HOUSE JOINT RESOLUTION NO. 26 Proposing amendments to the Constitution of the State of Alaska relating to and limiting appropriations from and inflation proofing the Alaska permanent fund by establishing a percent of market value spending limit. Co-Chair Harris MOVED to ADOPT Work Draft Version U of HJR 26 dated 3/19/04. There being NO OBJECTION, it was so ordered. PETE ECKLUND, STAFF TO REPRESENTATIVE WILLIAMS, explained the incorporation of Representative Stoltze's Amendment #1 in Version U. He said that it simply shortened and amended the title of the resolution. In response to a question by Co-Chair Williams, Mr. Ecklund commented that Amendment #2 is not in Version U. Co-Chair Williams announced that he would move HJR 26 to the bottom of the agenda until Representative Stoltze arrived to address it. HOUSE JOINT RESOLUTION NO. 26 Proposing amendments to the Constitution of the State of Alaska relating to and limiting appropriations from and inflation proofing the Alaska permanent fund by establishing a percent of market value spending limit. Co-Chair Williams again brought HJR 26 before the committee to discuss Work Draft Version U that was adopted earlier in the meeting. He noted that Amendment #1 by Representative Stoltze was adopted and incorporated into Version U. Representative Stoltze MOVED to ADOPT Amendment #2. Representative Hawker OBJECTED. Representative Stoltze explained the amendment reflects his concern about protecting the principal from invasion in the event a POMV is implemented in the Constitution. He had the amendment drafted after listening to testimony from the Mental Health Trust and Permanent Fund Corporation staff. Amendment #2 reads: Page 2, line 3: Delete "five" Insert "four" In response to a question by Co-Chair Harris, Representative Stoltze explained that the amendment changes the percentage, on line 2, page 3 of the new version. It proposes to make it 4% of the value. Representative Hawker agreed with the intent of the amendment to ensure protection of the value of the Permanent Fund over time. The issue has been given a great deal of technical analysis and consideration, but he was personally convinced that 5% would protect Fund over time. He discussed the ten-year rolling real rate of return for the Permanent Fund and why 5% is appropriate. He reminded the committee of statutory enabling language in HB 298 that provides that if the 10-year real rate of return drops below 5%, the Legislature would be limited to that lower number for draws. He concluded that there is a compelling argument to keep it at 5%. He noted that the constitutional amendment states "up to 5%." He could not support Amendment #2. Vice-Chair Meyer commented that in the community meetings on POMV, people constantly returned to the 5%. He is comfortable with 5% and up to the 5%. He expressed that adequate safeguards are already in place. Representative Croft commented that 4% is a more prudent number. He supported erring on the side of caution and conserving more for Alaska's children and grandchildren. He said 5% is defensible, but "on the outer edge of what most endowments take." Co-Chair Harris expressed support for Amendment #2. Co-Chair Williams stated that he objected to Amendment #2 for the reasons that Vice-Chair Meyer and Representative Croft expressed. After working on the Percent of Market Value for the past six years, he believes that 5% is a good and proven payout. He would vote against the amendment. A roll call vote was taken on the motion. IN FAVOR: Joule, Stoltze, Chenault, Croft, Harris OPPOSED: Fate, Foster, Hawker, Meyer, Williams Representative Moses was absent. The MOTION FAILED (5-5) and Amendment #2 was not adopted. Co-Chair Harris MOVED to ADOPT Amendment #3. Co-Chair Williams OBJECTED for purposes of discussion. TOM WRIGHT, STAFF TO REPRESENTATIVE HARRIS, explained that Amendment #3 would establish an earnings reserve account to ensure that the corpus of the Fund would not be touched and would be a separate entity. Language was inserted on page 2, beginning on line 4, to provide a mechanism within this amendment to appropriate funds for the operation of the Permanent Fund Corporation. There is also language providing to distribute a program of dividend payments for state residents and public education after paying the costs of operation. Conforming language on page 2, subsection (b), line 19, provides that after the effective date, the costs up to June 30, 2004 prior to the passage of this amendment will be appropriated. Co-Chair Harris asked if this constitutional language protecting the corpus of the Fund provides that if the earnings are less than 5%, the payout would be less than 5% for the first five of six fiscal years. Mr. Wright affirmed. Amendment #3 reads: 23-LS1006\V Cook 3/22/04 CS FOR HOUSE JOINT RESOLUTION NO. 26( )  IN THE LEGISLATURE OF THE STATE OF ALASKA TWENTY-THIRD LEGISLATURE - SECOND SESSION   BY    Offered:  Referred:    Sponsor(s): HOUSE RULES COMMITTEE BY REQUEST OF THE LEGISLATIVE BUDGET AND  AUDIT COMMITTEE  A RESOLUTION    Proposing amendments to the Constitution of the State of  Alaska relating to the Alaska permanent fund, establishing  the earnings reserve account, and permitting distribution  from the account only for permanent fund dividends, costs of  administering the permanent fund, and public education.  BE IT RESOLVED BY THE LEGISLATURE OF THE STATE OF ALASKA:  * Section 1. Article IX, sec. 15, Constitution of the State of Alaska, is amended to read: Section 15. Alaska Permanent Fund. (a) At least twenty-five per cent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses received by the State shall be placed in a permanent fund, the principal of which shall be used only for those income- producing investments specifically designated by law as eligible for permanent fund investments. The earnings reserve account is established as a separate  account in the fund. All income from the permanent fund shall be deposited in the earnings reserve account as soon as it is received. Appropriations may  only be made from the earnings reserve account as provided in (b) of this  section [GENERAL FUND UNLESS OTHERWISE PROVIDED BY LAW].  * Sec. 2. Article IX, sec. 15, Constitution of the State of Alaska, is amended by adding a new subsection to read: (b) Appropriations from the earnings reserve account for a fiscal year may not exceed five percent of the average of the market values of the fund on June 30 for the first five of the six fiscal years immediately preceding that fiscal year. Appropriations from the earnings reserve account may be made only for the following purposes: (1) costs of administering the permanent fund; (2) a program of dividend payments for State residents established by law together with costs of administering that program; and (3) public education.  * Sec. 3. Article XV, Constitution of the State of Alaska, is amended by adding a new section to read: Section 30. Transition. (a) On the effective date of the 2004 amendments relating to the Alaska permanent fund (art. IX, sec. 15), the unencumbered, unappropriated balance of the earnings reserve account established under AS 37.13.145(a) is added to the earnings reserve account established in the Alaska permanent fund. (b) Section 15(b) of Article IX first applies to appropriations for fiscal year 2006. Appropriations from the permanent fund for fiscal year 2005 are subject to Section 15 of Article IX as that section read on June 30, 2004.  * Sec. 4. The amendments proposed by this resolution shall be placed before the voters of the state at the next general election in conformity with art. XIII, sec. 1, Constitution of the State of Alaska, and the election laws of the state. Representative Croft asked if the language on page 2, lines 9-10 protects the current dividend structure in law. Mr. Wright clarified that it states a program of dividend payments for state residents, and it doesn't prescribe a percentage or an amount. In response to a question by Representative Croft, Mr. Wright said it would apply to the current statute. Representative Croft asked if the Legislature could change the current statute on the dividend program under this language. Mr. Wright pointed out that the Legislature always has the authority to change the dividend program. Co-Chair Harris explained that Amendment #3 would establish in the Constitution three things that the Legislature can do with the earnings of the Permanent Fund: pay the costs of administering the Fund, pay the dividend, and appropriate for public education. It doesn't give percentages. Representative Croft commented that the amendment language looks like a dividend protection but it could be anything established by law. Co-Chair Harris observed that the Legislature could spend all the earnings of the Permanent Fund if it so chose, but this amendment provides some small protection to the dividend. Co-Chair Williams asked if Amendment #3 changes everything and gives a new direction to HJR 26. Co-Chair Harris replied that it's not a complete change, but it is a lot more specific. Co-Chair Williams requested that the committee not vote on Amendment #3 at this time in order to have time to review it before the next hearing. Representative Hawker asked Co-Chair Harris to consider dividing Amendment #3 into the two distinct issues embodied in Section 1 and Section 2 of the amendment. Representative Joule commented that there is currently an earnings reserve account and he asked how this would be different. Mr. Wright pointed out the only difference is that this amendment states there is a separate earnings reserve account and places it in the Constitution. Representative Fate MOVED to ADOPT Amendment #4. Co-Chair Williams OBJECTED for purposes of discussion. Representative Fate expressed concern over the ability of the Legislature to fulfill its prime purpose of appropriating money. He expressed that any percentage is subject to a warranted change, and the ten-year rolling average has been well researched. He said he is one of the few members who can recall the Great Depression that lasted 12 years, with double-digit inflation. He reiterated that the prime responsibility of the Legislature is to appropriate, and if it can't, its function has been eroded. Representative Fate explained that Amendment #4 changes six words. On line 2, instead of saying a percentage of 5%, it codifies in the Constitution that there will be a percentage determined by law. Amendment #4 reads: *Sec.2. Article IX, sec. 15, Constitution of the State of Alaska, is amended by adding a 01 new subsection to read: 02(b)Appropriations from the permanent fund for a fiscal year shall be 03 a percentage of[on may not exceed five percent of] the average of the 04 market values of the fund on June 30 for the first five of the six fiscal years 05 immediately preceding that fiscal year as determine[d] by law. MR. BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA PERMANENT FUND CORPORATION, DEPARTMENT OF REVENUE, compared Amendment #4 to Work Draft U. The proposed work draft puts a spending limit on the Permanent Fund equal to the Board of Trustees' recommendation of no more than 5%. The proposed amendment maintains the concept of basing appropriations on market value, but states that the spending limit would be put into statute instead of the Constitution, on an annual basis. Representative Croft noted previous discussions of the limit of 5%, which would allow lower appropriations but not higher. This amendment would allow higher appropriations. The trade-off for POMV is the spending limit discipline of 5% in good years in order to reserve for the bad. He expressed concern that in a year when oil prices and the market are up, the inclination to ignore an income tax or oil tax and the pressure to spend up to 6% or 7% might be irresistible. This amendment gets rid of the needed discipline. Representative Hawker agreed with Representative Croft and expressed concern that Amendment #4 clearly allows overspending in the good years. He pointed out that it violates three of the five reasons the Permanent Fund Corporation argues for Percent of Market Value: maintaining the purchasing power of the Fund, preventing overspending in good years, and making payout amounts more stable from year to year. He observed that the purpose of the POMV set percentage is to stabilize the amount of appropriation from the Fund and give absolute guarantee of the long-term value of the Fund. He respectfully did not concur with the amendment. Representative Fate informed the committee that his amendment was drafted in concurrence with the spending limit bill [HJR 9] before the Committee. For him, it does not come down to a short, or even a 25-year term consideration of the growth of corpus of the Fund. In his view, although he agreed with the concept of the measure, passage of HJR 26 would erode the prerogative and responsibility to appropriate by the Legislature. It is not his concern whether the Fund even grows, but putting from zero to 5% in the Constitution establishes an appropriation. He introduced the amendment because of the basic question of the functions and responsibilities of the Legislature, not in order to allow 7% or 8% in the future. Co-Chair Harris asked if the fiscal note for $700 thousand dated 3-16-04 is still in effect with the bill. Mr. Bartholomew affirmed, and explained that there are two additions to the FY 05 budget that the Board of Trustees and Permanent Fund staff is requesting. Once the Legislature adopts the constitutional amendment, the Corporation would fall under the restrictions of the Alaska Public Offices Commission (APOC) on the authority to advocate. The requests in the operating budget are for additional authority to educate and advocate for Percent of Market Value; and if the Legislature supported that request, to be able use radio, television and print media to carry out those functions. A roll call vote was taken on the motion to adopt Amendment #4. IN FAVOR: Foster, Fate OPPOSED: Hawker, Joule, Meyer, Stoltze, Chenault, Croft, Williams, Harris Representative Moses was absent. The MOTION to adopt Amendment #4 FAILED (2-8). Representative Croft questioned if the Fund would educate in a non-partisan manner or advocate for POMV. He asked how it would be found in a fiscal note. Mr. Bartholomew stated that in talking with the APOC, the definitions of education and advocacy are unclear. He said that if there were specific lines to draw, the PFC would work with legal counsel on the authority to comply, as well as the authority language. He noted that if the language in the operating budget did not pass, the PFC couldn't spend the $700 thousand. Co-Chair Harris thought that it would be a "slap in the face" to the public for the Permanent Fund Corporation, which is entrusted with the dividend to advocate for POMV. He questioned using $700 thousand dollars of the Permanent Fund on advocacy when another entity could assume that role. Mr. Bartholomew agreed that it would be the preferred way. He explained that the "feed-back" from the public on the Percent of Market Value approach indicates that a broad segment of the public does not understand it. The public is educated through mass media. The Permanent Fund needs the authority to speak publicly. To reach the public, you must go after them, he said. Co-Chair Harris voiced concern that the Just Say No campaign gets the message out to many Alaskans who may not be educated on the issue but are hearing the message. He asked if people would be "turned off" by the use of $700 thousand of Permanent Fund money to tell Alaskans what they need to do. He asked if that had been considered. Mr. Bartholomew replied that even as the request was written up, the Board discussed a negative public reaction. TAPE HFC 04 - 63, Side B    Mr. Bartholomew continued discussing the use of state money for advocating for the POMV, expressing that the Board of Trustees believes there is the obligation to educate and that the benefits outweigh the risks. Vice-Chair Meyer pointed out that $300 thousand is in the Supplemental Budget and asked if the $700 thousand is additional. Mr. Bartholomew addressed the $1.4 million advocacy, pointing out that the amount could be determined by campaign parameters. Costs would be split between FY 04- FY 05, with $900 thousand in FY 05 and $700 thousand derived from the fiscal note. He said that $200 thousand would come from other parts of the budget. He expressed that the Board was very sensitive to the potential negative reaction and it urged the Corporation not to proceed without legislative guidance. Vice-Chair Meyer asked if there would be other than public sources of funding available if there were only General Fund money. Mr. Bartholomew answered that the Corporation had not pursued other sources, and private groups had not contacted it. The Board would not seek private funding, and as a public entity, it wouldn't want to have "strings attached." Vice-Chair Meyer noted that there are opposing groups raising private money. He suggested a grassroots effort to be a "Just Say Yes" group, but he acknowledged that it would be a challenge. Representative Hawker referred to the fiscal note. He thought that the opposition groups would not be held to the same standard of truthfulness and impartiality of the Permanent Fund Corporation, and he commented that it is easy to tell people what they want to hear. He voiced concern over the Legislature's leadership role and responsibility, and said that if the Legislature lacks faith in its own convictions on the POMV being the right thing to do, an inappropriate message could be sent to the public. He expressed that the dialogue before the public should be objective, factual and truthful. Representative Stoltze felt that there is no legitimate reason to use government money and it would erode public confidence. He recommended looking at it from a strategy point of view, and he lauded all the effort that has been expended. Co-Chair Williams noted that he agreed with the Permanent Fund Corporation's approach. He stressed that this is an important issue for the State of Alaska, and the public needs to make an informed decision. Co-Chair Williams stated that HJR 26 would be HELD in Committee for further consideration.