter it
whatsoever. And anybody that says that I've said to them
the same thing, bring forth any kind of an opinion that
our existing law is not, cannot withstand a challenge
from the IRS and they can't because it is existing law.
Just because it may have to go through some extra steps,
which means to go on to the ballot process, the money is
still there, the whole process is still there, and
nothing has changed. It takes more to get to it, just
like getting to a constitutional budget reserve or any
other thing. It's not taken off into the trust
{indisc.}. It's the existing law as it is. That is the
reality of it.
SENATOR THERRIAULT said that existing law says the decision is made
on a year-to-year basis, whereas if you put it into the
Constitution, that decision is made for all time, unless it is
reversed.
CHAIRMAN TAYLOR said the legislature appropriates the dividend and
people do not realize that. All of the income flows through the
general fund and the legislature appropriates it back to the
people. As long as the legislature appropriates the dividend with
a governmental function involved, the state is shielded from an IRS
tax.
SENATOR WARD said, "So will this, once it's passed, it will have
the same degree to it and there will not be a letter from the IRS
stating anything different."
CHAIRMAN TAYLOR asked if Senator Ward had any legal opinions on
that.
SENATOR WARD said, "They have told me they will not issue a letter
to say that this would alter it in any form or the status of it.
Until one comes, all it is, is rhetoric from people that want to
get their hands on the dividend."
CHAIRMAN TAYLOR said the committee would wait for the committee
substitute and bring it up again at a later meeting.
There being no further business to come before the committee,
Chairman Taylor adjourned the meeting at 2:15 p.m.
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