Legislature(2003 - 2004)

10/29/2003 07:00 PM Senate JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE JUDICIARY STANDING COMMITTEE                                                                             
                           MAT-SU LIO                                                                                           
                        October 29, 2003                                                                                        
                           7:00 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Ralph Seekins, Chair                                                                                                    
Senator Scott Ogan, Vice Chair                                                                                                  
Senator Johnny Ellis (via teleconference)                                                                                       
Senator Hollis French (via teleconference)                                                                                      
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Gene Therriault                                                                                                         
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Lyda Green                                                                                                              
Representative Mike Hawker (via teleconference)                                                                                 
Representative Eric Croft (via teleconference)                                                                                  
Representative Vic Kohring                                                                                                      
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE JOINT RESOLUTION NO. 18                                                                                                  
Proposing amendments to  the Constitution of the  State of Alaska                                                               
relating to  limiting appropriations from  and inflation-proofing                                                               
the Alaska  permanent fund  by establishing  a percent  of market                                                               
value spending limit.                                                                                                           
     HEARD AND HELD                                                                                                             
                                                                                                                                
SENATE JOINT RESOLUTION NO. 19                                                                                                  
Proposing amendments to the Constitution of the State of Alaska                                                                 
relating to the Alaska permanent fund.                                                                                          
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS ACTION                                                                                                               
                                                                                                                                
SJR 18 - See State Affairs minutes dated 5/1/03 and 5/6/03 and                                                                  
     Judiciary minutes dated 5/15/03, 6/26/03 and 10/28/03.                                                                     
SJR 19 - See State Affairs minutes dated 5/13/03 and Judiciary                                                                  
     minutes dated 5/17/03, 6/26/03 and 10/28/03.                                                                               
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Mr. Eric Wohlforth                                                                                                              
Wohlforth, Vassar, Johnson and Brecht                                                                                           
900 West Fifth Avenue, Suite 600                                                                                                
Anchorage, AK 99501-2048                                                                                                        
POSITION STATEMENT:  Presented SJR 18 to the committee                                                                        
                                                                                                                                
Mr. Phil Furbush                                                                                                                
Palmer, AK                                                                                                                      
POSITION STATEMENT:   Opposed to  any legislation  that allocates                                                             
any portion of the fund for the state budget                                                                                    
                                                                                                                                
Mr. Games Garhart                                                                                                               
Wasilla, AK 99687                                                                                                               
POSITION STATEMENT:  Likes the  direction of SJR 18 but expressed                                                             
concerns                                                                                                                        
                                                                                                                                
Mr. Dirk Nelson                                                                                                                 
Ester, AK 99725                                                                                                                 
POSITION STATEMENT: Believes  the budget shortfall is  due to the                                                             
fact that Alaska oil is being sold at below market value                                                                        
                                                                                                                                
Mr. George Williams                                                                                                             
No address provided                                                                                                             
POSITION  STATEMENT:   Believes  SJR 18  should  contain a  fixed                                                             
percent that the Legislature can spend, not "up to" 5 percent                                                                   
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 03-58,  SIDE A [RECORDING  BEGINS SEVERAL MINUTES  AFTER THE                                                             
MEETING CONVENED.]                                                                                                              
                                                                                                                              
        SJR 18-CONST. AM: PF APPROPS/INFLATION-PROOFING                                                                     
                                                                                                                                
CHAIR  RALPH   SEEKINS  called  the  Senate   Judiciary  Standing                                                             
Committee meeting to order at 7:00 p.m.                                                                                         
                                                                                                                                
MR. ERIC  WOHLFORTH, public member  of the Alaska  Permanent Fund                                                               
Corporation (APFC) Board  of Trustees, said that both  SJR 18 and                                                               
HJR  26 [House  companion legislation]  propose a  constitutional                                                               
amendment, which  he informally calls, "the  5 percent solution."                                                               
They provide  for a permissible  legislative payout of  5 percent                                                               
of the  fund's market value,  averaged over a 5-year  period from                                                               
the  permanent  fund. Under  the  current  system, actual  earned                                                               
income from the fund is  available for legislative appropriation.                                                               
The Board  of Trustees supports  a 5 percent market  value payout                                                               
solution for a  number of reasons. It will conserve  the fund for                                                               
future generations  and maintain  its ability  to pay  out monies                                                               
for current generations.                                                                                                        
                                                                                                                                
MR. WOHLFORTH  referred to  a handout  he distributed  to members                                                               
and gave the following presentation.                                                                                            
                                                                                                                                
The  seven trustees  of the  permanent  fund are  not taking  any                                                               
stance on how the income from  the permanent fund should be used.                                                               
The trustees are promoting what  they believe is a more efficient                                                               
and  effective  mechanism for  the  availability  of income  each                                                               
year.                                                                                                                           
                                                                                                                                
The chart  on the top of  page 2 shows the  permanent fund market                                                               
value over the  last four years. In the year  2000, the value was                                                               
$26.5  billion,   comprised  of   the  reserved  account   -  the                                                               
principal, of $23.5  billion, and the realized  income account of                                                               
$3 billion. The  total value of the fund eroded  to $23.5 billion                                                               
during  the  poor performing  market  for  2.5 years  until  nine                                                               
months  ago. The  amount  of the  realized  income available  for                                                               
distribution  at June  30, 2002  was $100  million. The  realized                                                               
earning  account  is  the  account  from  which  the  Legislature                                                               
appropriates income  each year for  payment of dividends  and for                                                               
inflation proofing.  That account  is comprised of  actual income                                                               
earned by the fund.                                                                                                             
                                                                                                                                
The  fund's asset  allocation is  illustrated  on page  3 of  the                                                               
handout.  In  1978, the  fund  was  invested almost  entirely  in                                                               
bonds. Since that  time, the fixed income  portion of investments                                                               
has become  a minority amount,  around 40 percent.  A substantial                                                               
amount of  the fund is  invested in domestic and  foreign stocks,                                                               
and the  balance is invested  in real  estate. When the  fund was                                                               
invested  in bonds,  interest payments  were  received every  six                                                               
months. The amount available for  expenditure was based on actual                                                               
income.   Now that  a major  portion of the  fund is  invested in                                                               
stocks,  that  formula  is  no   longer  correct  and  should  be                                                               
superseded.  The  Board  of Trustees  proposes  a  constitutional                                                               
amendment to limit spending to 5 percent of market value (POMV).                                                                
                                                                                                                                
MR. WOHLFORTH  said the POMV is  explained at the top  of page 4.                                                               
Various studies have  shown, over a 30 to 40  year period, that a                                                               
fund  like the  permanent  fund  can expect  to  have an  average                                                               
annual  return  of about  8  percent.  Inflation will  average  3                                                               
percent. Those  studies show that the  maximum annual sustainable                                                               
payout is  5 percent, based on  the 8 percent earnings  and the 3                                                               
percent cost of inflation proofing.   Should the Legislature pass                                                               
either   of   the   resolutions   and  the   voters   support   a                                                               
constitutional  amendment, the  Legislature could  spend up  to 5                                                               
percent of the market value.                                                                                                    
                                                                                                                                
MR. WOHLFORTH said the fund's  performance as shown at the bottom                                                               
of page  4 shows that  historically the fund's return  would have                                                               
met this  rate of return target.  He said he refers  to the Board                                                               
of  Trustees' proposal  as  the 5  percent  solution because  the                                                               
phrase "POMV" is  unfamiliar to people. It will  protect the fund                                                               
by eliminating  the distinction  between principal  and earnings.                                                               
It  protects the  option  of having  an  annual distribution  for                                                               
dividends  and it  protects the  fund for  future generations  by                                                               
restricting spending.                                                                                                           
                                                                                                                                
MR. WOHLFORTH said  the current formula payouts are  shown on the                                                               
bottom  of  page  5,  projected   to  2005.  They  are  based  on                                                               
projections   of  earnings   provided  by   the  APFC's   outside                                                               
consultant and show the statutory  amount currently available for                                                               
appropriation.  The actual  figures  through 2003  show what  was                                                               
available for  the dividend transfer and  for inflation proofing.                                                               
He said the $490 million figure for  2005 is due to the fact that                                                               
the current  payout formula requires  a calculation based  on the                                                               
average of  the last five  years and some  of the worst  years in                                                               
the  stock  market occurred  during  that  time period.  Dividend                                                               
payments for the next two years are projected to be below $1170.                                                                
                                                                                                                                
MR.  WOHLFORTH referred  to the  top of  page 6,  and said  the 5                                                               
percent  formula  requires  that   the  funds  be  calculated  by                                                               
multiplying  the  current  market  value, which  today  is  $25.9                                                               
billion, by  5 percent, which  amounts to a $1.3  billion payout.                                                               
The chart  on the bottom  of page  6 shows volatility.  The chart                                                               
shows  that the  investment of  the  permanent fund  is far  more                                                               
volatile and apt  to jump up and down in  large measure from year                                                               
to year  if the  current formula  continues to  be used.  That is                                                               
because the new  formula is based on a straight  5 percent of the                                                               
market  value each  year;  the  old formula  is  based on  actual                                                               
earnings over 5 years.                                                                                                          
                                                                                                                                
MR. WOHLFORTH said  the new formula ensures  the Legislature will                                                               
have  the ability  to make  an annual  payout. It  will make  the                                                               
payout amounts  more stable from year  to year and will  make the                                                               
payout  amounts  compatible  with  investment  strategy.  At  the                                                               
present  time, if  the APFC  decides to  terminate an  investment                                                               
manager  because of  poor performance,  and the  account contains                                                               
$300 million of unrealized capital  gains, the manager would sell                                                               
the  account upon  transfer and  produce $300  million in  actual                                                               
income. Those  monies would  go into  the actual  payout formula.                                                               
Some  of the  very large  amounts of  realized income  during the                                                               
bull market  years were realized  for exactly that  reason. Those                                                               
earnings had nothing to do  with investment strategy but were due                                                               
to  management changes.  That  is not  the  way modern  endowment                                                               
funds  are  managed.  He  pointed out  the  North  Slope  Borough                                                               
endowment  fund is  managed using  the  POMV formula,  as is  the                                                               
Municipality of  Anchorage fund. He  urged the committee  to give                                                               
favorable consideration to one of the two resolutions.                                                                          
                                                                                                                                
CHAIR  SEEKINS noted  that Senator  French was  participating via                                                               
teleconference, as was Representative Croft.   He then opened the                                                               
meeting to questions of Mr. Wohlforth.                                                                                          
                                                                                                                                
SENATOR  OGAN  noted  that  he   attended  the  Senate  Judiciary                                                               
Committee meeting in  Kenai the previous night and  learned a few                                                               
things. The committee heard an  interesting discussion on how the                                                               
5  percent of  market value  would be  paid. One  testifier noted                                                               
even though  the 5 percent of  the market value is  paid out, the                                                               
fund  would have  no realized  income until  stocks are  sold. He                                                               
asked if assets would have to be liquidated to make the payout.                                                                 
                                                                                                                                
MR. WOHLFORTH  said the  proposed 5  percent would  be available,                                                               
regardless  of liquidating  assets. That  might well  require the                                                               
liquidation  of  assets.  The  whole range  of  assets  would  be                                                               
considered to fund the 5 percent.                                                                                               
                                                                                                                                
CHAIR SEEKINS  said when he  served on  the Board of  Trustees, a                                                               
certain amount of the permanent  fund was in cash while ownership                                                               
was transferred. He asked Mr.  Wohlforth about his statement that                                                               
firing a  manager would cause  a realized  gain. He asked  if the                                                               
equity would  still be held  in the name  of the State  of Alaska                                                               
and transferred to another manager without a sale.                                                                              
                                                                                                                                
MR.  WOHLFORTH  said that  is  possible  on some  occasions.  The                                                               
endeavor,  when a  manager  is  terminated, is  to  see if  those                                                               
stocks can be transferred to  another manager. However, there are                                                               
also sales  to make up the  transfers at times. He  said any sale                                                               
of an asset could produce a capital gain.                                                                                       
                                                                                                                                
CHAIR SEEKINS said to his  recollection, the board had investment                                                               
managers  but  depositories  held  the  stocks  that  were  being                                                               
managed.                                                                                                                        
                                                                                                                                
MR. WOHLFORTH said  the APFC still has a custodian  that does all                                                               
of that.                                                                                                                        
                                                                                                                                
SENATOR GREEN pointed  out it is important to  emphasize that the                                                               
Legislature could use  "up to" 5 percent under  the proposal, and                                                               
would not be mandated to use that much.                                                                                         
                                                                                                                                
MR.  WOHLFORTH agreed  and said  the suggested  language for  the                                                               
constitutional amendment says  the Legislature can pay  out up to                                                               
5 percent  of the market value  on a 5-year average  basis. It is                                                               
the board's  strong belief that how  the 5 percent is  used [will                                                               
be determined by the Legislature].                                                                                              
                                                                                                                                
CHAIR SEEKINS noted the arrival of Representative Kohring.                                                                      
                                                                                                                                
MR. WOHLFORTH  explained the first step  is to get the  5 percent                                                               
spending limit  enacted to get in  line with how other  funds are                                                               
managed.                                                                                                                        
                                                                                                                                
CHAIR  SEEKINS asked  Representative  Hawker if  the language  on                                                               
page 2, line  4 that says "may  not exceed 5 percent"  is also in                                                               
his resolution [HJR 26].                                                                                                        
                                                                                                                                
REPRESENTATIVE  HAWKER said  that  is correct  and explained  the                                                               
difference  between   the  House  and  Senate   version  is  some                                                               
predicate language  that was modified  in the House  version. The                                                               
substance of the resolutions remains the same.                                                                                  
                                                                                                                                
CHAIR  SEEKINS said  it is  important to  emphasize that  neither                                                               
resolution mandates that the Legislature  draw 5 percent from the                                                               
permanent fund  every year.  The amount drawn,  up to  5 percent,                                                               
would be at the Legislature's  discretion so that the Legislature                                                               
could opt to draw nothing in  the case of a financial disaster in                                                               
the markets.                                                                                                                    
                                                                                                                                
SENATOR  OGAN   said  he  believes  his   constituents  are  very                                                               
mistrustful of any  suggestions to change the  permanent fund. He                                                               
said  there have  been a  couple of  runs on  using the  earnings                                                               
reserve  for  government  expenses.  He asked  Mr.  Wohlforth  to                                                               
review  how  this  proposal would  change  the  dividend  program                                                               
because  he  fears  a  lot   of  people  do  not  understand  the                                                               
difference between  the constitutionally protected corpus  of the                                                               
permanent fund  and the dividend  program. The dividend is  not a                                                               
constitutionally  protected entitlement.  He asked  Mr. Wohlforth                                                               
to describe  how the amount  of the dividend would  be determined                                                               
and distributed.                                                                                                                
                                                                                                                                
MR. WOHLFORTH said  the best way to approach that  would be to go                                                               
back almost  two years ago  when the earnings reserve  had dipped                                                               
substantially  and  everyone  feared   that  no  money  would  be                                                               
available  for  the  dividend.   By  good  fortune,  the  markets                                                               
corrected and the earnings reserve  showed a positive balance. He                                                               
said using  up to 5  percent of the  market value allows  for any                                                               
use  the  people  and  Legislature  determine.  It  will  provide                                                               
assurance  that funds  will  be available  for  the dividend  and                                                               
other uses,  whereas the  current formula  is an  outmoded regime                                                               
designed when  the entire  permanent fund  was invested  in bonds                                                               
and there was no uncertainty  about the earnings. He repeated the                                                               
5  percent  market  value  would  make  certain  that  funds  are                                                               
available   each   year.   He  said   he   understands   people's                                                               
apprehension but wishes this proposal had advanced years ago.                                                                   
                                                                                                                                
SENATOR OGAN  said this is  not a change  to the formula  used to                                                               
calculate the dividend;  it is simply a change in  how the corpus                                                               
of the permanent fund is managed.                                                                                               
                                                                                                                                
MR. WOHLFORTH said that is an accurate statement.                                                                               
                                                                                                                                
CHAIR SEEKINS said when he was  a member of the Board of Trustees                                                               
in  1990, the  Board  discussed the  possibility  of a  different                                                               
distribution  method and  the percent  of market  value. At  that                                                               
time, the  POMV was emerging in  endowment funds. He asked  if 85                                                               
percent of endowment and retirement  funds are now using the POMV                                                               
method of distribution.                                                                                                         
                                                                                                                                
MR. WOHLFORTH said  that is correct and that the  POMV has almost                                                               
become the universal  way to measure how much can  be paid out in                                                               
a given year.                                                                                                                   
                                                                                                                                
SENATOR OGAN  asked if  the payout  has traditionally  been about                                                               
4.5 percent.                                                                                                                    
                                                                                                                                
MR. WOHLFORTH said that is about right.                                                                                         
                                                                                                                                
SENATOR OGAN asked if it is prudent to say 5 percent.                                                                           
                                                                                                                                
MR.  WOHLFORTH  said  saying  "up to"  5  percent  provides  some                                                               
flexibility.                                                                                                                    
                                                                                                                                
CHAIR SEEKINS said  the Legislature will have  the opportunity to                                                               
decide  the amount  on an  annual basis.  He said  any legislator                                                               
could propose any amount up to 5 percent.                                                                                       
                                                                                                                                
REPRESENTATIVE CROFT asked  if the corpus of the  fund could ever                                                               
be invaded  if the  Legislature pays out  5 percent  over several                                                               
years of poor markets.                                                                                                          
                                                                                                                                
MR.  WOHLFORTH  explained  that  under  the  POMV  approach,  the                                                               
concept of  principal would  no longer  exist; the  principal and                                                               
earnings reserve will be treated as one entity.                                                                                 
                                                                                                                                
CHAIR SEEKINS asked  Representative Croft if he would  vote for a                                                               
5 percent drawdown in a bad year.                                                                                               
                                                                                                                                
REPRESENTATIVE  CROFT said  he would  not  but expressed  concern                                                               
that relying  on the Legislature  to spend  less than it  can get                                                               
its hands on is an "iffy" proposition.                                                                                          
                                                                                                                                
CHAIR SEEKINS  said in  the history of  the permanent  fund, over                                                               
one-third of the deposits to the  principal have been made by the                                                               
Legislature, showing a good track record.                                                                                       
                                                                                                                                
REPRESENTATIVE CROFT  said Chair Seekins  has more faith  than he                                                               
does.                                                                                                                           
                                                                                                                                
CHAIR SEEKINS said he would not vote  for a 5 percent payout in a                                                               
poor market year either.                                                                                                        
                                                                                                                                
REPRESENTATIVE  CROFT commented  that most  of the  endowments he                                                               
has reviewed  are in the 4.7  to 4.8 percent range;  very few pay                                                               
out 5 percent. He  asked if that is correct and  why 5 percent is                                                               
supposed to be the correct number.                                                                                              
                                                                                                                                
MR. WOHLFORTH said  the university endowment funds  show a payout                                                               
of 5 to 5.5 percent. He  said the Board of Trustees believes that                                                               
5 percent  is a  good long  term average,  based on  the National                                                               
Association of College Endowments Study of 2002.                                                                                
                                                                                                                                
CHAIR SEEKINS asked  if the board proposed a 5  percent payout or                                                               
a payout not to exceed 5 percent.                                                                                               
                                                                                                                                
MR. WOHLFORTH  said the Board proposed  a payout not to  exceed 5                                                               
percent.                                                                                                                        
                                                                                                                                
SENATOR GREEN  asked if  one of the  provisions makes  the entire                                                               
permanent fund subject to legislative appropriation.                                                                            
                                                                                                                                
MR. WOHLFORTH said that is incorrect.                                                                                           
                                                                                                                                
SENATOR  GREEN said  she wondered  whether a  chart is  available                                                               
that shows  the amount  of the  payout had  the POMV  method been                                                               
used and a  chart showing a futuristic comparison  if the current                                                               
formula continues to  be used. She questioned  whether they would                                                               
show a substantial difference looking back or forward.                                                                          
                                                                                                                                
MR.  WOHLFORTH  said   those  charts  do  exist.   They  show  an                                                               
interesting  degree  of  sameness  of payout  permission  if  one                                                               
superimposes the new formula on the  old payout rule. He said, in                                                               
further  response to  Representative Croft,  a letter  to Senator                                                               
French  dated September  9 shows  the average  payout of  the 660                                                               
members of the National Association  of College Endowments is 5.3                                                               
percent. He  said he  would be glad  to supply  committee members                                                               
with further detail and background information.                                                                                 
                                                                                                                                
SENATOR  FRENCH  said his  question  deals  with years  when  the                                                               
return on  the permanent fund  is zero or negative.  During those                                                               
years the Legislature could take  a 5 percent payout, however the                                                               
overall value of the fund would  be reduced. He said it seems the                                                               
check  on  that  is  the  language in  the  bill  that  says  the                                                               
Legislature can  pay out up to  5 percent, so it  therefore could                                                               
pay out nothing, to match market conditions.                                                                                    
                                                                                                                                
MR.  WOHLFORTH  said that  is  the  case. The  Legislature  could                                                               
determine that  a lesser payout  is appropriate if the  market is                                                               
"sick."                                                                                                                         
                                                                                                                                
SENATOR FRENCH responded:                                                                                                       
                                                                                                                                
     My next  thought is that  if the Legislature  starts to                                                                    
     sort of be  wise and the Legislature  starts to protect                                                                    
     the value of the permanent  fund by sort of setting the                                                                    
     payout at the  rate of return that the  fund is making,                                                                    
     then aren't  we kind  of reinventing the  wheel? Aren't                                                                    
     we going back to the plan  that we have in effect right                                                                    
     now,  which is  that we  let the  market determine  how                                                                    
     much is available for appropriation every year?                                                                            
                                                                                                                                
MR. WOHLFORTH said no one is  able to say with certainty that the                                                               
permanent  fund  will earn  5  percent  under all  circumstances.                                                               
However, under  the circumstances  [Senator French  referred to],                                                               
the Legislature can determine what  is appropriate for that year.                                                               
He believes  this proposal is  substantially better than  what is                                                               
used now, but he does not  believe there is a perfect formula for                                                               
all foreseeable contingencies.                                                                                                  
                                                                                                                                
CHAIR  SEEKINS  asked  if  the   POMV  formula  would  have  been                                                               
sustainable over the last 20 years.                                                                                             
                                                                                                                                
MR. WOHLFORTH said it would have.                                                                                               
                                                                                                                                
CHAIR SEEKINS announced that he would take public testimony.                                                                    
                                                                                                                                
MR.  PHIL FURBUSH,  a resident  of  Palmer representing  himself,                                                               
said he  strongly opposes any  legislation that would  remove the                                                               
constitutional  protection of  the permanent  fund, which  SJR 18                                                               
would do. In addition, he  opposes any legislation that allocates                                                               
any  portion of  the fund  for the  state budget  or reduces  the                                                               
amount of revenues allocated to the  fund. He said if the goal is                                                               
to protect the  permanent fund, more amendments would  have to be                                                               
made to  the Constitution to do  that, such as an  amendment that                                                               
would not allow any portion of  the permanent fund to be used for                                                               
the budget.  Another amendment might  require that more  money be                                                               
deposited into  the fund.  He said  if the goal  is to  provide a                                                               
predictable dividend, then only a  portion of the earnings should                                                               
be used, not a portion of the  entire fund. He said he cannot see                                                               
how removing  the protections  and taking  any percentage  of the                                                               
fund, whether  it is making money  or not, protects the  fund. If                                                               
more  money  is needed  for  the  state budget,  the  Legislature                                                               
should  implement an  income  tax that  more  fairly spreads  the                                                               
burden among those who are able  to pay. He said if the permanent                                                               
fund  dividend is  taken away  from a  family of  four living  on                                                               
$20,000, the loss would equal  20 percent but taking the dividend                                                               
away from a  family of four earning $200,000 would  amount to two                                                               
percent. That puts a bigger burden on the lower income family.                                                                  
                                                                                                                                
MR. FURBUSH said the permanent fund  is all the state has to show                                                               
for the  nonrenewable resources  it has  consumed. He  asked what                                                               
the state  will do to provide  energy for the state  when the oil                                                               
is gone.  He said the permanent  fund is all the  state will have                                                               
to use. He  said his biggest worry  is the state will  use up its                                                               
oil and  spend the  permanent fund  and leave  future generations                                                               
with no way to provide for energy or their other needs.                                                                         
                                                                                                                                
REPRESENTATIVE  KOHRING   said  he  concurs  with   many  of  Mr.                                                               
Furbush's statements.  He, too,  is worried  about the  future of                                                               
the fund  if the POMV concept  is adopted. He said  he is looking                                                               
at  the POMV  concept  from a  money  management perspective  and                                                               
questions  whether  it  is prudent  management  to  threaten  the                                                               
principal  of  the  fund  by  virtue  of  guaranteeing  a  payout                                                               
dividend when the market is such  that the fund is not profiting.                                                               
He said from  the perspective of a  private corporation, spending                                                               
seed  core money  to pay  a  dividend would  be a  bad thing.  He                                                               
repeated that it  appears to him that the POMV  concept will risk                                                               
the principal of  the permanent fund.  He  also expressed concern                                                               
about the  issue of spending a  portion of the permanent  fund on                                                               
government  expenditures, which  will provide  a disincentive  to                                                               
government reform.                                                                                                              
                                                                                                                                
TAPE 03-58, SIDE B                                                                                                            
                                                                                                                                
MR. JAMES  GARHART, a resident  of Wasilla  representing himself,                                                               
said  the  [APFC}  fall  2002 revenue  booklet  says  the  annual                                                               
permanent fund  dividend distribution has  been equal to  about 4                                                               
percent of  the market value of  the fund. He said  the fact that                                                               
the 5 percent  is a cap and not a  mandate seems straightforward.                                                               
He  asked  if  use  of  the 5  percent  would  be  restricted  to                                                               
permanent   fund-related   expenses,  such   as   administration,                                                               
inflation proofing and dividends.                                                                                               
                                                                                                                                
CHAIR SEEKINS  said that would  remain exactly the  same, meaning                                                               
the disbursement of those funds would be up to the Legislature.                                                                 
                                                                                                                                
MR.  GARHART asked  whether any  amount over  5 percent  would be                                                               
rolled back into the fund.                                                                                                      
                                                                                                                                
CHAIR  SEEKINS said  not necessarily,  and that  it has  not been                                                               
that way  in the past. He  explained that $7 billion  of the fund                                                               
today is comprised  of earned income that was  redeposited by the                                                               
Legislature into the principal to  protect it from being spent on                                                               
other areas of government.                                                                                                      
                                                                                                                                
MR. GARHART asked  where those excess funds would go  if the POMV                                                               
proposal goes into effect.                                                                                                      
                                                                                                                                
CHAIR SEEKINS  said there would  not be any excess  funds because                                                               
the drawdown  would be  determined using  5 percent,  even though                                                               
the fund  may have earned  20 percent. The 15  percent difference                                                               
would remain in the fund so it would not have to be redeposited.                                                                
                                                                                                                                
SENATOR GREEN contended that in  some ways, if the permanent fund                                                               
had a  huge earning year, it  would be less vulnerable  under the                                                               
POMV system.                                                                                                                    
                                                                                                                                
CHAIR SEEKINS said  having been a trustee he is  aware that under                                                               
the current system  the trustees can play God  with the permanent                                                               
fund profit  every year. He  referred to  page 6 of  the handout,                                                               
which shows the  volatility of the fund, and said  in 1996 a huge                                                               
spike occurred  in the  realized gains. That  was created  at the                                                               
instruction  of   the  Board  of   Trustees.  Those   six  people                                                               
determined what became  realized gains. He said  the trustees can                                                               
cherry  pick the  fund during  a bad  year and  sell the  winning                                                               
investments  off thereby  increasing the  gains and  reducing the                                                               
principal.  He  indicated  the  principal  of  the  fund  is  not                                                               
absolutely  protected  today.  He  expressed  concern  about  the                                                               
political volatility  that can come  into play under  the current                                                               
system that would no longer come into play under the POMV.                                                                      
                                                                                                                                
MR.  GARHART said  his understanding  is that  under the  current                                                               
system,  the  earnings are  supposed  to  be deposited  into  the                                                               
general fund  unless otherwise  specified by  law. The  5 percent                                                               
proposal  would  eliminate  that  because  the  earnings  reserve                                                               
account would  no longer exist.  He then said,  regarding Senator                                                               
Ogan's comment  about 83 percent  of the voters being  opposed to                                                               
allowing  the  permanent  fund  earnings   to  be  used  to  fund                                                               
government several years  ago, he also voted  against that ballot                                                               
initiative because  it said  a portion of  the earnings  could be                                                               
used but  did not specify how  much. He said his  biggest concern                                                               
is that a portion  of the 5 percent will start  being used to pay                                                               
government expenses.                                                                                                            
                                                                                                                                
CHAIR  SEEKINS   said  nothing  in  this   proposal  mandates  or                                                               
prohibits that from  happening. SJR 18 is strictly a  way to have                                                               
a reasonably predictable distribution on an annual basis.                                                                       
                                                                                                                                
MR. GARHART  said most of the  people he has talked  to share his                                                               
concern.                                                                                                                        
                                                                                                                                
CHAIR SEEKINS said  the Legislature could use every  penny of the                                                               
earnings  reserve  today to  fund  government  under the  current                                                               
program. He  said whether the political  will to not use  it will                                                               
be there  in the future  depends on what  kind of a  disaster may                                                               
arise.                                                                                                                          
                                                                                                                                
MR. GARHART mentioned  that one of his biggest  concerns with the                                                               
budget shortfall  is the mandate  that 25 percent of  the royalty                                                               
amount must  be deposited into  the corpus of the  permanent fund                                                               
in addition  to inflation  proofing, which  builds the  corpus of                                                               
the permanent fund at the expense of the budget deficit.                                                                        
                                                                                                                                
CHAIR SEEKINS  said the inflation-proofing mandate  is statutory,                                                               
not constitutional.  The Legislature  has acted  responsibly over                                                               
the years by inflation proofing  the fund. However, if a decision                                                               
has to be made  as to whether to inflation proof  the fund or pay                                                               
for  education that  would  entail  a big  discussion.  If the  5                                                               
percent proposal is adopted,  inflation proofing becomes inherent                                                               
to the process.                                                                                                                 
                                                                                                                                
MR. GARHART  said he likes  the direction the 5  percent proposal                                                               
takes but believes more protections are needed.                                                                                 
                                                                                                                                
MR.  DIRK NELSON,  a  resident  of Ester  testifying  on his  own                                                               
behalf, said his  main concern is that changing the  rules of the                                                               
game   of  making   the  permanent   fund  inaccessible   to  the                                                               
Legislature  is not  the  problem;  the game  itself  is. He  has                                                               
talked to  people who have  researched the market value  of North                                                               
Slope crude versus what the  oil corporations are paying for that                                                               
oil.  He  said  Conoco-Phillips  posted  a  $1.3  billion  profit                                                               
according to  a newspaper story published  yesterday, while North                                                               
Slope  crude  is  being  sold  at well  below  market  value.  He                                                               
questioned why the Legislature is  not looking in that direction.                                                               
He  said  the  state  should  be looking  at  market  value  and,                                                               
likewise  with  the gas  line,  exactly  how Alaska  accrues  its                                                               
royalties  and why  certain persons  who claim  to represent  the                                                               
citizenry are fond of specific  plans that give the citizens less                                                               
royalty.                                                                                                                        
                                                                                                                                
MR. NELSON said  he opposes changing the  current rules governing                                                               
the  permanent   fund  and  anything  that   will  further  allow                                                               
legislative  access to  the  fund  when the  state  is not  being                                                               
responsible in getting market value for its resources.                                                                          
                                                                                                                                
CHAIR SEEKINS asked Representative Hawker,  a member of the House                                                               
Ways and  Means Committee,  to take  Mr. Nelson's  comments under                                                               
advisement.                                                                                                                     
                                                                                                                                
REPRESENTATIVE HAWKER  agreed to  do so and  said the  House Ways                                                               
and Means  Committee has scheduled meetings  in several locations                                                               
during the months of November and December.                                                                                     
                                                                                                                                
CHAIR  SEEKINS asked  for comments  from the  members or  public.                                                               
There were none. He then asked  Mr. Wohlforth if he is correct in                                                               
assuming that  the benefit to the  5 percent proposal is  that it                                                               
will provide a relatively simple, predictable number.                                                                           
                                                                                                                                
MR. WOHLFORTH said that is correct.                                                                                             
                                                                                                                                
CHAIR  SEEKINS  said   even  though  the  number   will  be  more                                                               
predictable, based on the history  of the permanent fund, it will                                                               
not "eat" into the principal to the fund.                                                                                       
                                                                                                                                
MR. WOHLFORTH  said that is  correct. He added that  according to                                                               
the  volatility  chart,  the  permanent  fund  has  had  enormous                                                               
earnings in  a given year,  20 percent,  all of which  would have                                                               
been available for legislative appropriation.  The new formula of                                                               
even,  annual, permitted  "up to"  distributions  is the  telling                                                               
point  of preserving  the fund  and will  sustain the  fund on  a                                                               
long-term basis.                                                                                                                
                                                                                                                                
CHAIR SEEKINS asked whether the  current method or the POMV gives                                                               
the  Board  of Trustees  the  opportunity  to look  at  long-term                                                               
investments versus remaining in a short-term investment.                                                                        
                                                                                                                                
MR. WOHLFORTH answered the 5  percent of market value proposal is                                                               
the tool  that fund managers,  trustees, and  investment managers                                                               
need to  sensibly manage for  the long-term and not  be concerned                                                               
by  an annual  spike.  In  addition, the  POMV  will prevent  the                                                               
Legislature from using all of a  20 percent return, if 20 percent                                                               
was available.  He said the point  he is trying to  get across is                                                               
that the  realized earning formula  just doesn't work for  a fund                                                               
that is no longer composed solely of bonds.                                                                                     
                                                                                                                                
CHAIR SEEKINS asked if the  POMV method would eliminate political                                                               
volatility as well as market volatility.                                                                                        
                                                                                                                                
MR. WOHLFORTH said that any  potential political volatility would                                                               
be eliminated.                                                                                                                  
                                                                                                                                
CHAIR SEEKINS said  he threw out a theoretical  situation where a                                                               
person  could convert  unrealized gains  into realized  gains for                                                               
political  reasons during  a poor  market. He  asked if  the POMV                                                               
would  eliminate that  possibility and  thereby protect  the fund                                                               
even more.                                                                                                                      
                                                                                                                                
MR. WOHLFORTH replied:                                                                                                          
                                                                                                                                
     Absolutely, Mr.  Chair, and if  it should  ever happen,                                                                    
     God  forbid, in  a future  year -  there's an  election                                                                    
     year, and we've  gotten into such a  mess that somebody                                                                    
     running for governor would say  wouldn't it be great if                                                                    
     we  could, in  fact,  enhance the  dividend this  year,                                                                    
     even realizing  it's a 5-year  average, by  selling out                                                                    
     these   securities,  all   of  which   have  got   some                                                                    
     appreciation over  cost even  though it's a  down year.                                                                    
     The 5  percentage of market  value solution  takes even                                                                    
     the possibility  of politics out  of an  action program                                                                    
     like that.                                                                                                                 
                                                                                                                                
SENATOR OGAN  asked Mr. Wohlforth  if such  a move has  ever been                                                               
made for political purposes.                                                                                                    
                                                                                                                                
MR.  WOHLFORTH said  not to  his knowledge.  He said  he believes                                                               
Chair Seekins  will agree that  the trustees, during his  term on                                                               
the  board,  simply acted  as  professionally  as they  could  to                                                               
manage the money.                                                                                                               
                                                                                                                                
CHAIR  SEEKINS said  he was  never asked  to do  that and  had he                                                               
been, he probably would have resigned.                                                                                          
                                                                                                                                
SENATOR OGAN asked  Mr. Wohlforth if the  permanent fund earnings                                                               
have exceeded the amount of  revenue the state has generated from                                                               
royalties.                                                                                                                      
                                                                                                                                
MR.  WOHLFORTH  said he  believes  that  line  is very  close  to                                                               
crossing.                                                                                                                       
                                                                                                                                
SENATOR OGAN  commented if the  state does not get  more resource                                                               
development going, "We're all in deep kimchee folks."                                                                           
                                                                                                                                
CHAIR SEEKINS agreed.                                                                                                           
                                                                                                                                
MR. GEORGE  WILLIAMS, a resident  of the Mat-Su Valley,  said his                                                               
concern is that SJR 18 allows  the Legislature to spend "up to" 5                                                               
percent.  He believes  people  will not  be  satisfied without  a                                                               
fixed number.  He said most  people do not trust  the Legislature                                                               
to handle their  money. They worry the Legislature  will dip into                                                               
it  to  manage government.  He  believes  the Legislature  should                                                               
establish  an  income  tax  before  making  any  changes  to  the                                                               
permanent  fund  and  believes the  majority  of  Alaskans  would                                                               
support an income tax today.                                                                                                    
                                                                                                                                
SENATOR OGAN said  he believes the permanent  fund represents the                                                               
fact that the citizens collectively  own the subsurface rights of                                                               
the  minerals in  the state.  The permanent  fund reflects  their                                                               
share of  that mineral wealth.  He believes it is  appropriate to                                                               
distribute some of  that wealth, especially in light  of the fact                                                               
that people in  the Mat-Su Valley are waking up  to the fact that                                                               
they do not own subsurface rights to their land.                                                                                
                                                                                                                                
MR. WILLIAMS said he learned a  lot at the meeting and believes a                                                               
large part  of the problem  is that most people  don't understand                                                               
issues. He  noted Congress passed  a law in 1916  that prohibited                                                               
homesteaders from  owning the  mineral rights  on their  land. He                                                               
believes shallow gas drilling is great for the Mat-Su Valley.                                                                   
                                                                                                                                
CHAIR SEEKINS  said he  believes the permanent  fund is  owned by                                                               
current  and future  generations of  Alaskans and  he intends  to                                                               
protect it for them.                                                                                                            
                                                                                                                                
MR.  WILLIAMS repeated  his concern  is  that SJR  18 allows  the                                                               
Legislature to  spend an  amount up  to 5  percent. He  prefers a                                                               
fixed amount.                                                                                                                   
                                                                                                                                
MR.  GARHART asked  if  the earnings  are  insufficient to  cover                                                               
inflation  proofing  and  the  5   percent  payout,  whether  the                                                               
Legislature could tap  into the corpus to make  up the difference                                                               
under the new proposal.                                                                                                         
                                                                                                                                
CHAIR SEEKINS said  it could. He explained  the Legislature could                                                               
draw a maximum  of 5 percent from the permanent  fund even though                                                               
the annual  gain was 4  percent. He said  the corpus of  the fund                                                               
could  be  reduced   in  the  early  years  if   the  market  was                                                               
disastrous.                                                                                                                     
                                                                                                                                
CHAIR SEEKINS closed  public testimony on SJR 18  and thanked all                                                               
participants.                                                                                                                   
                                                                                                                                
            SJR 19-CONST. AM: PERMANENT FUND INCOME                                                                         
                                                                                                                                
CHAIR SEEKINS noted that Senator  Lincoln, sponsor of SJR 19, has                                                               
asked Representative Croft to present  SJR 19 to the committee at                                                               
this time.                                                                                                                      
                                                                                                                                
REPRESENTATIVE ERIC  CROFT told members that  Senator Lincoln was                                                               
tending to an  emergency in Rampart and asked him  to address the                                                               
committee because he  is the sponsor of  companion legislation in                                                               
the House, HJR  3. He said when he and  Senator Lincoln presented                                                               
to  the  Senate  Judiciary  Committee during  session,  the  main                                                               
discussion was  about an asserted  potential tax  difficulty with                                                               
SJR 19  He noted the  permanent fund is  tax exempt at  this time                                                               
but SJR  19 would constitutionally protect  the dividend. Whether                                                               
doing  that would  affect  the  public purpose  of  the fund  and                                                               
imperil its tax-free status is  in question. His review of recent                                                               
cases over  the last two years  led him to believe  that a change                                                               
in  the tax  status  was  not within  the  realm of  possibility.                                                               
Attorney General Renkes recently  commissioned an outside firm to                                                               
research  the  question and  has  sent  a letter  to  legislators                                                               
confirming  that constitutionally  protecting  the dividend  will                                                               
not imperil the fund's tax status.                                                                                              
                                                                                                                                
REPRESENTATIVE CROFT  submitted that  SJR 19 provides  a spending                                                               
limit that  makes the  most sense  from an  individual taxpayer's                                                               
perspective. He wants the spending  limit to reflect the limit on                                                               
how  much  legislators  can  take  out of  his  pocket.  He  said                                                               
limiting either  input or output  could create a  spending limit.                                                               
It  makes  the most  sense  to  him to  limit  input  - how  much                                                               
government can take from his  pocket and to require government to                                                               
live  within that  limit.  He  said the  output  limits can  have                                                               
unintended consequences and stated:                                                                                             
                                                                                                                                
     The one used now is a  suit that's way, way too big. It                                                                    
     doesn't fit  and you could  guess wrong and fit  a suit                                                                    
     for the  next 20 or  30 or 40 years  that unnecessarily                                                                    
     constrained  what we  spent on  education and  roads or                                                                    
     police  officers. It's  really  hard  to predict  those                                                                    
     things.                                                                                                                    
                                                                                                                                
REPRESENTATIVE CROFT said  what is predictable is  the amount you                                                               
do not want government to take  from individuals. SJR 19 is a way                                                               
to constrain  the size of  government and, more  importantly, the                                                               
amount  it can  take from  individuals. He  said making  sure the                                                               
Legislature cannot touch the dividend  is crucial to the oncoming                                                               
debate  of  whether  or  not the  structure  of  calculating  the                                                               
earnings of the fund is changed.  He pointed out there is a large                                                               
mistrust of the Legislature on  this issue, some of that mistrust                                                               
is warranted.  He said so  many politicians have promised  not to                                                               
use the  dividend without a  vote of  the people.   Many Alaskans                                                               
are concerned  that the POMV,  despite its merits, will  become a                                                               
Trojan  horse.  It  could  become   the  justification  vote  for                                                               
legislators to  say a  vote was  taken and they  can now  use the                                                               
dividend.  Legislators  can  prove   they  don't  intend  to  use                                                               
people's dividends by enacting SJR  19, the companion legislation                                                               
that enshrines the dividend in the Constitution.                                                                                
                                                                                                                                
REPRESENTATIVE CROFT summarized by saying  SJR 19 will not create                                                               
tax problems,  it creates a real  spending limit in terms  of how                                                               
much it can  take from people's pockets, and it  will be vital to                                                               
convincing  Alaskans that  the POMV  or any  other change  to the                                                               
permanent fund is appropriate.                                                                                                  
                                                                                                                                
SENATOR  OGAN  asked  if  AS  37  and AS  43,  as  cited  in  the                                                               
resolutions,  would constitutionally  protect  the hold  harmless                                                               
agreement.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  CROFT  said  he  would  get  an  answer  to  that                                                               
question to Senator  Ogan.  He then said he  meant to mention the                                                               
provisions  in  the  statute  that directly  relate  to  how  the                                                               
dividend  would  be calculated.  He  was  not  sure if  the  hold                                                               
harmless provision is in that  same provision, but offered to get                                                               
that information to the committee.                                                                                              
                                                                                                                                
SENATOR OGAN said the [hold  harmless provision] is not something                                                               
he  wants  to  constitutionally  protect;   he  would  prefer  to                                                               
eliminate it.                                                                                                                   
                                                                                                                                
CHAIR SEEKINS  noted that  no one  was present  to testify  so he                                                               
closed  testimony on  SJR  19. He  announced  that the  committee                                                               
would  meet the  following  day  at 7:00  p.m.  at the  Anchorage                                                               
Legislative Information  Office and would take  testimony at that                                                               
time. He then adjourned the meeting.                                                                                            
                                                                                                                                

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