HOUSE BILL NO. 232 An Act making a special appropriation from the budget reserve fund under art. IX, sec. 17c, Constitution of the State of Alaska, to the Alaska Income Account; and providing for an effective date. HOUSE BILL NO. 231 An Act relating to income of the Alaska permanent fund, to the Alaska Income Account, and to permanent fund dividends; and providing for an effective date. Co-Chair Mulder acknowledged that Commissioner Condon had previously expressed his concern regarding the plan submitted by the House Majority and how the anticipated level of return would affect the plan. He noted that the Commissioner had provided several "runs" on the plan. WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE, advised that previous discussion had focused on two issues. The first created a target rate of return projection of 8.25% including current capital market assumptions. He noted that an 8.1% rate of return or greater would be important. An additional concern is that the rate of return supports the payout under the provision of HB 231. He believed that the legislation would provide for a 5.25% payout on a five-year "look-back" rolling average. Commissioner Condon explained that an 8.1% rate of return, subtracting 4% for inflation and 40 basis points for management fees, could provide trend line projections. The trend line projections follow the value of the fund from four years ago. The bill would average market value over 20 quarters beginning one year ago. He commented that over time and working through the transition period, it was acknowledged by the staff that the actual payout rate would be a medium case of 4.8% to 4.9% of the current value. He believed that a 5.25% proposed payout could work. Representative Austerman questioned if the proposed plan could provide better "possibility" for the State in the long-term. Commissioner Condon replied that in order to make a payout from the permanent fund could reduce the risk relative to current practice. He emphasized that the State has been very lucky over the past twenty years in using the current system. Vice-Chair Bunde MOVED to adopt work draft CS HB 231 (FIN), 1-LS0960\H, Cook, 5/14/99, as the version before the Committee. There being NO OBJECTION, it was adopted. Representative Grussendorf requested discussion on Section 10 which outlines the questions being proposed to the public and how they should appear on the ballot. Representative Bunde noted that he supported a "yes" and "no" option. He assumed that the ballot would increase the likelihood that people read the plan and then make an informed vote. Representative G. Davis asked that the effective date be clarified for the record. He referenced Page 5, Section 5, and suggested that it be clarified that the dividends received in 1999 would be for calendar year 1998. Co-Chair Mulder suggested that people do not equate that this year's dividend is for previous year eligibility. He thought that would confuse the issue for the voters. Representative G. Davis suggested adding language including the 1999 "distribution". Representative Bunde pointed out that Section 10 indicates that the Special Election would be held September 14th. He questioned if the program would go into effect after the election had been tabulated. Co-Chair Mulder explained that Sections 3, 7 and 9 of the act take effect July 2, 1999. Sections 1, 2, 8 and 10 take effect immediately. There would be an advisory election, and if the voters turn it down, the Legislature would need to take recourse to reverse the action of adopting those sections. Representative J. Davies believed that enacting the $1000 dollar dividend this October would cause confusion. The Legislature would be subject to criticism if that action was taken. In order to achieve greater clarity, he recommended a special session be planned to address these concerns. Co-Chair Therriault agreed that there would be a lot of suspicion from the voters. Co-Chair Mulder explained that it had been presented this way, following consultation with Legislative Legal, and not having the ability to tie the outcome of an advisory election to the enactment of the legislation. The legislation attempts to provide a one vote vehicle; if that should be rejected, then the Legislature can come back into Special Session. Representative J. Davies inquired if the Permanent Fund Division had been consulted regarding the length of time it would take to issue the checks. Co-Chair Mulder replied that he personally did not know the amount of programming and time required recalculating the checks. Representative J. Davies suggested that the September 14th election date be moved up considering the downside possibility. He commented that the proposed schedule might not be workable. Representative Williams questioned the constitutional issue of people voting themselves more money through the permanent fund. Representative J. Davies reiterated his concern regarding the timing issue of the "no" vote. Representative Williams interjected that the Legislature is not responsible to provide voters with their check at a time they believe reasonable. Co-Chair Mulder noted that the September 14th date had been chosen in consultation with the Division of Elections. He offered to try to "marry" the two-time tables between the Division of Elections and the Permanent Fund Division's release of checks. Discussion followed regarding the timing of disbursement of the permanent fund checks. Representative Bunde stated that if the voters chose not to accept the proposed option, this Legislative Body does not have "time" to wait until next year to address these budget challenges. He suggested that the Committee discuss a "Letter of Intent" should the plan be rejected to meet in Special Session. Representative Austerman pointed out that everything discussed thus far had been tied to how much money would be distributed and then tying that concept to the dollar value of the permanent fund in an "yes" or "no" vote. Co-Chair Mulder assumed that voters would react to question Grussendorf asked if question #7 would be affected by a "no" vote on #5. He agreed that the question is simple, however, there will be complications when explaining it to the public. Representative Austerman recommended that Sections 8 & 9 become effective October 1st. He believed that could tie the vote to the dividend to the rest of the questions which would keep the endowment active. Co-Chair Mulder noted that there would continue to be a need for a payout recalculation. Representative J. Davies questioned "What the people would be voting on" with these questions. He recommended that the issue and focus be limited in order to make it clear what the results become. Representative Bunde preferred that the proposed questions continue to be submitted as a package. Representative Grussendorf pointed out that there are several options which are not included in proposed statute such as spending reductions, spending limits and no new statewide taxes. Representative G. Davis reiterated that 99% of the decision would be based on the question dealing with the dividend. He agreed it is important to establish a plan which includes that concern. He recommended that the question be put to the public one week earlier. Representative Williams elaborated that each question would be essential to the entire package for creating a spending plan. Co-Chair Mulder advised that constituents would be more at ease knowing that there was "constraint" on State spending. He added that his office had received negative feedback when proposing a tax issue. The proposed legislation would encourage the "State to put their best foot forward in obtaining passage of the legislation". That expectation was the spirit in which this plan was designed. Representative Austerman asked what will happen if it is voted down. Co-Chair Mulder replied, no one knows what will happen if there is a "no" vote. He reiterated that there is a lot of pressure to make large budget reductions and that no single option can bring the State to an optimal place. Representative J. Davies stated that he had been prepared to move the previous version of the legislation from Committee. That version did not include a statement that no further taxes would be implemented. He acknowledged that he did not support the current version. Representative Bunde pointed out that this plan does not suggest that new taxes be enacted, however, observed that would not preclude taxes being introduced in other legislation. (Tape Change HFC 99 - 140, Side 2). Representative Austerman recommended deleting question #2 regarding spending limit. If the Legislature should enact new taxes, that question would not be clear. Representative Grussendorf agreed with Representative Austerman recommending that question #2 be dropped. Co-Chair Mulder clarified that the proposed plan could put in place a funding mechanism for basic level State funding. If people want more services, options will be available with consideration of new revenue. He projected that the issue will not go away soon. Co-Chair Mulder noted that taxes are not precluded from the option. Representative Williams commented that question #7 is misleading. Co-Chair Therriault referenced Page 5, Line 4 and asked why language "substantial" had been included. Co-Chair Mulder replied that there is no formula within statute for an advisory election and that there is no absolute compliance with election laws. REPRESENTATIVE SHARON CISSNA questioned if it would be problematic in having a "yes" or "no" vote on each individual question. Co-Chair Mulder assumed that would make it more difficult for the Division of Elections and offered to consult with them regarding this matter. Representative Bunde pointed out that this plan needs to be included in a package for it to work. Representative Cissna advised that if the voter decides not to cap the dividend and yet wants the rest of the plan, they would basically be requesting a tax. Representative Kohring advised that he would not support the plan. He stated that the plan does not clearly make the connection between the use of the permanent fund earnings for government services. He urged that question #6 be further clarified. Representative Williams voiced frustration in that Representative Kohring was not supporting the plan, and had not provided the Committee with an alternative option. Representative Kohring argued that he had submitted his proposed plan to Co-Chair Mulder's office and that he had also addressed these concerns in caucus. Representative Austerman stated that the State could not balance the budget by cuts only as proposed by Representative Kohring. He emphasized that ten members of the Majority body had worked long and hard on preparation of this plan. Co-Chair Mulder MOVED to adopt Amendment #1 and then OBJECTED for the purpose of discussion. [Copy on File]. He explained that voting citizens had requested that there be greater accountability of expenditures. Representative J. Davies noted that the details outlined in the amendment are already included in the Permanent Fund expenditure list. He added that he did not object to the amendment, however, urged that it be on a short list. He envisioned a succinct list of the basic programs for which the money would be used. Co-Chair Mulder asked if Representative J. Davies felt that the amendment would "add anything" to the ballot question. Representative J. Davies replied that it would marginally enhance the concern. Co-Chair Mulder WITHDREW his OBJECTION to Amendment #1. There being NO further OBJECTION, Amendment #1 was adopted. Co-Chair Mulder MOVED a conceptual amendment to Page 5, Line 26, deleting "revenue" and inserting "annual payout". He pointed out that revenue would reflect earnings. Co-Chair Mulder MOVED to amend the language to insert "amount transferred" instead. There being NO OBJECTION to the amendment to the amendment, it was changed. There being NO OBJECTION to Amendment #2 as amended, it was adopted. Representative J. Davies MOVED to adopt Amendment #3. [Copy on File]. Co-Chair Mulder OBJECTED for the purpose of discussion. Representative J. Davies explained that the amendment would add the language "University of Alaska" to Page 5, Line 30. Co-Chair Mulder suggested that inserting that language could lose the support of those voters who do not support public school education. Co-Chair Therriault added that the Alaska Constitution currently addresses that concern. Discussion followed among Committee members regarding the referenced language being including K-12 or K-University. Representative J. Davies WITHDREW the MOTION to adopt Amendment #3. There being NO OBJECTION, Amendment #3 was withdrawn. Representative Austerman MOVED conceptual Amendment #4, deletion of subsection #2, Page 5, Lines 15 & 16. There being NO OBJECTION, it was deleted. Representative J. Davies MOVED a corresponding change to Page 5, Line 10. Co-Chair Mulder noted that the plan does call for a spending limit. Representative J. Davies MOVED that the language on Line 10 read: "This long range plan requires further state spending reductions and limitations on State spending." Representative Williams suggested that language would be redundant. Representative Grussendorf recommended using the language "fiscal discipline". Co- Chair Mulder thought "spending limits" would work best. Representative Bunde questioned what would be addressed with the addition of that proposed language. Representative J. Davies stated that it would be clearer to indicate that: "This long-range plan would require further reductions and limitations on state spending". Representative J. Davies WITHDREW the prior MOTION to adopt Amendment #5. There being NO OBJECTION, it was withdrawn. Representative J. Davies MOVED to adopt the new Amendment requires further limitations and reductions on state spending". There being NO OBJECTION, it was adopted. Representative Austerman MOVED to adopt Amendment #6, Page 5, Line 25, inserting "for distribution" after "$1,000". Representative J. Davies MOVED to amend Amendment #6 inserting "in each of". Co-Chair Mulder questioned if that language would enhance the amendment. He suggested changing the language to "Alaska residents in the amount of $1,000 for annual distribution in 1999, 2000, and 2001". Co-Chair Mulder MOVED the amendment to Amendment #6. There being NO OBJECTION, the language was changed. There being NO OBJECTION to Amendment #6 as amended, it was adopted. Representative Bunde MOVED to report CS HB 231 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. Co-Chair Mulder requested that the MOTION be HELD. Co-Chair Mulder explained that the Division of Elections had not yet prepared a fiscal note. The fiscal note accompanying the bill had been taken from SB 76, which reflects an $839 thousand dollar note, assuming that the cost would be the same. Representative Bunde acknowledged that the fiscal note was high, pointing out that public government and participation "costs money" which is the price we need to pay. Co-Chair Mulder explained the note and also the services attached to it. The fiscal note would cover costs of a special election as provided for in a similar advisory election as in the Senate version of the legislation. Representative J. Davies asked if there would be additional expenditures by the Permanent Fund Corporation. Co-Chair Mulder noted that they had not provided a fiscal note to the Senate Finance Committee at this time. Representative Bunde MOVED to report CS HB 231 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. Representative Kohring OBJECTED. Representative Foster also objected noting that the proposed plan would be harmful to the people living in Bush Alaska. He emphasized that the proposed plan was a "Healthy Urban Alaska Plan" and would be unfair to Bush Alaska. Representative J. Davies added that this bill is not necessarily "good" for urban Alaska either. He stated that there needs to be constraints on government, however, the plan does not include statewide taxes, which will ultimately limit funding for statewide roads and the University system. In order to be equitable, there should be a balanced approach in who is asked to pay. (Tape Change HFC 99 - 141, Side 1). Representative Grussendorf noted that the process of the plan is not yet over. He advised that when educating his constituents, he would indicate both the "ups and downs" of the proposed plan and then what could happen to the State with "no" plan. Representative Austerman stated that he supported the plan and that to "do nothing" would doom the permanent fund dividend. That is not an option. There is no other source of money at this time. Representative Bunde commented that the Alaska fiscal situation is "sick". Without addressing the problem now, there will be no dividend down the road. He looked forward to educating the citizens of Alaska regarding these options and allowing them to make the choice. Representative G. Davis noted that the decision before the State is difficult. The proposed plan has consistent flexibility and does not preclude any future taxes. He emphasized that this is a responsible plan and voiced his support in putting the vote to the people. Representative Moses pointed out that the State would spend nearly $1 million dollars to implement "1/2 of a plan". He emphasized that Legislators continue to make recommendations that are not feasible. Representative Moses believed that all legislators know what really needs to be done. Co-Chair Mulder spoke in support of the proposed legislation, as it is essential to critical services within the State. Without this legislation to safeguard Alaska's future, the outlook is bleak. If the public votes "no", the Legislature will be faced with a difficult decision of dismantling State government. Representative Kohring observed that there exists a philosophical disagreement among Committee members. He noted that he personally comes from a more conservative perspective. He recommended more privatization, merging and focusing on resources for very basic standards. He voiced concern about the current size of State government, while continuing to spend $6 billion dollars a year. Representative Kohring stressed that he does not want to see just cuts but recommends more profound incentive measures be taken. Representative J. Davies agreed with Representative Moses that what is being proposed is 1/2 of a plan. There are pieces of the plan which he knew would be good public policy, however, this plan will not bring enough money to the State to continue funding major pieces of public policy. He maintained that other revenues need to be found in order to maintain our current expenditures. He reminded members that the University of Alaska badly needs more money. Representative Williams advised members that the Permanent Fund was established in order to pay for a "rainy" day which the State is currently experiencing. A roll call vote was taken on the MOTION made by Representative Bunde to move the bill from Committee. IN FAVOR: G. Davis, Grussendorf, Williams, Austerman, Bunde, J. Davies, Therriault, Mulder OPPOSED: Foster, Moses, Kohring The MOTION PASSED (8-3). CS HB 231 (FIN) was reported out of Committee with a "do pass" recommendation and with a new fiscal note by the House Finance Committee. HOUSE BILL NO. 232 "An Act making a special appropriation from the budget reserve fund under art. IX, sec. 17c, Constitution of the State of Alaska, to the Alaska Income Account; and providing for an effective date." Representative Bunde MOVED to adopt work draft for CS HB 232 (FIN), 1-LS0961\D, Cook, 5/14/99, as the version before the Committee. There being NO OBJECTION, it was adopted. DENNY DEWITT, STAFF, REPRESENTATIVE ELDON MULDER, explained the differences between the previous committee substitute and the newly adopted one. He referenced the sectional analysis provided by Tamara Cook, Director of Legal Services. [Copy on File]. Mr. DeWitt explained that the current permanent fund payout would have a dividend larger than HB 231 would allow for. The structure required to have that amount of money available in the account would require the State to place by statute more dollars in that account then the Permanent Fund Dividend Division would be allowed to pay out. The balance would be greater than allowed to be paid out to the Alaska Income Account. Representative J. Davies understood that explanation was opposite of what was actually occurring. He thought that the dividend account would be emptied after the 1999 appropriation. Mr. DeWitt replied that the reason that there is money left in that account is because the State would be moving toward making a deposit into the dividend account, greater than the amount allowed by law to be paid out. Co-Chair Mulder added that the excess funds would be swept into the Income Account. Representative J. Davies asked if the Income Account had been created under current statute. Mr. DeWitt replied that it was and would not go away because the excess funds would need to be moved back to the Alaska Income Account. Representative J. Davies pointed out that for the legislation to be effective, it would require a 3/4 vote. He asked the intent including the Capital Budget Request (CBR) following the budget appropriation. Co-Chair Mulder replied that it would continue to exist to address potential settlements coming into it. If the plan were adopted and placed into statute, there would be a corresponding constitutional amendment to come forward to the CBR as unnecessary in the future. Representative J. Davies questioned how a significant shortfall would be handled by the Healthy Alaska Plan. Co- Chair Mulder responded that the money would either be borrowed, reduce spending accordingly or raise taxes. Representative Grussendorf voiced hesitation in eliminating the CBR should something dramatic occur to State revenues. Co-Chair Therriault asked about the repayment section of the CBR and when that money would become available. Representative Austerman pointed out that neither of the proposed bills addresses the CBR. However, he saw the Alaska Income Account as the "shock absorber". Representative Bunde suggested that the role of the CBR would follow the money, so then the money would roll over to the Alaska Income Account. Representative J. Davies agreed. He added that it is important to know how the State will track money borrowed from that account. Co-Chair Mulder agreed that some mechanism should be put in place, emphasizing however, that it is important to allow future legislatures to be able to adjust that amount. Representative Bunde MOVED to report CS HB 232 (FIN) out of Committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CS HB 232 (FIN) was reported out of Committee with a "do pass" recommendation with a new fiscal note by the Department of Revenue.