SENATE JOINT RESOLUTION NO. 33 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. SENATOR JERRY MACKIE told of how he wanted to generate public discussion on his proposed plan prior to the resolution being heard in any committee. He stated there was a huge response that represented both pro and con viewpoints. He continued that he was appreciative of those who supported the plan. Of those who opposed the plan, he said he wanted to find out why to determine how the concerns might be addressed. Senator Mackie then began to describe the elements of the resolution, referring to a handout entitled, Mackie Plan Assumptions. [Copy on file.] Senator Mackie stated the resolution is a constitutional amendment that would require voter approval. If approved, he said the plan would provide a one-time final dividend payment of $25,000 from the permanent fund for each Alaskan who is eligible for the dividend as of January 2001. He qualified that no new people would move to the state to take advantage of the payout because the one-year residency requirement has already begun. Senator Mackie noted the plan requires no new statutes or changes to statutes. Senator Mackie shared that after the $25,000 dividends were paid out, which he estimated to total approximately $14 billion, the dividend program would end and there would be a balance of $12 - $13 billion in the permanent fund. He said the Permanent Fund Corporation estimates that 592,000 people would be eligible to collect a dividend in the year 2002. He added that the fund would continue to be managed by the Permanent Fund Corporation, the principal would be constitutionally protected against spending without voter approval and that only the earnings would be available for government spending. Senator Mackie pointed out that the plan also calls for inflation proofing the fund and stated that most people agree that inflation proofing the fund was the responsible thing to do. Senator Mackie relayed that the Corporation gave an estimate of the annual earnings off of the $12 billion balance using rates of return of eight, ten and twelve percent. He qualified that the Corporation issued a disclaimer stating their prediction was an eight-percent rate of return. However, he said their projections were always conservative and he noted that the fund has never earned below ten percent. Therefore, he believed ten percent was the most reasonable assessment of future earnings. He referred to the chart in the handout that showed that once the fund was inflation-proofed earnings of ten percent would be $884 million in the first year of the plan. In the year 2003, he said the fund would earn $923 million. He continued with predicted earnings of $962 million and $1.4 billion in the next two years with the amount continuing to grow. He said the reason the earnings continue to increase was because the plan does not change the current constitutional requirement that 25 percent of oil revenues go to the corpus of the permanent fund. Senator Mackie's prediction was that after the payout, this plan balances the budget with no additional taxes required. He indicated his opposition to taxes. Senator Mackie admitted there would be a significant impact on dividend recipients' individual income taxes. He relayed that the Alaska Society of Public Accountants has volunteered to do a complete analysis on the tax consequences for all tax brackets. He thought the members' would be surprised to learn that individuals would actually have more money after they received the one-time large dividend, paid the tax, invested the remaining funds and received an annual dividend from their personal investment. Senator Mackie noted that the average Alaskan was in the 28 percent tax bracket. He said an individual would have to earn over $250,000 per year in order to reach the 39 percent tax bracket. He added that he was continuing to work on determining how Individual Retirement Accounts (IRAs), educational trusts and other investments could avoid some of the tax burden. Senator Mackie voiced another question raised was the affect the payout would have on the eligibility of recipients of such public assistance programs as welfare, Medicare, and low income housing programs. He talked to Margaret Pugh, Commissioner, Department of Health and Social Services and was told that this could be the best public assistance program ever to get people off welfare and to become self- supporting. Senator Mackie avowed that the reason people are poor was because they didn't have any money. He predicted that giving this money would help people. He also anticipated that the state would save money with the reduction of public assistance. Senator Mackie explained how current statutes does not calculate permanent fund dividends as income for eligibility for the Alaska Temporary Assistance Program Denali KidCare, Adult Public Assistance, or the Longevity Bonus Program. He also learned that permanent fund dividend income was not included in the eligibility requirements for most Medicaid benefits. However, he noted that the dividend would be considered as income for those recipients of two programs, food stamps and supplemental social security insurance. Senator Mackie spoke to low income housing programs saying that while current participants would not be affected because federal guidelines allow for a one-time receipt of cash, any new applicants would be affected. He added that daycare assistance, the USDA child and adult care food program, school meals eligibility, and Headstart would not be adversely affected by the large payouts to eligible Alaskans. Senator Mackie next addressed child support saying that Commissioner Perdue said the reason many people were on welfare was because of back child support owed to custodial parents. He told about the large amount of money that a single parent household would receive after the parent and children's' dividends were collected and after the deadbeat parent's dividend was garnished. He suggested that the money could provide for the children's education, provide job training or fund a small business to allow the family to get off public assistance. He quoted the Department of Health and Social Services "It's not fair to assume these folks want to stay on welfare. Any opportunity they have to get off - they're gone." He stressed that this plan would provide a tremendous opportunity for people who are dependent upon the government for basic support. Senator Mackie shared there were currently 11,000 cases of overdue child support payments in the state, where dividends are garnished to help make those payments. He estimated that garnishing a $25,000 dividend from deadbeat parents, who are Alaskan residents would collect $103 million for those children. He continued that 7,500 of those cases would be closed because the amount due was equal to or less than the amount of the large payout. The balances due on the cases would be reduced greatly, he stressed. Senator Mackie next addressed the 10,100 defaulted student loans equaling $80.9 million owed to the State Of Alaska noting that the garnishment of the large dividend would close 9,000 accounts and repay $67 million to the student loan program. Senator Mackie stated that the $25,000 dividends from the current number of 3,500 felons would yield $87.5 million. He told of how the funds are allocated to the Sexual Violence and Domestic Abuse programs, the Violent Crimes Compensation program and the Department of Corrections Prisoner Rehabilitation program. Senator Mackie believed that the permanent fund was established by the voters to provide a source of revenue that would pay for essential services when oil revenues declined. He stated that only 40 percent of the current residents of Alaska were residents when the permanent fund was established. He continued that it wasn't until six years after the fund was established that the legislature decided to distribute some of the earnings among individual residents. He argued that many people have since developed the attitude that the permanent fund is only in place to provide the dividends. Senator Mackie admitted that he and other legislators had been unwilling to argue this point with the public. He divulged that he was as guilty as many others were of championing on the campaign trail, to protect the citizen's dividends at any cost. As a result, he remarked that because of this attitude, "our state's going down the drain." Since he and others were retiring, he shared that they could now "tell it like it is." Senator Mackie expressed that the state was unable to adequately fund the University of Alaska, K-12 education, deferred maintenance needs and road systems. He expounded that this has had a significant negative impact on the public at a time when Alaska is the richest state in the nation. He surmised that there was not one other state that would not want to trade places with Alaska's financial problems. He restated his opposition to tax, saying that to implement a large sales tax would only drain money from the community He did not appreciate the use of the word "bribe" but noted that the $25,000 dividend was an incentive or a negotiation to try to break the hold that people have on the notion that the fund is only for providing dividends. He talked about the different reasons the September 14, 1999 advisory vote regarding the use of the permanent fund had failed. He asserted that those who claim the budget should be cut further don't understand that an additional $1 billion cannot be cut from a $2 billion general fund. His assessment of the reason the long-range budget plan was not approved was because the legislature did an inadequate job of educating the public. He stated that the plan "looked like a blank check that we are writing to ourselves." He added that the plan was too complicated and did not give the voters enough time to thoroughly understand it. Senator Mackie warned against "sticking our heads in the sand," suggesting that the legislature should devise another option to present to the voters. "If you don't like my plan let me see your plan" he remarked and said he appreciated others' plans. He made further comments about other plans and surmised that other legislators would prefer the matter to "go away." Co-Chair Torgerson warned the witness to keep his comments to the bill rather than speculation of the other member's intentions. Senator Mackie shared one of the reasons he developed this plan was because of his concern about the future. He cautioned that if the state's reserved continued to be spent down, in four to five years the reserves would be gone and the legislature would be unwilling to tax at the high rate that would be necessary to fund government. The only option, he stressed would be to tap into the earnings of the permanent fund, which is what pays for the dividend program. Senator Mackie stated that because of the state's constitutional mandate to balance the budget, the legislature would have no other choice but to use funds from the earnings reserve account. REPRESENTATIVE GARY DAVIS added that when the legislation was introduced he immediately supported it. He noted that this plan balances the budget without imposing new taxes. Representative Davis gave a history of the expectations of dividend recipients that initially were "wow, this is nice" to entitlement sentiments after several years of the program. He spoke of testimony from Alaskans challenging the legislature to not take away their individual dividends. He expressed that those people who argue so ardently against using the permanent fund to help pay for government services are not the same people trying to make the decisions necessary to keep government functioning. Representative Davis stressed that while this legislature is attempting to make a $30 million budget reduction, future legislatures will face the need to make much larger reductions. He admonished those who simply call for reductions without understanding what was involved. Representative Davis stated that in the previous year, the voters rejected a long-term solution to the budget situation and that this resolution offered a short-term solution, which may be what the voters wanted. Senator Green asked if the sponsor had looked at what statutes would need to be revised to incorporate this plan. Senator Mackie said he had not because other than clean-up language in the reviser's bill, there would be no other changes to statute. He was careful to not make any changes to statute. Senator Green repeated Senator Mackie's comments that those recipients of welfare, Medicaid, low income housing, Temporary Aide for Needy Families (TANF) or Denali KidCare would not loose their eligibility for those programs after collecting the large dividend. She asked what would be the impact on the hold harmless and if it would be only a portion of the payout amount or the entire $25,000. Senator Mackie understood that the hold harmless did not automatically rise with the amount of the dividend, but was an amount set in statute. Senator Green wanted to know if the witness thought it was a good thing for people who's income and need were the qualifying factors for these programs to receive $25,000 and not have their eligibility impacted. Senator Mackie responded that it was a good thing in that those individuals and families would become able to move off of welfare, which he predicted all would do. Senator Green said that she understood that those recipients would not be required to move off welfare. Senator Mackie deferred to the department for a specific response. He expressed his prediction that many people would leave these public assistance programs and that the entire hold harmless provision would go away since there would no longer be a dividend. Senator Leman continued on Senator Green's point that the sponsor had said the large dividend would not prohibit people from qualifying for certain programs and that the sponsor thought that was positive. Senator Leman found it interesting that the sponsor took that approach rather than considering it a positive incentive for those people if they would not qualify for the programs. Senator Mackie responded that the hold harmless was already placed in statutes and that the legislature could change those provisions if desired. After listening to those who manage the programs and deal with the participants daily, he realized that the participants would be gone. Senator Leman asked if "gone," meant gone from the state or from the programs. Senator Mackie clarified that he meant those program recipients would no longer participate in the public assistance programs, although some could leave the state as well. Senator Leman asked where is the credibility of the permanent fund program when applicants sign an oath that they intent to stay in the state indefinitely. Senator Mackie countered that was the way the system currently operated and that he was not changing anything. While he was not promoting that people leave the state after receiving a large dividend, for those people who lived in Alaska only to receive the benefits of the permanent fund he said, "don't let the door hit you in the butt on the way out." He stressed that he was born in Alaska, his family has been in the state forever and that he would die in Alaska. He suggested that if those people left, there might be smaller class sizes and fewer people to worry about. Co-Chair Torgerson stressed that this resolution did not repeal any statutes. He thought that for Committee members to drill the witness on the impact the resolution would have on any laws was unfair. Senator Wilken requested another opportunity to continue this conversation after the public testimony. He wanted to discuss the fund's earnings and how they would be projected in relation to inflation proofing. Senator Adams stated that the presentation was excellent but that the plan was ahead of its time because the state was not yet "broke". However, he surmised that this was the best long-range plan before either the Senate or the House of Representatives. He supported no taxes, and expressed "let the people vote." Senator Adams then asked about future generations. Senator Mackie agreed the intergenerational issue was a problem and admitted this was not a perfect plan. However, he was also concerned about future generations if there is no money to fund certain services such as the university system and senior citizen programs. Senator P. Kelly questioned whether this plan would actually lose on the intergenerational point, because of the argument that if the state is going to be able to pay for future services, a long-range fiscal plan needs to be implemented now. Co-Chair Torgerson asked the sponsor to provide a written response from the Department of Health and Social Services regarding Senator Green's concerns about whether recipients of a large dividend would qualify for certain public assistance programs. ART GRISWOLD testified via teleconference from Delta Junction as an older resident who would lose money from his Social Security Insurance as well as his tax deductions for his minor children and his spouse if the large payout was made. He encouraged funding of the land grant university work as intended. MARY GRISWOLD testified via teleconference from Homer that she was opposed to SJR 33 and supported HB 411 as a better method of providing essential government services while preserving the dividend program. JAMES SHOWALTER testified via teleconference from Kenai against SJR 33 saying that legislatures did not know the meaning of the word "no". KATE BALLENGER testified via teleconference from Kodiak in strong support for SJR 33 because she believed it would relieve the current funding situation. She was tired of hearing the debate on what programs to cut when this money was available. She could not understand how anyone could oppose this plan when it would eliminate the deficient. JUNE BURKHART testified via teleconference from MatSu asking Senator Mackie what part of no didn't he understand. She took issue with his suggestion that voters did not understand what they were voting for on the advisory vote. She avowed that she knew what she was voting for. BRYAN VAN ETTINGER testified via teleconference from Petersburg against SJR 33 because he believed it would place a wedge between divorced parents. He addressed the deadbeat dad comment and took offense to the term. JOHN GLOTFELTY testified via teleconference from Delta Junction that the resources were given to all Alaskans in the constitution and told the Committee not to remove the citizens from the oversight of the fund. Tape: SFC - 00 #57, Side B 9:54 AM Mr. Glotfelty continued. SUSAN GIBSON testified via teleconference from Kenai taking issue with Senator Mackie's comment about people's attitude regarding budget reductions. She suggested the legislature get some courage to stand up to special interest groups. LINDA ANDERSON testified via teleconference from MatSu accusing the legislators of lining their pockets. BILL PHILLIPS testified via teleconference from Kenai about his mistrust of the legislature. JESSE CHANDLER testified via teleconference from MatSu that he thought the $25,000 payoff was "stupid". KEITH LIPSE testified via teleconference from MatSu telling the Committee to not use his dividend to fund welfare. He charged that the people on public assistance would return even after receiving the large payout. Senator Mackie concluded thanking the Committee for hearing this resolution. He promised that at the next hearing he would ask those who support the plan to come testify. AT EASE 9:59 AM / 10:04 AM