Legislature(1999 - 2000)
02/04/2000 08:10 AM Senate JUD
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JOINT SENATE JUDICIARY & STATE AFFAIRS COMMITTEE
February 4, 2000
8:10 a.m.
MEMBERS PRESENT
Senator Robin Taylor, Chairman
Senator Dave Donley
Senator Jerry Ward
Senator Lyda Green
Senator Kim Elton
MEMBERS ABSENT
Senator Rick Halford, Vice-Chairman
Senator John Torgerson
Senator Johnny Ellis
Senator Jerry Mackie
Senator Randy Phillips
OTHERS PRESENT
Senator Loren Leman
Representative Scott Ogan
Representative Jerry Sanders
Representative John Coghill
COMMITTEE CALENDAR
Discussions with former Governor Hammond on SJR 35.
WITNESS REGISTER
Former Governor Jay Hammond
General Delivery
Port Alsworth, AK 99653
POSITION STATEMENT: Gave opinion on SJR 35
ACTION NARRATIVE
TAPE 00-05, SIDE A
Number 001
CO-CHAIRMAN ROBIN TAYLOR called the Judiciary Committee meeting to
order at 8:10 a.m. The first order of business to come before the
committee was the opinion of former Governor Hammond on SJR 35.
Chairman Taylor introduced former Governor Jay Hammond.
Chairman Taylor explained that the purpose of SJR 35 is to provide
an opportunity for the people of Alaska to vote on whether the
legislature should continue to protect and defend the PFD. SJR 35
retains the formula that provides for a PFD and inflation proofing,
and it establishes parameters on how the money left over is spent.
That has been the practice in the legislature since the creation of
the PFD.
Number 166
FORMER GOVERNOR JAY HAMMOND, who held office from 1974 to 1982,
stated that initially when the August 14, 1999 advisory vote
failed, many people speculated the legislature would do nothing.
He felt that was unlikely. At an Alaska Humanities Forum gathering
held in Anchorage, he felt the public understood the true question
but he felt the public vote reflected a primary concern to not
touch the PFD, somehow the public has to be removed before the
legislature can get toward a balanced budget plan.
The legislature is better equipped to decide who needs budget cuts,
or revenue enhancing is the best means of accomplishing those
objectives. There are certain basics that should be met to meet
the public accord, one being the reassurance that the PFD
essentially will remain the same, unaffected. That can be
accomplished in two or three different ways. SJR 35 calls for a
constitutional amendment, enshrining the PFD. Senator Mackie's
proposal would do something similar to SJR 35, and there are other
proposals out there. What form that will take, he is certainly not
the best person to make that decision. He has suggested that once
the PFD is assured, how the budget gap is closed is up to the
legislature. There have been discussions about revenue
enhancements, revenue cuts, and he suggested that the State receive
benefits from the oil wealth, roughly in this proportion.
The State only receives approximately 10 percent of the benefits in
the dividend. The other 90 percent have been going to government
services, that is another benefit. He would suggest that by
addressing it through cuts, reduce the benefits that primarily go
to Alaskans, the dividends go exclusively to Alaskans. The
benefits of other state services go primarily to Alaskans, and if
you use that approach solely you will neglect another source of
revenue. The enormous amount of transient workers, commercial
fishermen, tourists, who don't receive benefits from either of
those sources, the dividend and state services. If you choose to
simply cut services, it is not as bad as cutting dividends. If you
need more money, doing something that would cap some of the other
transient sources. There are several services out there that would
do less damage to the average Alaskan, than would a reduction in
the dividend, and perhaps a reduction of services. Keep all the
options on the table, don't just cut or impose taxes; take a look
at a broad mixture that takes those elements into consideration.
Whatever program is adopted has to be a major step toward resolving
the budget gap. Give the people relative assurance that the PFD's
are essentially the same as in the past.
Concerns have been voiced about a constitutional amendment, one
being that it might change the PFD's tax exempt status with the
Internal Revenue Service. The other concern is that if the
constitutional amendment doesn't pass. There is no backup that
assures the public that the PFD will remain unaffected. A vote of
the public on that question would have almost the same force and
effect on legislative violence to the PFD, as would a
constitutional amendment. The legal ramifications are also of
concern. If the constitutional amendment were floated out, and
there was no backup, the legislature would be back to square one.
Number 667
CHAIRMAN TAYLOR explained that SJR 35 would only put a
constitutional vote before the people. Do you want the assurance
that the same system that you have grown used to over the years,
will be protected in that fashion. There is no discussion here
about fully resolving the fiscal gap, a plan to resolve that might
take $1.2 to $1.5 billion. Income taxes and other things will
generate $300 million, which is only a small portion of it.
Whatever plan is used to resolve the budget problem will be a
fairly complex plan. Alaska has many other sources and
opportunities for revenue, land sales being one of them. The
legislature has several such bills floating around also.
Number 769
SENATOR GREEN stated that she watched the debates on the advisory
vote; her main opposition was the language. An issue debated on
both sides was that the public doesn't mind the legislature using
some of the money if the people are assured that the dividend will
not be affected. The people's confidence was shaken on the
advisory vote, the legislature has to go back and bring the public
to an understanding that the legislature is trying to inflation
proof the fund. This was based on the non-renewable resources, it
does not regenerate itself.
SENATOR GREEN's initial interest in introducing SJR 35 was to give
the public the assurance the PFD is protected. The tax issue was
just a "red herring." Anytime you inquire further about court
decisions and inquiries from the IRS there is disappointment in the
response because it is always no. Is the IRS going to come in one
day and say the State is prevented from doing this by agency
administration and lawyers.
It involves changing the bar, how many votes and support it
requires to appropriate and pay out the dividend. To change the
bar it would go to a 2/3 vote in the legislature, and a vote of the
people. For people who have the ability to testify they might say
that it could raise a tax question.
Number 1035
SENATOR WARD stated that there are people who truly believe that
legislators can't touch the dividend without a vote of the people.
The original legislation reads that it is at the mercy of the
legislature. Senator Ward asked Governor Hammond what the
reasoning was behind the creation of the PFD.
Number 1140
GOVERNOR HAMMOND stated that he advocated for 50 percent of lease
bonus royalties and severance taxes. The legislature at that time
cut severance tax out, cutting the total contributions in half.
The 50 percent was reduced to 25 percent, but the legislature has
infused money in the fund to offset that reduction. At that time
he asked that half the earnings be used for dividends and the other
half be used for government services. If the fund had the
contribution level that was originally proposed, it wouldn't need
inflation proofing.
It would have been impossible to add additional constraints to
require a vote of the people. Using some of the money for public
purposes, and one public purpose is inflation proofing the fund.
If 50 percent of the funds earnings shall be allocated for public
purposes, and don't even mention dividends, maybe that is more
legally tenable. If the legislature did that the State would have
to have something to acquire public support. What if the State
needed more of those moneys than what some formula restricted you
to, to keep the State out of bankruptcy. There should be an escape
clause that the allows the legislature to have access to those
funds or change that formula.
Number 1367
CHAIRMAN TAYLOR explained that the Constitutional Budget Reserve
Fund does need a 3/4 vote to pass, and since the fund was created
the State has had to utilize the fund almost every year.
REPRESENTATIVE OGAN explained that an opinion by legal counsel for
the legislature stated that HJR 49 could potentially be a tax
problem. Representative Ogan asked Governor Hammond to explain in
detail the why the legislature can alter the dividend program, but
the legislature can't touch the principle of the fund without
changing the constitution. Representative Ogan then explained what
happened last year with the advisory vote.
GOVERNOR HAMMOND stated that he is totally opposed to a cap on the
dividend. Suddenly there has been international interest in the
PFD program. Countries and corporations are interested in how the
fund was created and the dividend program itself. Governor Hammond
advised legislators not to touch the dividend program because the
program would not be as successful if the public was not involved.
The public is always looking over its shoulder to see how their
government is spending the money. Governor Hammond stated that no
more than 50 percent of the earnings should be used to inflation
proof the fund; dividends wouldn't necessarily have to be
mentioned. A vote of the public would eliminate the government's
ability to cause mischief with the money.
SENATOR TAYLOR said that in essence SJR 35 does just that. It says
the State will conduct things just as it has, changing nothing. 50
percent of the Permanent Fund's earnings will go to dividends, and
the other 50 percent will ensure the public there will be inflation
proofing. It will be the opposite of Senator Mackie's plan. The
public believes it already has that right, but it doesn't. The
government should give it that right, and preserve that right
within the constitution.
GOVERNOR HAMMOND said he also wanted to create an investment entity
that the public would own shares in. Like any other investment or
stock, the public should have an opportunity to vote on it, but
that plan was "Zobelized". There are problems with the simplistic
approach of shareholder voting, because a vast majority of the
shareholders are children who don't have the right to vote. There
should be a vote of the people, or as close as you can get to it
without posing legal ramifications. It should be looked at like a
stock portfolio and the shareholders, or the public, should have a
say in how it is conducted, not left up primarily to the
legislators.
Number 1921
REPRESENTATIVE OGAN stated some facts about the income tax and
state sales tax. He pointed out the public would certainly be
interested in State spending, if there was an income tax.
GOVERNOR HAMMOND said when the income tax was eliminated people
criticized the State for living beyond its means. To correct that,
people must cut their living expenses, or increase their means. By
eliminating the income tax the State has severed a connection
between the public purse and the politicians. That had to be re-
established. That was another reason for creating the dividend
program. He disagreed with eliminating the income tax. He felt
that it should be suspended or reduced, but not eliminated in case
the State needed it.
GOVERNOR HAMMOND questioned how economic development is possible,
particularly the type that generates new population increases. If
the State is not extracting enough money to offset the cost of
services provided, that is a formula for uneconomic development.
Other states know they have to extract money through taxes and user
fees to support economic development. If the state cannot balance
the budget through cuts and needs revenue type enhancements, it can
impose an income tax or state sales tax. It can structure income
taxes to reduce the percentage paid by Alaskans and increase the
percentage paid by transients. Governor Hammond gave some other
creative ideas on taxes and credits given to Alaskans.
The Mackie Plan is the opposite of what the PFD was created for.
If the legislature allowed people to borrow $25,000, at current
dividend levels it would prime rate plus, and all the public would
do is relinquish their dividend until the balance is at zero. The
only ones that would pay out of pocket are short time people that
are going to leave the State.
Number 2267
SENATOR TAYLOR said the important deal today is will the
legislature give the public the assurance they believe they have
had all along. That is, will there be some semblance of
protection to the dividend program, and will there be some
semblance to inflation proofing the fund. That is all SJR 35 does.
SENATOR LEMAN stated the problem the State has with financial
experts theories. If the market drops off then the State could
lose the PFD in eight or nine years. A better method to pay the
dividend is instead of paying it on realized gains, to pay as a
portion of the value of the fund. There is still incentive to keep
the fund, protect it and keep it growing, but maybe providing
incentive for people to play with creating realized gains. Last
year, Governor Knowles proposed the PFD board sell some of it to
create earnings. Maybe we should change the formula, so we protect
it and have it in perpetuity.
GOVERNOR HAMMOND said he was not opposed to that.
SENATOR LEMAN asked Governor Hammond if the State should keep the
concept of paying dividends off some type of earnings, keep the
concept of inflation proofing and doing it that way.
GOVERNOR HAMMOND said yes that would be ideal.
TAPE 00-05, SIDE B
SENATOR ELTON asked Governor Hammond if he would feel more
comfortable if the legislature enshrined what was in the
constitution, to using 15 to 20 percent of the income stream for
other government purposes.
Number 2346
GOVERNOR HAMMOND replied whether or not the legislature enshrined
it in the constitution, he would have no objection to 15 percent
that still allows for inflation proofing and full funding
dividends. Some people think that it may take 37 percent, only
leaving 13 percent for other public purposes. He would support
even the 50-30-20 or the 40-30-30 approach, but the 40-30-30 would
erode the dividend by roughly 20 percent by what it would otherwise
be. But, anything beyond that gets into the guts of the dividend
concept and why it was created. Governor Hammond referred to a
plan from Senator Torgerson.
SENATOR ELTON stated that it probably wouldn't matter that much if
the legislature were to enshrine the progression of the fund, and
then using a capped portion of the dividend stream.
SENATOR TAYLOR said that is exactly what the bill does, there is no
cap. Each discussion on the undistributed income account, those
are discussions that have to be taken up in the legislative process
and in public debate. By passing this bill the State is not going
to have only the legislature in a smoke filled room, making a
decision that impacts the dividends or impacts inflation proofing.
The public is then assured they will have a vote on the subject,
before it was to occur. The people believe they have a right to a
vote, the legislature should make certain the public does have that
right.
Number 2177
SENATOR GREEN said the concerns of the public across the State was
a discomfort when it comes to a decision of the PFD. Until the
legislature assures the public that it is not the intent of the
legislature to spend the dividend program, and by passing SJR 35 or
a similar measure then there can be discussions handling the
problems the State has with its budget.
REPRESENTATIVE SANDERS asked Governor Hammond about the government
getting 90 percent of the money and the public gets 10 percent.
Now, the State is saying perhaps another 15 percent. When that was
given to the government, they used all of that and a little more.
If they are granted another 15 percent, how long will it take
before the government expands to use all of that and a little more.
How does this thing progress if the legislature does not enshrine
and protect the dividend, and inflation proofing by a vote of the
people.
GOVERNOR HAMMOND said the additional income that could have been
used for other purposes, that went into undistributed earnings it
went as icing on the cake. If we are going to give anything up it
should be that. There is no way to write a meaningful spending
limit. Governor Hammond refers to the Dave Rose Plan, and that is
something that the State should maybe look at again.
SENATOR TAYLOR said all plans are worthy of debate. The
legislature always goes one step further. The legislature just
needs to make sure the public can have a vote on what happens to
the corpus of the fund before it's tapped. That will be put into
the constitution.
GOVERNOR HAMMOND said his concerns were if the constitutional
amendment gets voted down and the legislature doesn't have a
backup. Is there a catastrophic escape clause provision. If the
legislature carried on even after a vote of the people, it would be
political hari-kari. If you can avoid that and accomplish the same
thing in a simpler approach, it is something to consider.
SENATOR WARD said he thought the legislature would never try to
take the dividend without a vote of the people. Last year the
House of Representative passed the legislation with an effective
date, regardless of whether the advisory passed, the time had come
that the system was grabbing the money.
GOVERNOR HAMMOND said there hasn't been a public vote expressing
the opinion of the people in the manner that he thought they would
express themselves. Once that is done, the State would have
constraints on the legislature that weren't in existence before the
vote.
SENATOR DONLEY said obviously the existing appropriation limit in
the constitution has never worked, the calculation under the
existing constitutional language would give the State six billion
dollars in general funds to spend now. There is a way to craft
constitutional restraints on spending that might be effective, in
our system of government is not conducive to downsizing, because of
the pressure on the legislature by the constituents for more. In
America, very few legislatures and executive branches have been
successful in downsizing.
Number 1820
REPRESENTATIVE OGAN said the Majority Caucus from the House of
Representative introduced companion legislation to Senator Donley's
bill because capping the PFD only will not fix the spending
problem. The companion legislation caps spending and protects the
PFD.
CHAIRMAN TAYLOR expressed the committee's gratitude to Governor
Hammond.
GOVERNOR HAMMOND commended committee members for confronting an
issue that has to be resolved. SJR 35 is an element of the total
package that has to be addressed first. If the State of Alaska
continually draws off the budget reserve account, the dividends
will go into a free fall and probably exhaust in the near future.
Any action to preclude that is worthy of pursuit.
There being no further business to come before the committee,
CHAIRMAN TAYLOR adjourned the meeting at 9:10 a.m.
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