HJR 47 - CONST AM: PERMANENT FUND [Discussion also relates to SJR 33, the companion resolution in the Senate.] CHAIRMAN KOTT announced that the final order of business would be HOUSE JOINT RESOLUTION NO. 47, proposing amendments to the Constitution of the State of Alaska relating to the permanent fund and to payments to certain state residents from the permanent fund. He indicated testimony via teleconference would be taken following opening remarks. Number 1260 REPRESENTATIVE GARY DAVIS, Alaska State Legislature, sponsor of HJR 47, came forward to explain the resolution, accompanied by Senator Jerry Mackie, sponsor of companion resolution SJR 33. Representative Davis told members he had submitted this resolution because of the need for discussion on the status of the permanent fund dividend (PFD) and what should be done with that, if anything. REPRESENTATIVE DAVIS noted that in 1976 a constitutional amendment created the permanent fund itself; his research shows that eight current legislators were [in the legislature] at that time. Also interesting to him is that four current legislators were not in the state when the dividend program was established, and he believes that number will grow in future elections. He indicated legislators all have their own understandings about the fund, and current legislators are the ones making the decisions, with day-to-day involvement dealing with the budget situation regarding the services that the state is providing. Therefore, it is an issue that the current legislature must deal with. Number 1427 REPRESENTATIVE DAVIS advised members that since the fund began, its earnings have averaged about 10 percent. Deposits required through the constitutional amendment from the oil royalties have amounted to $6,328,000,000; additional appropriations that the legislature has made into the corpus total $6,750,000,000; inflation-proofing added to the corpus amounts to $5,837,000,000; and the earnings total $21,201,000,000. The total paid in dividends has been $8,626,000,000. That is what has been done with the royalties, Representative Davis asked whether that is what was intended from the constitutional amendment, and he said that is every individual's determination. REPRESENTATIVE DAVIS noted the evolution in people's attitudes over the years regarding the PFD, from "That's nice" at the beginning to "This is my right, and I want my check, and when is it gonna be here, and how much is it?" Representative Davis suggested there is something wrong with that scenario and asked what the future will bring. This legislation certainly offers an option regarding how to handle the dividend. Referring to the September 14 [advisory] vote, he indicated he firmly supported that proposition, which he believes was a great long-range plan, but it had failed for a number of reasons. REPRESENTATIVE DAVIS surmised that there won't be $200-300 million in cuts in the next couple of years, nor will there be taxes passed to the $200-300 million level to reduce the budget gap. He also doubts that there will be spending from the earnings reserve account. The legislature is going to be forced, in about ten years, to either cut the budget a billion dollars in one year or use the dividends. Restating that this needs to be addressed now, he suggested that people didn't see the rush about the balanced budget plan put out the previous year, and that $500 million more would be spent this year because that proposal wasn't enacted. REPRESENTATIVE DAVIS restated that the people had voted "no" on September 14 on a long-range financial plan. He concluded, "If they didn't want a long-range plan, do they want a short-range plan? This is a short-range plan. Let's put it to the voters and see if this is what they want." CHAIRMAN KOTT thanked Representative Davis and invited Senator Mackie to speak. Number 1871 SENATOR JERRY MACKIE, Alaska State Legislature, noted that he and Representative Davis would work together throughout hearings in either body on this proposal. He highlighted what the plan does and some of the feedback from the public. First, this constitutional amendment would allow for a one-time final payment of $25,000 to each Alaska resident who would be eligible as of January 1, 2000 for a dividend. Because a person not already in Alaska by January 1 of this last year wouldn't be eligible, the plan won't attract more people to Alaska. SENATOR MACKIE noted that he would use round numbers. Assuming 590,000 eligible recipients of the PFD next year, which is what the Alaska Permanent Fund Corporation (APFC) has estimated, he said roughly $14 billion would be required to pay a $25,000 distribution to everyone who is eligible. That equates to about 13.8 dividends averaging about $1,800 apiece, in advance. Assuming there is $26-27 billion at the time - depending on realized value, as that fluctuates daily - that would leave about $12 billion, which would continue to be managed by the APFC and would be constitutionally protected from the legislature's being able to spend it. The PFD program would go away after the one- time payment. Only the earnings from the remaining $12 billion would be used for two things: as a first priority, to inflation- proof the fund as has always been done, and second, the remaining revenues would go directly to the general fund to be used for paying for essential state services. Number 2071 SENATOR MACKIE drew attention to a memorandum from Jim Kelly, Director of Communications of the APFC, dated January 18, 2000, in response to Senator Mackie's request for a projection based on $12 billion in terms of what it would earn, how much it would cost to inflation-proof the fund and what would be left for general fund expenditures as new revenues. The body of the memorandum read: You have asked the Alaska Permanent Fund Corporation (APFC) to do a financial projection using certain assumptions which you provided. You asked us to draw down all Fund income and as much principal as necessary in order to pay each Alaskan a $25,000 dividend in 2001. You have also asked us to assume that all Fund income in subsequent years would be used first to inflation-proof Fund principal, and then balance then would be transferred to the General Fund. You asked us to assume that the Fund earned a rate of return of 8%, 10% and 12%. Based on these assumptions, the table below indicates the amount of income in millions of dollars that would be transferred to the General Fund each year beginning in 2002: Year 8% 10% 12% 2002 588 884 1,200 2003 615 923 1,252 2004 642 962 1,304 2005 671 1,004 1,360 2006 699 1,046 1,416 2007 729 1,090 1,474 2008 759 1,132 1,530 2009 788 1,176 1,580 2010 817 1,219 1,646 TOTALS 6,308 9,436 12,762 You have also asked our estimate of per capita dividends for the protection period, based on the status quo. These numbers appear in the following table: 2000 1,888.77 2001 1,900.53 2002 1,877.56 2003 1,772.58 2004 1,695.11 2005 1,768.48 2006 1,828.57 2007 1,894.01 2008 1,962.86 2009 2,034.48 2010 2,108.06 TOTALS 20,731.00 Senator, I should point out that the rates of return you have asked us to assume - 8%, 10% and 12% - are in excess of what the APFC expects to earn given Fund asset allocation and capital market assumptions. In addition, these projections represent only our best estimate of the median case; actual performance will vary with market volatility. PLEASE NOTE THAT THE CORPORATION NEITHER SUPPORTS NOR OPPOSES ANY PROPOSED CHANGES TO THE CURRENT USE OF FUND EARNINGS, EXCEPT AS THEY MAY RELATE TO THE PROPER EXERCISE OF THE TRUSTEES' FIDUCIARY RESPONSIBILITIES AS REQUIRED UNDER THE PRUDENT INVESTOR RULE. SENATOR MACKIE used the 10 percent rate in the middle column as reasonable, surmising that the $884 million returned to the general fund in the first year, after inflation-proofing, would balance the budget. That the amount would continue to go up because left in place is the provision that 25 percent of all the oil revenues would continue to be deposited into the corpus of this fund; in addition, the state would continue to inflation- proof the fund. He believes the growth of the fund and the earnings will give the state the opportunity to keep pace with inflationary costs. He suggested that APFC personnel could speak to the rationale for the PFD projections listed for the status quo [in the second table of the memorandum]. Number 2240 SENATOR MACKIE told members the plan balances the budget and requires a vote of the people to make that decision, and there are no new taxes. He highlighted concerns heard from the public, noting that many like it, many don't, and even more people haven't really understood it and have had questions. The intention was to introduce the plan early, he said, to listen to people and to do research to discover whether concerns are well- founded. SENATOR MACKIE told members that one of the first things heard from the public was a concern about taxes. He said he cannot, at this point, give people a lot of confidence that they won't have to pay taxes like everyone else does when receiving more income, and he personally doesn't have a problem with that. The Alaska Society of Certified Public Accountants has agreed, as a group, to analyze income levels, tax brackets, what types of things people may be able to get tax credits for, and so forth. Senator Mackie indicated that when he and Representative Davis receive that report, they will share it with the legislature. SENATOR MACKIE turned attention to the effects on income-related eligibility for recipients of welfare, Medicaid or low-income housing programs. He reported that in response to a request to the Department of Health and Social Services, Commissioner Perdue and her staff had answered questions and had helped to educate the sponsors about the programs they administer and the possible effects, although the department isn't in a position of advocacy or opposition at this point. He said he would ask the department members present that day to answer any follow-up questions. He noted that he had assumed that a payout like this would have a tremendous effect on a lot of these programs. TAPE 00-25, SIDE A Number 0001 SENATOR MACKIE told members there would be no effect on welfare - the Alaska Temporary Assistance Program (ATAP) - which doesn't use a PFD as criteria to determine eligibility. Nor would there be effects for the most part on family Medicaid or Denali KidCare, with some exceptions dealing with institutional categories, some 19- and 20-year-olds, "and other things which I don't really want to speculate about." Nor would there be any effect on the adult public assistance program, which is generally for elderly and disabled people, because the PFD is not used as a criteria to determine eligibility. SENATOR MACKIE pointed out that there would be effects on two programs: food stamps and supplemental security income (SSI); the PFD is calculated for eligibility requirements for those programs. However, the statutes and a federal waiver allow for the current hold-harmless period of up to four months. He stated, "After four months, I guess, if they've spent their money and they don't have the income, they would continue to qualify for the program. If they've invested it and they have that asset, then they probably wouldn't be eligible for that program." Senator Mackie indicated people don't want to be poor or to be on these programs. He believes that most would like to move on with their lives, and this [$25,000] could create a significant opportunity for them to do so. Number 0182 SENATOR MACKIE reported that current tenants of low-income housing would not be affected by the $25,000 distribution because federal requirements allow for exempting a one-time payment of cash. However, there would be future low-income people who may not qualify if they still had this money. As for education and child care programs, the $25,000 distribution does not affect the following low-income programs: day care assistance, the USDA (United States Department of Agriculture) child and adult care food program, school meals or the Headstart Program. SENATOR MACKIE said Commissioner Perdue has suggested that the number one reason why people are on welfare is because of being owed back child support. Currently, there are 11,000 cases involving back child support; PFDs are garnished for that purpose. It is estimated that garnishing $25,000 PFDs from so- called dead-beat dads, for the most part, would collect $103 million in back child support for children in this state. It would eliminate 7,500 of the 11,000 cases involving $25,000 are less, and it would make a serious dent in the 3,500 cases involving more than $25,000. SENATOR MACKIE told members that similarly, currently there are 10,100 defaulted student loans totaling about $80.9 million owed to the State of Alaska; 8,600 of those are for less than $10,000. It is estimated that garnishment of PFDs would close 9,000 accounts and return $67 million to the state, making the student loan program fairly healthy. Furthermore, right now 3,500 felons will not receive a PFD according to the statutes; garnishing those would collect about $87.5 million, and those funds, by statute, are allocated to domestic violence and sexual abuse programs, Violent Crimes Compensation Board programs, and the Department of Corrections for prisoner rehabilitation programs and the costs of incarceration. Number 0485 SENATOR MACKIE returned to the issue of taxes, saying he doesn't believe they will come up with something magic so that people can avoid paying taxes. However, he isn't afraid to pay income taxes on the $25,000 because if he "front loads" that into a mutual fund and it earns compounded interest over 15 years, it will be worth a lot more than PFDs received over a 15-year period, "providing you can trust that the legislature's even going to give it to you." SENATOR MACKIE said when the permanent fund was created, less than half the people now in the state were here, and there was no mention of a dividend program. It was only six or seven years later that the legislature decided, at the height of oil revenues, to share some of that with the public. Although it has been a great program for people, however, he suggests that the intent of the permanent fund was to provide revenues to the state when oil production and revenues declined. "And we have been ... in that situation for many years now, but we have not had the political will to do anything with the permanent fund about it," he stated, emphasizing that there is now a billion-dollar problem. SENATOR MACKIE referred to Representative Davis's conjecture that there wouldn't be any more PFDs in ten years and suggested that it would be more like four years. He told members that when [the legislature] has spent the constitutional budget reserve fund and is faced with a constitutional mandate to balance the budget, the only pot of money available will be the earnings from the permanent fund, which pay for the dividend program. Legislators will have to spend those permanent fund earnings to balance the budget. SENATOR MACKIE said that even a full-blown income tax, which he doesn't support, would only generates about $300 million, for a "$700 million program." A 5 percent statewide sales tax would generate another $300 million, but he doesn't like that idea because all it does is "suck money out of the communities at a time we're trying to put money back into those communities." He said that should be a local option for the communities to raise funds at a local level, with their own residents, and keep it in their communities for services to their citizens. Number 0688 SENATOR MACKIE suggested the public needs to recognize that it is better to have 15 years' worth of dividends, in advance, than to trust the legislature to provide future PFDs after cutting the budget by a billion dollars. He stated, "It's in people's best interest to take the money now and then receive the benefits of us being able to, as a state, provide decent essential services to our public, and educate our kids, and fix our buildings and our deferred maintenance problems with the university and other kinds of things that we are never [going to] get to do." SENATOR MACKIE again turned attention to the September 14 vote, saying he had supported that proposal and would do so again. He believes the public didn't understand it because what it did wasn't clearly articulated. As a consequence of the "no" vote on that, Senator Mackie told members, he had said, "Okay, complicated is not good. Simple is good. You get $25,000. You don't get another dividend. We balance our budget. We get rid of the politics of the permanent fund around here. And we move on with our state, and we don't have to tax everybody to do it." SENATOR MACKIE noted that polls two days after he introduced the plan were taken before he was able to respond to people and explain things. He surmised that people who have unaddressed concerns will say "no" when asked in a survey, "Yes or no, do you support the plan?" However, he believes that if people were to go to a ballot box and have an opportunity for $25,000 - and if they don't trust that the legislature will allow PFDs to continue - the people would take the money. He also suggested that polling [results] now would be different, and he stated the desire to try to continue to educate the public and to let them decide. Number 0885 CHAIRMAN KOTT referred to Section 1 of HJR 47, which says at least 25 percent of the royalties, rentals and other proceeds from minerals would be placed into a permanent fund. He asked whether continuing to use the name "permanent fund" opens a Pandora's box like when the existing fund was created in the mid- '70s. He asked what the rationale is. REPRESENTATIVE DAVIS indicated having it in the constitution is as permanent as it can be because it takes a vote of the people to change that. CHAIRMAN KOTT asked why not call it a "rainy day fund," for example. He suggested that people in other states hearing about the $25,000 could still recognize that there is a permanent fund and misconstrue it. Number 0991 SENATOR MACKIE explained that having 25 percent of the oil revenues going into the permanent fund is the way it is currently done, which wouldn't change. He said he didn't want to change anything in terms of statutes. Except that the dividend division would go away, he didn't want to change the APFC, which would continue to exist with a board a trustees and would be managed the same; however, the APFC would have $12 billion to manage instead of $26 billion, and there wouldn't be a dividend program any longer. It would still be the permanent fund, and the 25 percent royalties, as well as the inflation-proofing money, would allow that to grow. Senator Mackie pointed out that the last time the permanent fund contained $12 billion was in 1992, not that long ago. REPRESENTATIVE DAVIS added that he doesn't think anybody is cemented to the term "permanent fund." It could be "constitutional fund," for example. CHAIRMAN KOTT said he understands now that the rationale has been explained. He indicated there is no need to uproot what has already been done and to have the APFC change its stationery and business cards and whatever else it would require. He also indicated a change may present a problem for "our true investors." SENATOR MACKIE specified that this plan doesn't require any statutory changes or name changes, just putting it on the ballot and letting people vote. Part of the thinking was to not have it make statutory changes or be complicated, he indicated. Number 1094 REPRESENTATIVE GREEN mentioned conjecture that a lot of people will grab the $25,000 and head south, which he thinks is great. He also referred to concern that some who stay may blow the money somehow and then complain that there are no more PFDs. He said one big question, however, is whether this will have a tremendous tendency to overheat the economy unless people spend it outside of Alaska or use it wisely, which probably half of the people won't do. SENATOR MACKIE said that is a good question, and he doesn't have a crystal ball nor will claim to be an expert on the economy. He stated, "There's been a lot of discussion about how other people might spend their money, and very little about the fact that this is the only plan that balances our budget without taxes." He has received hundreds of e-mails, telephone calls, faxes and letters, he said, some good, some bad, and some with questions. He has heard from people with three children who rent their home and work from paycheck to paycheck, for example, who say they would pool their money for a first family home. It also may be an opportunity to put money for three children into an education account, because by the time the children are 18 years old, the money would have grown to $100,000. SENATOR MACKIE said he doesn't see how anything is going to get overheated. Although certainly there will be people who others don't believe spent their money wisely, this is a free country, and he trusts that people will do with their money what they believe is in the best interests of themselves and their families. However, it would be incredibly naive to assume that there will be no negative effects, although it is hard to put a finger on those. He concluded that many people will invest their money, and there are great opportunities out there with mutual funds, for example. He restated the desire to leave it up to the people and whatever happens, happens. REPRESENTATIVE DAVIS commented that there may be some overheated mutual funds around the country. Number 1303 REPRESENTATIVE GREEN asked whether there would be, in the plan, a way to try to educate the people who have never invested before. Surmising that there would be scam artists coming up and trying to "bleed" people, he asked whether there would be some way to enlighten residents. REPRESENTATIVE DAVIS answered that he had thought about that a lot, and had wanted to establish an Alaska trust fund, into which the money automatically would go, and then let people draw it out if they wanted to; however, that is unconstitutional, to his understanding. He had also thought about the possibility of putting out a request for proposals (RFP) for investment firms to be "the investment firm as the prime consultant to Alaskans when this distribution happened." He concluded, however: How much babysitting do you want to do to the citizens? If they want to invest it, they can invest it. If they want to invest it ... with a shyster, who are we to say that the guy's even a shyster? So ... I think it's just best left up to the individual .... If they piddle it away, they piddle it away. SENATOR MACKIE added, "We don't tell people how to spend their dividends right now." He then stated: We're trying to keep it real simple and let the people vote on this and decide, and also let the people do what they're going to do with the money. And other than that, I think we start treading into a whole bunch of areas that perhaps we don't have any business being in. But, you know, you pointed out ... some real concerns that ... I guess people are going to have to deal with individually. And I don't know how to respond to some of those, ... on how they might spend their money or shysters or anything else. Number 1442 CHAIRMAN KOTT returned to a point mentioned by Representative Davis, that he had looked into establishing some kind of Alaskan trust fund but had found it to be unconstitutional. He asked whether that is from a state standpoint or a federal standpoint. And if it were unconstitutional from a state standpoint, why couldn't that language be included in this constitutional amendment, to be part of the program? REPRESENTATIVE DAVIS responded that it is from a federal standpoint, as he interprets what he was told. He said perhaps even in the discussion over the dividend itself, there was debate on that. A federal law had opened an opportunity for a short period of time to do that, but that window is closed because that federal law has "sunsetted." He agreed it is a good avenue to discuss if there is an opportunity, but his understanding is that federal law disallows it. SENATOR MACKIE pointed out that the estimated 193,000 Alaskan residents under 18 years of age are probably who they are talking about. A number of people have suggested to him, because they are concerned about children who may never see their money because their parents squander it, for example, that the state establish a trust and hold [the money] in trust for the children. That is something he is willing to consider, depending on the feeling of other legislators and if that is what it takes, through this process, for everyone to come together. However, his reason for not putting it in the plan goes back to his earlier statements about trying to tell families how to manage their affairs or finances or how to raise their children or invest; he has a hard time with that. That area needs some discussion, and they need to involve the public and get their response to some of that. SENATOR MACKIE said furthermore, from a purely economic standpoint, he would rather take his young son's money and invest it for him in an educational mutual fund, because it will be worth so much more when he is 18 years old, than to leave it in a state trust at 3 or 4 or 5 percent interest. There are so many safe, conservative investment mutual fund opportunities out there that yield far greater returns that he would hate to take away that option from parents who will be responsible with their children's money. "That's a tough one," he commented, adding he wants the public to think about what is important and to let legislators know. Number 1604 REPRESENTATIVE GREEN asked about the possibility of having an optional trust for children, even for payouts over a period of years; he suggested perhaps that wouldn't be considered unconstitutional. Noting that the 5 percent [interest] mentioned by Senator Mackie is very modest, he said that if it were 7.2 percent under current economics, a child could almost quadruple the money within ten years on a very conservative investment. REPRESENTATIVE DAVIS pointed out even if it is established in a trust, if this passes, as soon as the state is contractually obligated to distribute $25,000 to a person it would be taxable, to his understanding. SENATOR MACKIE added that it is called constructive receipt of income. Once a person has the benefit of [the money] and could take it all out if so desired, the person has to pay the taxes up-front. That is what the certified public accountants (CPAs) group will provide information on, which is why he hadn't gone into details about the tax consequences. REPRESENTATIVE DAVIS suggested other laws and tax codes might tell a different story, but the foregoing was the initial response they had received. Number 1734 REPRESENTATIVE CROFT suggested the state trust idea is the one that was unconstitutional; he mentioned efforts ten years ago or so to close the pool of PFD recipients. However, nothing prohibits what Representative Green had mentioned, where the form just asks whether a person wants the money in cash or held in trust at bank, for example, or says that for a minor the money can - or will - be held in trust, and asks where. SENATOR MACKIE surmised that there may not be a problem regarding constructive receipt of income if the wording is that the money for all minors would be held in trust. He said those are some of the questions about which information is to be provided. REPRESENTATIVE CROFT said he wouldn't want the state keep the money, however, but suggested a choice of its being disbursed either in trust for a person somewhere or in the form of a check. He agreed that the state wouldn't provide as good an income. He said there might be ways to do tax planning on that election. SENATOR MACKIE said he would be happy to look at that. REPRESENTATIVE DAVIS clarified his earlier statement. He said "illegal under federal law" would probably be more correct than "unconstitutional," from what he was told. REPRESENTATIVE CROFT said he would like to see what Representative Davis had on that. SENATOR MACKIE commented that that is one reason for trying to keep it really simple. "Give everybody a check and let them deal with their own business," he restated. Number 1848 SENATOR MACKIE advised the committee: There's a serious tax question right now, Mr. Chairman, that we didn't talk about, with the IRS [Internal Revenue Service], because the reason we haven't been taxed with the permanent fund is because we've said it's going to be used for a public purpose, not just for personal dividends. So the IRS is waiting and waiting till we're actually going to use it for a public purpose. And I think they are poised to come and nail us big time, right now, because we're not using it for a public purpose. We've never spent a dollar of it. ... I had two choices. One is try to do a plan that gets us out of that situation, along with some of the other things, or participate in the 25 percent bonus for turning in tax [defrauders]. And a 25 percent bonus on $5 billion is substantial, but I decided to go this route instead. Number 1888 CHAIRMAN KOTT thanked the sponsors and announced that he would turn to testifiers on teleconference. He called upon Mr. Noah Bagwill but was told that the Delta Junction Legislative Information Office (LIO) was no longer online. The then called upon Ms. Kathleen Ballenger. Number 1091 KATHLEEN BALLENGER testified via teleconference from Kodiak in support of HJR 47. As a Kodiak resident for more than 32 years, she has seen the state in prosperous times and lean ones; the latter appears to be the case now. She said it is ludicrous that the state has an account with billions of dollars and yet there are problems balancing the state budget. She believes it is time to take a long, hard look at what would be best for the State of Alaska, not just for the individuals who call Alaska home. She said she feels that the proposal made by Senator Mackie, now echoed by Representative Davis, makes total sense. Ms. Ballenger stated: By passing this resolution, we would once again have the opportunity to seriously look at the dilemma we are in and ask the voters to make a choice. I think we need to really concentrate on the state's deficit and not some of the lame concerns I have heard expressed. The comments I have heard from people who are against this proposal range from "I would take the money if the state would pay the income taxes for me" to "It would glut the economy" to "It would shortchange future generations." There is also the notion that some would take the money and leave Alaska. I just don't accept any of these arguments. The first one, about wanting the state to pay the federal income tax, just rings with the title of one of the new TV shows entitled "Greed," and the shortchanging of those unborn assumes that everyone who gets the current PFD for a child holds it for that child. The state, thank goodness, cannot and should not be able to mandate what we do or do not do with our PFD. So whether one wants to take the money and run or use it to pay bills, or for a down payment on part of the American dream, or save it, that would be the individual's choice. The big payout could help many with major purchases, to pay off debts and/or send their child to college. The options are endless. ... If we were to pull ourselves out of this economic mess and inflation-proof the funding of state services, then we could really hold our elected officials to task from this day forward. Many of the financial quagmires we are in now are because of the ups and downs we have had with the state's prosperity and lack thereof. I don't want to see us continue the hassle over funding for the schools and local communities. With this plan, the state could even make a permanent resolution for the PCE [power cost equalization] program, so that everyone in Alaska can be assured they will have affordable electric rates. It is my belief that even those who say they are against the $25,000 distribution and ultimate elimination of the fund might, in fact, vote differently behind a closed curtain. I'm urging that you pass this resolution and give all Alaskan residents that opportunity. Thank you, Representative Davis and Senator Mackie, for introducing this proposal to the legislature. At least everyone is now openly talking about the financial problems that exist. I certainly hope a "resolve" can be found. CHAIRMAN KOTT thanked Ms. Ballenger and called upon Mr. Wayne Weihing in Ketchikan; however, he was informed that all of the LIOs had ended the teleconference. [The people listed above are the only ones who had signed up to actually testify.] Number 2121 REPRESENTATIVE GREEN asked whether an incarcerated person getting out this year might have grounds to litigate because the cutoff date was arbitrary. SENATOR MACKIE requested that Representative Green write that out as a question so he could request a legal opinion. He said he would hate to speculate. However, his understanding is that a lot of those people won't even file for a PFD because they cannot receive one anyway; it goes to the state. "So we file them for them and garnish it and pay off some of the things that I was talking about," he added. He restated that he would find out. REPRESENTATIVE GREEN suggested the amount may be immaterial. REPRESENTATIVE DAVIS voiced his understanding that currently the state takes 100 percent of a PFD for a garnishment. SENATOR MACKIE agreed, saying there is a pecking order. REPRESENTATIVE DAVIS asked who pays the taxes on it if the state takes 100 percent of $25,000. He suggested that should be looked at, surmising that the departments would have the answers. SENATOR MACKIE offered to follow up on that too. REPRESENTATIVE GREEN and CHAIRMAN KOTT said the state doesn't pay federal taxes. REPRESENTATIVE DAVIS replied that they are taking the individual's money, though. REPRESENTATIVE GREEN pointed out that it comes back to the state, however. SENATOR MACKIE suggested that someone who is delinquent on child support payments is probably not paying federal taxes either. Number 2237 REPRESENTATIVE GREEN, alluding to stock market gains over the past few years, asked, in essence, whether severing the fund poses any risk of its not being able to earn what it has previously, if that positive trend doesn't continue. SENATOR MACKIE agreed it is possible that if the market went down over the next five years, the permanent fund wouldn't be worth $26 billion anymore. He said there is always a time to buy and a time to sell, and maybe right now is a good time to cash it out. Number 2315 CHAIRMAN KOTT asked when the payouts would occur [under the plan] and what types of conditions there would be to cash out some of the investments of the fund. He further asked what effect that would have on the state's bond rating, if any. SENATOR MACKIE answered that he doesn't know about the bond rating but would discuss the intention with the plan. First, nothing would be known until the voters of Alaska approve or disapprove it in November of this year. From that point, the APFC would have almost a year because the dividends come out in October. Meantime, the normal process wouldn't be changed, including the PFD application process. The $25,000 would take the place of the normal PFD that a person would have received in October of next year anyway. In terms of what is done legislatively or statutorily or regarding the public's application criteria for eligibility for a PFD, none of that would change. SENATOR MACKIE agreed that the APFC, however, would need a plan. Should this pass the legislature, that would put the APFC on notice that the issue is going on the ballot. Senator Mackie explained that the earnings for that year would be used first, towards the $25,000, then the earnings reserve would be used; he isn't sure how much is in the earnings reserve now but it is "pretty huge." Then whatever principal was required would be used, thus requiring a constitutional amendment to be able to satisfy the $25,000 payouts. That would leave whatever balance of principal and value of the fund remained, which the sponsors estimate at $12 billion, although it could be higher or lower. A new management plan on how to manage that money would take place. Number 2411 REPRESENTATIVE GREEN said there is a restriction on the [APFC] board regarding how they can mix the portfolio. Assuming this gets through the legislature, he suggested there may be a need to look at that and to get expert advice regarding whether to maintain that kind of portfolio mix or modify it. "It could have an effect on how they divest ... enough to make out the $25,000 each," he added. SENATOR MACKIE responded that the asset allocation mix has always been subject to discussion by the legislature. He doesn't want to change anything because [the APFC] has done a good job with the permanent fund; he expects that would continue unless there were an overriding reason why they asked for, and were granted from the legislature, a change to that mix. That is a separate issue from this plan. Senator Mackie closed by saying this is only plan on the table that balances the budget, it gives the people an opportunity to make the decision, and it offers some predictable future for the state and the services it provides. He reiterated the risk that, in four or five years when savings are gone, the state will have to spend the people's PFDs to pay for essential services. [HJR 47 was held over.]