HJR 30 - CONST. AM: REPEAL BUDGET RESERVE FUND CHAIRMAN KOTT announced the first order of business is HJR 30, Proposing amendments to the Constitution of the State of Alaska repealing provisions relating to the constitutional budget reserve fund and providing that the balance in the fund be deposited into the budget reserve fund established by statute. CHAIRMAN KOTT called on Representative Jeannette James, sponsor of the resolution. Number 0060 REPRESENTATIVE JAMES stated that ever since she has been in the legislature she has been aware of the constitutional budget reserve fund and the problems that it has created for legislators. It didn't turn out like it was intended. It was there to collect taxes. It has done that, but testimony from the Administration has indicated that the state can only expect back $1.6 million per year from back taxes. She thinks it has outlived its usefulness and should go away and in its place there should be a long-term plan. Where the money should go she doesn't know, however. When she wrote the resolution, she suggested that it should go into the statutory budget reserve. That's where funds were building before. It has been empty for a long time and has quite a few restrictions on it, so maybe, that's not a good place. She suggested putting it in the earnings reserve of the permanent fund or the general fund. Wherever it is put, the deposit needs to get the highest rate of return as possible. REPRESENTATIVE JAMES further stated the constitutional budget reserve fund has been a burden between the majority and the minority with the three-fourth vote requirement. It has caused a lot of distress over the years, and it is time to put that behind. The biggest problem is that any money borrowed has to be paid back, and as long as it is there even if it's empty every year the legislature has to "scarf off" everything at the end of the year that's available for appropriation and pay it back creating a sweep provision in the budget. That is a problem and as long as it's on the books the legislature will continue to have to deal with it. Number 0263 CHAIRMAN KOTT asked Representative James what would happen to the monies that the legislature owes to the fund. Does it go away? Is the legislature no longer obligated to repay it? Does that obligation revert to where ever the legislature decides to deposit the remaining monies from the constitutional budget reserve? Number 0315 REPRESENTATIVE JAMES replied, she assumes, if the fund goes away that any debt to it would go away. Maybe the constitutional amendment needs to be clearer to indicate that any debt would be extinguished. She suggested getting a legal opinion. Number 0355 CHAIRMAN KOTT said the constitutional amendment would need to be clear to the voters. "I'm sure there'd be some motivation out there within the public that would decry that we borrowed money from this fund and now this is a roundabout way to at least prevent us from paying it back." REPRESENTATIVE JAMES stated, it is her personal opinion, the people do not understand that it has to be paid back. It's not even an issue. They just think it's a place to put money. Number 0393 CHAIRMAN KOTT stated he completely agrees with Representative James. He's not sure that he would want to put that in language in the constitutional amendment, unless it was not clear from a legal standpoint of the legislature's obligation. If a legal opinion says that the obligation goes away with the fund and that the money is transferred to another account that would be fine. The more included in a constitutional amendment, the more confused the voter would be. Number 0435 REPRESENTATIVE JAMES stated, if the constitutional budget reserve fund is repealed, everything that is currently in it would go away. The payback is in the existing language in the constitution. Number 0455 REPRESENTATIVE MURKOWSKI asked Representative James whether she thinks that the money deposited from the closure of the fund should be defined in the constitutional amendment, so that people know where it will go, or whether there is something that can be done afterwards. Number 0513 REPRESENTATIVE JAMES replied it seems that part of repealing a constitutional fund would include what would be done to the money in there. There could be language that says, "at the will of the legislature" or "subject to legislative appropriation" or "put it in the earnings of the permanent fund to be managed with the rest of it" or "the statutory budget reserve fund." Number 0580 REPRESENTATIVE MURKOWSKI noted that much of the public debate is emotional in regards to the funds that the legislature has access to, which is why the constitutional budget reserve came about in the first place. The legislature, therefore, has to be cautious in terms of how this is presented, so that it's not perceived as one more way that the legislature want's to take a person's money and spend it "willy-nilly." Number 0630 REPRESENTATIVE JAMES suggested informing the newer legislators of the history of the constitutional budget reserve fund. She explained it was passed in 1990. At that time, there was a dispute between the legislature and former-Governor Hickel of what constituted a back-tax settlement. Where did the process start? Were administrative appeals included or did it mean going to court for a settlement? Money came in 1991 and 1992, and the governor and the administration took the position that the money did not have to go into the constitutional budget reserve fund. Another issue was, when can it be used with a majority vote? The constitution says that if the incoming money is less than the amount used in the previous year's budget, then it can be accessed with a majority vote. But, for any other time or reason money is taken out of the constitutional budget reserve fund, a three-fourths vote is needed. Beyond that, any money used out of the constitutional budget reserve fund has to be paid back. Thus, at June 30 of every year, any money that has not been appropriated is "scarfed off" to pay back the money that has been borrowed. Consequently, the little funds like the marine highway fund gets swept in and eventually swept out under the "sweep provision." She noted the sweep provision says that any money swept in to pay back the constitutional budget reserve fund gets swept back to where it was because the sate can't afford to short the money. The court said, in 1993, that the money available for appropriations, when comparing it to last year's budget, includes the permanent fund earnings, but it doesn't count when it comes to the sweep provision. The court also said that once money was collected from a tax appeal it needs to go into the constitutional budget reserve fund. She noted that there has been over $7 billion collected and put into the fund, and over one-half has been used. The state has never had the ability to pay it back, and she doesn't see any real ability to pay it back in the future. She reiterated the constitutional budget reserve fund is not working, like the election pamphlet said it would work, when she voted for it. Number 0933 REPRESENTATIVE CROFT stated it doesn't work because the state never gets to the point where appropriations are greater than the amount available for appropriations. There is always an amount left over after paying for dividends and providing for inflation-proofing, which he thinks are appropriations. There is always an amount left standing in the earnings reserve of the permanent fund. That amount clearly means that there isn't a deficit in terms of accounting. The court decision was correct. The state has never spent more than what was available for appropriations. It's not so much of a weird court decision, but weird accounting. But, because the state has never been in a position of deficit, the state has not had the constitutional authority to truly get into the constitutional budget reserve fund. The state has only had three-fourth authority to borrow from it creating an oddity. Number 1020 REPRESENTATIVE CROFT asked Representative James why she is ending the constitutional budget reserve fund rather than amending it, and whether she means to deposit the money into the earnings reserve of the permanent fund or some other statutory fund that would need to be created. Number 1040 REPRESENTATIVE JAMES replied it is up to the committee. She reiterated she selected the statutory budget reserve account because it is already on the books and is empty. REPRESENTATIVE JAMES further stated she agrees with not counting the earnings reserve money that's available for appropriation, but it is counted in the beginning, so why isn't it counted in the payback. That's the problem. As long as the state is short of funds, it will never get paid back. Number 1086 REPRESENTATIVE CROFT stated it counts in both places because money available for appropriation is everything that the state has coming in. REPRESENTATIVE JAMES said, according to the court decision, it doesn't count in the sweep provision. Number 1102 REPRESENTATIVE CROFT said the state is forced to sweep it back because it has always had more money available for appropriation than what has been appropriated. REPRESENTATIVE JAMES noted that the money doesn't sweep out of the earnings reserve of the permanent fund, only the other funds. Number 1116 REPRESENTATIVE CROFT noted that that money was never appropriated. He cited, as an example, if the state earns $1.5 billion, it will need another $900 million for dividends and $300 million for inflation-proofing resulting in $300 million left. If the legislature acts like it has for the past five years, it will leave that sit in the earnings reserve of the permanent fund, and proper accounting would say that there was never more appropriated than available. Number 1165 REPRESENTATIVE JAMES stated that is true. If it made sense, the $300 million would be swept back into the fund to pay back what has been borrowed at June 30 of every year, but that's not the way it works. Number 1176 REPRESENTATIVE CROFT replied, "Because it doesn't sit in the general fund." REPRESENTATIVE JAMES said she understands that. REPRESENTATIVE CROFT said his point is, the court's decision is a rationale interpretation of a quickly drafted constitutional amendment that may not accomplish all that it was intended to. REPRESENTATIVE JAMES said she agrees with the court's decision. The constitutional amendment to create the constitutional budget reserve fund was poorly written. Number 1193 REPRESENTATIVE JAMES stated, whatever is done for the long-term planning, the legislature needs to be sure that all of the money is earning as much as it can. The proper place, it seems, would be to put the balance in the earnings reserve of the permanent fund, or under the pile of money that is being managed by the Alaska Permanent Fund Corporation. Small amounts of money in different places limits the types of investments that can be made compared to a larger fund and a larger rate of return. It seems that the state should "put all its eggs in one basket" in this case. Number 1258 CHAIRMAN KOTT said "we" certainly want to get the best return for our investments. Number 1262 REPRESENTATIVE CROFT suggested a bill to deposit the balance into the earnings reserve of the permanent fund with a three-quarters vote. The advantage of that approach is because the constitutional budget reserve fund would still be alive for money from settlements. The approach of the constitutional amendment is for the settlements to go to the general fund because "we" don't expect the "big whopper settlements"... Number 1294 REPRESENTATIVE JAMES interjected and stated: "Just the ordinary course of doing business like a hundred...They're estimating $106 million a year just a--a small percentage of the taxes that we collect will be administratively appealed. You know, it's just a part of doing business." Number 1306 REPRESENTATIVE CROFT asked what would happen to the debt of $3.4 or $3.8. CHAIRMAN KOTT replied it would go away. According to Tamara Cook [Director, Legislative Legal and Research Services, Legislative Affairs Agency], by creating a new area for this money to be deposited, the prior debt terminates with the end of the fund. Number 1331 REPRESENTATIVE CROFT asked whether there is a problem with changing something that requires a three-quarters vote with a two-thirds vote. He wondered whether there is a principal based on modifying a rule with what it takes to effectuate it. Number 1355 REPRESENTATIVE JAMES replied she doesn't have the answer to that question. She declared that she hopes to get unanimous consideration, however. CHAIRMAN KOTT stated if this went before the voters it would just require a simple majority of the voters to repeal it. REPRESENTATIVE MURKOWSKI suggested calling Tamara Cook for an answer. Number 1381 REPRESENTATIVE ROKEBERG suggested getting a written legal opinion for a record to travel with the bill. He thinks the other members will have the same questions. He declared he intends to be a cosponsor. He agrees that the use of the constitutional budget reserve fund is problematic, and this committee needs to look at where the balance in the fund should be deposited. He shares the concern regarding the sweep language, which is why the constitutional amendment needs to be absolutely clear. He also shares the concern of a greater return on a stand-alone fund, a smaller corpus, and a shorter time horizon for the utilization of those funds. Testimony from the Department of Revenue has indicated that it is much less than expected. CHAIRMAN KOTT announced that Tamara Cook is online now. He asked her to comment on the trailing debt that the legislature owes to the constitutional budget reserve fund. Number 1465 TAMARA COOK, Director, Legislative Legal and Research Services, Legislative Affairs Agency, testified via a telephone. She stated that there is no debt. CHAIRMAN KOTT stated, so under the termination of the constitutional budget reserve fund there would be no debt. MS. COOK replied Article IX, Section 17(d) of the constitution says that if there is money left in certain places at the end of each fiscal year, it has to go into the constitutional budget reserve fund automatically to pay off the debt. But, that subsection would be repealed. Number 1490 REPRESENTATIVE CROFT asked Ms. Cook whether repealing the sweep provision repeals the debt. MS. COOK replied there is no obligation to repay because subsection (d) would be repealed. REPRESENTATIVE CROFT wondered whether there would be a theoretical debt. Number 1501 MS. COOK stated it's not even a theoretical debt. The obligation to repay only exists in subsection (d), and once that is gone there is no obligation or sweep. Number 1518 REPRESENTATIVE CROFT asked Ms. Cook whether there is a problem with the fact that this has a three-quarters vote requirement and with what is needed to change it. Some rules that establish super majorities can only be changed by that super majority. MS. COOK replied no because it amends the constitution. If the people choose to repeal Section 17, all of it is repealed. It's the people voting, not a super majority or majority of the legislature. The only thing the legislature can do is propose the amendment. Number 1557 REPRESENTATIVE CROFT asked Ms. Cook whether there is a reason that this would have to stay in the constitution, or can it drop out once it does what it was intended to do. MS. COOK replied it won't drop out on its own. The way it is written now, it would continue to operate indefinitely. REPRESENTATIVE CROFT said it would operate as one action. He asked Ms. Cook whether sunsets are ever placed in the constitution. MS. COOK replied she can't think of anything like that in the constitution. There have been provisions that ask for a question to be placed before the voters on a certain date again, but those are in the transitional sections. Number 1599 REPRESENTATIVE CROFT said: "The transitional sections didn't pop out. There were--are stuff at the end talking about how it's going to be..." MS. COOK stated there are a few odd provisional sections that exist with respect to other constitutional amendments. Number 1623 CHAIRMAN KOTT asked Ms. Cook to forward a written opinion on the trailing debt to the committee. Number 1678 REPRESENTATIVE ROKEBERG stated there are two ways to go - wait and see if something new results from this legislature, or let the legislature deposit it at its direction back in the earnings reserve of the permanent fund. This doesn't have to pass until the next session because it is a constitutional amendment. He is concerned that letting the balance in the fund be deposited at the direction of the legislature the people wouldn't have quite the faith in it otherwise if they knew exactly where it was going. Number 1730 CHAIRMAN KOTT stated he realizes that there are other things occurring outside this room and legislature, but whether or not any of that comes to fruition remains to be seen. This has a House Finance Standing Committee referral. He is sure that everything would be married there, if there is conflict with other issues. Number 1748 REPRESENTATIVE JAMES said that the public would support putting the balance in the earnings reserve of the permanent fund. It would probably be the favorite place. Number 1766 REPRESENTATIVE ROKEBERG said, by leaving the constitutional budget reserve fund in place now, that might tend to be looked upon as favoring one proposal over another. He knows that there is one proposal that talks about bringing life back into the statutory budget reserve fund. He also cited the All-Alaskan Plan as an example. Number 1806 REPRESENTATIVE CROFT stated the other place that might be the most popular, from a public perspective, is the principal of the permanent fund. Number 1826 REPRESENTATIVE JAMES stated that certainly would encourage the legislature to make a decision on where to fill the budget gap this year. She noted, however, that this wouldn't be effective until after next year's election. Number 1846 REPRESENTATIVE MURKOWSKI stated, in listening to this discussion, it seems that this would be more appropriately resolved at the House Finance Standing Committee level. The House Judiciary Standing Committee is charged with getting a legal opinion regarding the deposit of the money. Perhaps, it doesn't need to be specified where the money would be deposited. Number 1870 REPRESENTATIVE JAMES said she has had a lot of phone calls regarding depositing the balance into the statutory budget reserve fund. It is a term that hasn't been around for a very long time. She reiterated she choose that fund because it is empty and there are restrictions, but she would prefer putting it somewhere else that the people understand a little bit better. Number 1894 CHAIRMAN KOTT said he is trying to decide which is better - the earnings reserve of the permanent fund or the corpus of the permanent fund. There are pros and cons for both. The bill should leave this committee going into either one. The House Finance Standing Committee can sort it out based on whatever else it needs to be married up with it. Nevertheless, it is inappropriate to leave it go to the statutory budget reserve fund. REPRESENTATIVE JAMES noted she does not have any objection to that. Number 1914 REPRESENTATIVE ROKEBERG suggested the committee members consider the discretion of the legislature at this juncture. That's not entirely inappropriate, but it's not the most popular politically. Number 1980 CHAIRMAN KOTT said, if this is the only vehicle that goes forward, he would like to have some comfort in having set a policy that would go to the entire House. "We don't know what's going to happen up in Finance, and you know we got one crack at this. And, they can undue it up there, untie the knot. But, I'd rather I think forward something on that's a little more definitive." Number 2029 REPRESENTATIVE CROFT made a motion to delete the language, "budget reserve fund established by statute", on page 1, line 11, and to insert the language, "principal of the permanent fund (art. IX, sec. 15)". [Amendment 1] REPRESENTATIVE JAMES AND REPRESENTATIVE ROKEBERG objected. Number 2080 REPRESENTATIVE JAMES said she's not a financial whiz like some people, but after thirty years of accounting work she can calculate figures in her head. She believes, no matter what plan is put on the table, short of getting more oil down the pipeline or some other method of meeting the needs of the people that taxes won't even fill the gap. There is a minimal amount of money available outside the corpus of the permanent fund for the next...She is comfortable with putting it into the earnings reserve of the permanent fund for its maximum return, but she is not comfortable with putting it off-limits. She didn't support dumping more money back into the permanent fund last year because of emergencies. She said, "If we have any kinds of emergencies in our state, which we're prone to do, we could be in 'deep doo doo' if we don't have enough money available to make those decisions." Number 2186 REPRESENTATIVE JAMES further noted that the legislature still plans to downsize the amount of money being spent. The All-Alaska Plan suggests reducing spending for another five years. Representative Rokeberg has a piece of legislation that reduces the percentage of oil revenues that are put into the corpus of the permanent fund from 25 percent to what is demanded in the constitution. She thinks that is wise. The state ought not to put all of the money out of touch, but there needs to be some kind of control on how to do the budget, which is a whole different issue. She reiterated she would like to see some money sitting in the earnings reserve of the permanent fund for emergencies. Number 2229 REPRESENTATIVE ROKEBERG suggested the language, "the general funds' earnings reserve of the permanent fund". It is not an amendment. He noted that the earnings reserve of the permanent fund are general funds, except by statute. Number 2275 REPRESENTATIVE CROFT said this resolution has puzzled him because the effect of it can be done just by talking and getting three-quarters votes. Given the dynamics of the makeup of the legislature, this resolution is a way of not talking to the minority. The difference is only three votes. It takes 27 votes to put this on the ballot and 30 votes to just do it. He doesn't see the point of going around the minority. This could be a component of a long-range plan. It would probably be the component that follows almost any plan to get rid of the constitutional budget reserve fund. Representative Davies has said that some reformation of this constitutional provision needs to happen, but this is a way to go around the minority. There has been talk about changing the vote from a three-quarters to a simple majority. The minority has been very open and willing to discuss that, but it hasn't happened. It surprises him because he has worked well with the sponsor of the resolution on a lot of other issues. If that is the approach, then let's just put it in the principal where everybody feels safe. Number 2397 REPRESENTATIVE JAMES stated she agrees with Representative Croft. She has never seen the working relationship between the majority and the minority as good as it is this year. She doesn't blame that on the majority; it has been the minority who is more willing to work. The intent of the resolution, however, has nothing to do with the three-quarters vote; it has to do with the payback. The payback is a burden on the legislature, and to get a three-quarters vote to un-sweep the money is absurd. It is important to work together, but the legislators in the majority and minority might not be the same next year. The minority might be the majority, and the majority might be the minority. TAPE 99-34, SIDE B Number 0003 REPRESENTATIVE ROKEBERG stated Representative James is right. It is the payback. In his life, a business agreement/contract is put together to service the parties to that agreement/contract. The current system might be considered idyllic, but it has been his experience to the contrary. He has resented it greatly. There has been a substantial amount of spending and log rolling. In understanding the political history of why the two-thirds vote became three-quarters, this constitutional amendment has been a disservice to the people. They don't understand it. It's hard enough for experienced people to understand it. It needs to be changed. He hopes that something can be done along these lines. He is confident that there will be a plan to satisfy everybody, and that this resolution could be part of it. He agrees, with the sponsor, that clearly the earnings reserve of the permanent fund would be the most ideal location at this juncture. Number 0097 REPRESENTATIVE MURKOWSKI asked Representative Croft whether he said that he could support this if it is part of a bigger plan. REPRESENTATIVE CROFT replied absolutely. This resolution, however, is the "cart before the horse." What plan would be implemented by ending the constitutional budget reserve fund? It seems that the only change is from a three-quarters vote to a simple majority, which is only a power deal. He is also worried that the opposite is true. In other words, it would become an obligation to keep a balance of that $3 billion. It would be disingenuous to pass the resolution then spend it down twice. Number 0193 REPRESENTATIVE CROFT further stated, in response to Representative Rokeberg's last comment, he doesn't think that the constitutional budget reserve fund has been negative for the people. It is the time when legislators are consulted. "Obviously, it depends on whose ox is being gored whether it's good government or log rolling or some combination. But, this can and probably has to be an important component of what we do, but asking us to vote to do it before we know what we're doing is too much." Number 0232 CHAIRMAN KOTT announced for the record that all the committee members are present. CHAIRMAN KOTT called for a roll call vote. Representatives Green, James, Rokeberg, Murkowski and Kott voted against the motion. Representatives Croft and Kerttula voted in favor of the motion. The motion failed by a vote of 5 to 2. Number 0289 REPRESENTATIVE ROKEBERG asked Representative James whether she prefers an amendment including the words "general fund" or "earnings reserve of the permanent fund." Number 0302 REPRESENTATIVE JAMES replied she would like to have the money deposited into the permanent fund. She would like to change it before going to the House Finance Standing Committee, even though it might change as part of an overall plan. It might not even pass this year, but she has the entire interim to talk to folks about it. She would prefer that it didn't go into the statutory budget reserve fund. She reiterated any place else is fine with her, except for putting it into the corpus of the permanent fund or leaving it to the discretion of the legislature. Number 0349 REPRESENTATIVE ROKEBERG made a conceptual amendment to read, "general funds' earnings reserve of the permanent fund", after the word "the" on page 1, line 11. The idea is to tell the public that the earnings reserve of the permanent fund is part of the general fund. Number 0380 REPRESENTATIVE KERTTULA noted it would be better to leave that for the language in the explanation. The earnings reserve of the permanent fund really isn't part of the general fund. REPRESENTATIVE ROKEBERG said it is part of the general fund. It says so in the constitution. It has just been statutorily redefined. That's what has caused so much confusion. The people do not understand that the earnings reserve of the permanent fund is part of the general fund. As long as it is going into the earnings reserve, the people need to understand that it is available for appropriation. CHAIRMAN KOTT noted it is available for appropriation. Number 0418 REPRESENTATIVE MURKOWSKI asked whether that should be included in the constitutional amendment or as part of the explanation. REPRESENTATIVE ROKEBERG stated the only trouble is the people don't know that... REPRESENTATIVE MURKOWSKI asked whether it's the job of the legislature to educate them. REPRESENTATIVE ROKEBERG replied it is the job of the legislature to educate them, but maybe not in this constitutional amendment. He reiterated it was just a suggestion and deferred to the sponsor on whether or not she wants to use the language, "general fund." Number 0444 REPRESENTATIVE JAMES said, she thinks, it opens the door for confusion. It would be better to simply have the language, "earnings reserve of the permanent fund." She agrees that the money is available for appropriations and the people ought to know that, but technically it's not general fund money because it has been statutorily changed to include money that is available for appropriation within the permanent fund. Number 0464 REPRESENTATIVE ROKEBERG withdrew his conceptual amendment. Number 0473 REPRESENTATIVE ROKEBERG made a motion to insert the language, "earnings reserve of the permanent fund", after the word "the" on page 1, line 11. REPRESENTATIVE CROFT asked whether, "earnings reserve of the permanent fund", is defined anywhere. REPRESENTATIVE ROKEBERG replied it is in statute. REPRESENTATIVE JAMES noted that a change would have to be made to the title too. REPRESENTATIVE CROFT asked where is it in statute. REPRESENTATIVE ROKEBERG noted that he has been reading the constitution lately and it doesn't mention the earnings reserve of the permanent fund. REPRESENTATIVE CROFT said he has looked at the permanent fund corporation section and he can't find any mention to the earnings reserve. Number 0526 CHAIRMAN KOTT called for a brief at-ease at 2:15 p.m. and called the meeting back to order at 2:18 p.m. Number 0531 REPRESENTATIVE ROKEBERG made a motion to include the language, "earnings reserve account as established by statute in the permanent fund", after the word "the" on page 1, line 11; as well as the technical change to the title. There being no objection, it was so moved. Number 0565 REPRESENTATIVE ROKEBERG made a motion to move HJR 30, as amended, from the committee with individual recommendations and the attached fiscal note(s). There being no objection, CSHJR 30(JUD) was so moved from the House Judiciary Standing Committee.