SJR 13-CONST. AM: PERMANENT FUND  CHAIRMAN TAYLOR said SJR 13 proposed amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund. He asked Mr. Jay Hogan to provide testimony. MR. JAY HOGAN referred the committee to his letter dated May 3, 2002. He wanted to make one correction to that letter and said HB 304 had passed out of the House of Representatives and was now in the Senate. He said the letter explained his position. He said a great deal of change had been made to the permanent fund by statute over the past 26 years. He said the investment policy and inflation proofing was provided for by statute, as well as a host of other improvements. He said that was the way it was supposed to be. He said he sat through many committee hearings in 1975 when the statutory permanent fund was passed by the legislature and vetoed by the governor. He said the discussions in 1976 focused on making it a flexible provision so that future legislatures would be able to change the administrative structure, purposes of use and other things. He said the only provisions that were put in the Constitution were the concept of a trust fund, the source of income (25% of certain mineral royalties) and that funds could not be withdrawn once they were in the corporate status. MR. HOGAN said Wyoming had created a payout provision for their public school fund and permanent mineral trust fund by statute. He said other states did the same thing by statute and through their constitution. He said it was historically correct to make this change by statute. He didn't understand why there should be a constitutional provision when a statutory provision would do the job. 3:35 p.m. CHAIRMAN TAYLOR said it seemed that SJR 13 would set up a disconnect between the earnings and dividends by going to a fixed average percentile instead of the 5-year income averaging. He asked if SJR 13 would cause dividends to eat into the principal of the fund. MR. HOGAN said from his own research on the issue he discovered that there were a number of endowments and trust funds that used the 5% payout method. The theory is that over time it would allow for inflation proofing of the fund and allow a reasonable return of money to be used for other purposes. He said the State had more than 20 years of experience inflation proofing the permanent fund by statute by putting earnings reserve money into it and inflation proofing on an annual basis. He said that was the choice of those individual legislatures. He felt the permanent fund had been doubly inflation proofed. He said the legislature should retain the ability to choose what to do with the income of the permanent fund. SENATOR THERRIAULT commented that Mr. Hogan's letter provided a good synopsis of the history of the permanent fund and what other states were doing. He would probably use the first part of the letter that talked about the creation of the permanent fund. He received an email from a constituent that said the permanent fund was created to dish out dividends. He was amazed that there was so much misinformation out there. He said the Senate State Affairs committee substitute (CS) addressed the issue of the possibility of eroding the principal of the permanent fund. He referred to page 1, line 16, which stated, "Money may be appropriated from the earnings reserve account." He said Section 1 specified that all income from the permanent fund would be retained in a separate earnings reserve account. He said the 5% draw was limited to that earnings reserve account and would not be taken from the principal. CHAIRMAN TAYLOR asked if there were any further questions for Mr. Hogan. There were none. He asked Ms. Sheila Howe to provide testimony. MS. SHEILA HOWE, N.E.C., said she was a mother. She said she spent most of the summer reading over the information on SJR 13. She supports SJR 13 because the bill would give some stability and permanency to the inflation proofing qualities of the permanent fund. She understood that the permanent fund was initially intended to meet the needs of the state in the future. She wasn't concerned about the dividends paid out on a yearly basis. She saw the need to protect the permanent fund against inflation and perpetuities and thought SJR 13 was the best way to accomplish that. SENATOR THERRIAULT asked if she was in Alaska during the advisory vote on the permanent fund dealing with the long-range fiscal plan. MS. HOWE said she had been in Alaska since 1969 and had not missed an election. SENATOR THERRIAULT asked if she felt comfortable telling the committee how she voted. MS. HOWE was against that proposal because of the way it was laid out. She wasn't against using the APF. SENATOR THERRIAULT said Mr. Eddie Burke [ph.] said he spoke for Ms. Howe. He said Mr. Burke's editorials lumped Ms. Howe's no- vote with the 83% that voted against the proposal. He said Ms. Howe's position was very different than Mr. Burke's. CHAIRMAN TAYLOR asked Mr. Robert Storer to provide testimony. MR. ROBERT STORER, Executive Director, Alaska Permanent Fund Corporation (APFC), Department of Revenue (DOR), said the board of APFC believed that inflation proofing should be memorialized in the Constitution. He said that could be done by creating a spending limit of no more than 5% of the moving average of the APF over a five-year period. He said only the earnings reserve of the APF would be available and the principal of the APF would be protected. He said SJR 13 was heard extensively in the Senate State Affairs Committee. MR. JIM KELLY, Director of Communications, APFC, DOR, referred the committee to the memorandum from Mr. Storer requesting amendments to SJR 13 dated April 23, 2002. He addressed the fourth paragraph on page 2 of the memorandum, which requested a technical amendment: Sec. 30. Transition. On the effective date of the 2002 amendments relating to the Alaska permanent fund (art. IX, sec. 15), the balance [PORTION] of the statutory earnings reserve account (AS 37.13.145) [THAT CONSISTS OF INCOME] of the permanent fund is transferred to the earnings reserve account established in Section 15(a) [15(b)] of Article IX. MR. KELLY said he discussed this amendment with Senator Therriault and believed he was supportive of it. He said APFC had not had time to show the Senate State Affairs CS to the board and legal counsel when it was moved out of committee. After legal counsel reviewed the CS, it was discovered that 15(b) would need to be changed to 15(a). He said that was just a technical error. The addition of the word "balance" and the subtraction of "that consists of income" would be necessary to make the intent clear. He said the APF's market value was the combined total of the principal, the realized and the unrealized income. He said 5% of that would be the payout limit in any given year, all of which would come from the earnings reserve account. He asked for a further amendment to add the words "inflation proofing" after the words "relating to" in the first line of the title. He said SJR 13 was really about inflation proofing the APF. He said the 5% limit would ensure that the APF was made permanent in the Constitution. He said as long as those provisions were in the Constitution, APFC would be able to provide a growing income stream in addition to what would be needed to be retained to offset inflation. He believed the change in the title would make it easier for the people to support SJR 13 at the polls after it passed the legislature. CHAIRMAN TAYLOR moved Amendment 1 to add the words "inflation proofing" after the words "relating to" on page 1, line 1 in the title; replace the word "portion" with the word "balance" on page 2, line 9; strike the words "that consists of income" on page 2, line 10; and replace "15(b)" with "15(a)" on page 2, line 11. 3:50 p.m. SENATOR THERRIAULT said the wording of the title had gone back and forth between the legislative drafters and the APFC. He said bill titles were supposed to express the contents of the bill. He understood that the APFC wanted the title reworded for salesmanship but inflation proofing didn't really cover the full contents of the bill. He said SJR 13 was more than just an act dealing with inflation proofing because it would set up the 5% draw. He said inflation proofing would be accomplished but he didn't think that would be a correct title for the bill. SENATOR DONLEY said it wouldn't be a legal title. CHAIRMAN TAYLOR removed the title change from Amendment 1. MR. KELLY said the rest of the amendment was for clarification purposes. He said the point of that section was to transfer all of the money that was in the earnings reserve account and everything that everybody thought was in the earnings reserve account. He said that was currently in a statutory earnings reserve account and SJR 13 would set up a constitutional earnings reserve account. They just wanted to be sure that the two accounts matched up. SENATOR THERRIAULT said that was added in the Senate State Affairs Committee so that the legislature wouldn't have access to the earnings reserve account by a simple majority vote. He said the new account would be protected and only 5% per year would come out. MR. KELLY said the words "that consists of income" should be stricken because they suggested that the unrealized earnings would not be transferred when they should be. SENATOR THERRIAULT said they wanted to make sure that everything from the statutory earnings reserve account got moved into the constitutional earnings reserve account. CHAIRMAN TAYLOR asked if there was objection to Amendment 1. There being no objection, Amendment 1 was adopted. CHAIRMAN TAYLOR asked if there was further discussion on SJR 13. There was none. He asked if anyone else wished to testify on SJR 13. There was nobody. SENATOR THERRIAULT moved CSSJR 13(JUD) out of committee with attached fiscal note and individual recommendations. CHAIRMAN TAYLOR noted that there was an objection. Upon a roll call vote, Senators Cowdery, Ellis and Therriault and Chairman Taylor voted in favor of moving CSSJR 13(JUD) out of committee and Senator Donley voted against moving CSSJR 13(JUD) out of committee. Therefore, CSSJR 13(JUD) moved out of committee by a vote of four to one with attached fiscal note and individual recommendations.