HJR 25 - CONST. AM: PERM. FUND INCOME & DIVIDEND Number 1273 CHAIRMAN GREEN announced the next item of business was House Joint Resolution No. 25, proposing amendments to the Constitution of the State of Alaska to guarantee the permanent fund dividend, to provide for inflation-proofing, and to require a vote of the people before spending undistributed income from the earnings reserve of the permanent fund; and relating to the permanent fund. The committee had heard testimony from Representative Austerman, sponsor, on April 21, 1997. Number 1302 CLIFF STONE, Legislative Assistant to Representative Alan Austerman, read the sponsor statement into the record: "Within the Constitution of the State of Alaska, all income from the Alaska permanent fund is deposited into the general fund and available for appropriation. The legislature, by statute, has created an earnings reserve account, from which dividends and inflation-proofing are paid. Funds then remaining in the earnings reserve account are called undistributed income or leftover earnings. "Historically, this undistributed income has been deposited back into the principal of the permanent fund by the legislature. Last year, the legislature deposited $1.8 billion of undistributed interest earnings back into the corpus of the permanent fund, leaving a balance of about $100 million in the earnings reserve account. "Under current law, the permanent fund dividend and inflation- proofing could be eliminated by a simple majority vote of the legislature and subsequent approval by the Governor. "A constitutional amendment is the only way to guarantee the permanent fund dividend program continues and provide for inflation-proofing of the Alaska permanent fund itself and to require a vote of the people before any spending of the undistributed income can take place. "With both the permanent fund dividend and inflation-proofing permanently protected by the constitution, Alaskans might feel more comfortable about considering other uses for undistributed income in the earnings reserve account." MR. STONE stated the sponsor's intention is to create a dialogue to inform Alaskans of the difference between the permanent fund dividend and the permanent fund itself. He indicated when "permanent fund" is mentioned, people only think about the dividend. With this resolution, the sponsor hopes that during this interim and the next session, people can become educated statewide about how the permanent fund is set up, what constitutionally must be put back into the corpus, how it is inflation-proofed and how it is that Alaskans have a permanent fund dividend. Then people may feel comfortable with the legislature's looking at that earnings reserve account and making decisions for its use in state government other than depositing it back into the corpus of the fund. Number 1470 REPRESENTATIVE BERKOWITZ asked whether Mr. Stone was saying that current constraints prohibit the best investment possible for the fund. MR. STONE replied that the permanent fund itself is being managed by some of the best people available. Number 1500 REPRESENTATIVE BERKOWITZ said that was not his question; in fact, he was praising the management. He suggested the impact of this would be to "unleash them" somewhat, which would enhance the return to the state from the permanent fund. MR. STONE responded that he believed all the resolution attempts to do is place in the constitution the dividend and inflation- proofing. Currently, those are in statute. Theoretically, someday the legislature may decide to take the dividend and inflation- proofing, wiping them out. If those were in the constitution, they would be safeguarded a little better. CHAIRMAN GREEN said as the resolution is worded, it has no effect on activity and investment restrictions now placed on it. He stated, "And, I think, dealing with perhaps better rates of return on some types of investment - some certain stocks are a little higher-risk/higher rewards, if you're right - those restrictions that have recently been changed would still be changed ... by the majority." MR. STONE said that was his understanding. Number 1580 REPRESENTATIVE BUNDE said as long as he had been in the legislature, there had never been a move to spend the earnings of the permanent fund. Many people had been frightened of doing that, even though he understands that as the permanent fund was initially proposed, the earnings in excess of the dividend were to pay for state services. He asked whether Mr. Stone knew of any movement afoot to spend the earnings. MR. STONE said no. REPRESENTATIVE BUNDE commented, "And so, this may be putting suspenders on the belt." MR. STONE replied that he believed Representative Austerman's thought was that future legislatures may be more free-wheeling and, to make up for a fiscal gap, may be willing to restrict the dividend program itself, unless it is in the constitution. REPRESENTATIVE BUNDE suggested this is an attempt to bind future legislatures. Acknowledging the intent to guarantee continuation of a dividend and to require inflation-proofing, he asked whether a further intent is to disallow spending of the earnings. MR. STONE said no, the earnings reserve would still be at the discretion of the legislature. The idea is that if Alaskans understand that their permanent fund dividend is constitutionally protected, they might feel more at ease in allowing a future legislature to spend that earnings reserve account to set up an endowment, for example. Number 1685 REPRESENTATIVE BUNDE asked whether under HJR 25, excess earnings could be spent without a vote of the people. MR. STONE replied, "The original resolution did read that way, but this new, revised resolution takes that restriction away. After meeting with the permanent fund folks and through the House State Affairs, some consideration was made. And so, a CS came forward to not have that restriction in there." REPRESENTATIVE BUNDE referred to subsection (b) of Section 3, which says in part, "Income from the permanent fund shall be deposited into a separate account". He asked whether they were setting up a "permanent fund within the permanent fund." MR. STONE said no; the earnings reserve account is the separate account to which they are referring. Number 1760 REPRESENTATIVE JEANNETTE JAMES noted that she had worked extensively on this issue in the House State Affairs Standing Committee. She said as far as a deposit into a separate account, subsection (b) puts into the constitution what is already in statute. REPRESENTATIVE JAMES said the one change they made was where it indicates the reserve account can be spent for the permanent fund dividend program and inflation-proofing, both as provided by law. This does not preclude the legislature from changing the way the dividend is calculated; it just protects its existence. Depending on future interest rates and the cost of inflation-proofing, there could be insufficient money for both in the earnings reserve account. There could not be something set up in the constitution that the legislature would be unable to do. Therefore, they were not defining the dividend program or the inflation-proofing. REPRESENTATIVE JAMES continued, "The other part that was in this bill - which was, then, also, that the rest of the leftover could not be spent by the legislature without a vote of the public because of its being in the constitution - seemed to be unwieldy, because that wouldn't even let us put it back in the fund. It wouldn't let us do anything without putting it out to the people for a vote. And then, of course, we would get a vote based on not whether we could spend it or not, but whether we could spend it for that, and that that would have to be part of that issue." REPRESENTATIVE JAMES said it is an educational tool as much as anything else. People don't want any of the permanent fund spent because they believe it will affect their dividends. Conversations over this constitutional amendment will allow the legislature to let people know exactly how this works. She agreed that funds remaining after dividends and inflation-proofing will have a higher likelihood of being spent by the legislature without public outcry than the way it currently is. Representative James asked whether she had correctly evaluated the intent. MR. STONE said yes. REPRESENTATIVE JAMES noted that investment of money in the earnings reserve differs from investment of money in the fund itself; the former is invested for short-term, rather than long-term, gains. Number 1902 CHAIRMAN GREEN said as he reads it, there would be inflation- proofing, determined by inflation rates. Although the dividend would have to be maintained, it could be any amount, even one dollar, as determined under current law. MR. STONE concurred. He said in talking with Jim Kelly of the Alaska Permanent Fund Corporation, there had been very good returns these last few years. He stated, "And it's based on five-year segments, to kind of allow for those roller-coaster rides." In the future, there may be a less "bullish" market and the dividend itself may actually decline. CHAIRMAN GREEN recalled that the original purpose for the permanent fund was to take care of the cost of government during the lean years of oil revenue. MR. STONE said that seems to have been lost. CHAIRMAN GREEN asked for confirmation of that being the original intent. MR. STONE said he would have to look at that. However, he had heard that the original intent was to provide money to help support government as oil money dries up. REPRESENTATIVE PORTER said he remembered that precisely. He noted that he had further questions. Number 1981 REPRESENTATIVE CROFT stated his understanding that HJR 25 has no say about the rate of dividend, the particular investment strategy or the calculation of what adequate inflation-proofing is. It requires inflation-proofing and continuation of the dividend program, as provided by law, as the legislature sees fit. MR. STONE said that is correct. This in no way would change the way the fund is managed. It would simply protect, constitutionally, the dividend program and inflation-proofing. It was also intended to create the educational atmosphere mentioned by Representative James. Number 2025 REPRESENTATIVE BUNDE asked whether inflation-proofing would take priority over the dividend. He further asked whether anyone was present from the Alaska Permanent Fund Corporation. MR. STONE replied that he believed the way it is set up currently, the dividend program comes first. He noted that it is spelled out in statute. CHAIRMAN GREEN said if there is a downturn significant enough so they could essentially only cover inflation-proofing, since that is specified, then dividends would have to go down. MR. STONE said that is correct. CHAIRMAN GREEN stated, "So, they would take precedent." Number 2062 REPRESENTATIVE BERKOWITZ asked whether financial analysts had looked into this and, if so, what they had to say. MR. STONE said that was a good point. He had been talking with Mr. Kelly from the Alaska Permanent Fund Corporation. Some Internal Revenue Service (IRS) questions had been raised regarding how this would affect the distribution and the permanent fund itself if this is constitutionally protected, rather than statutorily protected. He stated, "The IRS is not letting us know how they would rule on such a case. But they're very concerned over at the Permanent Fund Corporation about ... such a ruling." REPRESENTATIVE BERKOWITZ referred to correspondence from Ron Lorensen (included in packets) discussing the IRS questions. He asked whether those questions had been pursued further in relation to this resolution. MR. STONE said not that he was aware of. But even before this resolution came to light, there were questions about the IRS tax implications with the permanent fund itself, because it was never intended to be just a dividend program. The fund itself was supposed to be utilized in some way to help support government. So, the IRS has been looking at this for some time. He said Mr. Kelly would be the person to address that question. Number 2141 REPRESENTATIVE BERKOWITZ commented that he was leery of rushing to making a change if it would jeopardize the tax status of the permanent fund. He suggested it would be prudent to have a firm grip on the consequences. CHAIRMAN GREEN asked whether there was an estimate of when that response may come. He noted that dealing with the federal government can be a lengthy process. MR. STONE replied, "Apparently they're not talking. They're letting the state make that decision." CHAIRMAN GREEN asked whether the concern with the IRS would be greater if this was protected statutorily rather than constitutionally. MR. STONE said apparently it was vice versa. He suggested that the Alaska Permanent Fund Corporation and its counsel could provide a better answer. REPRESENTATIVE PORTER requested consideration of an executive session and commented, "I can't think of anything that could have a greater impact on the state than this question." Number 2207 CHAIRMAN GREEN noted that if they went into executive session, their questions would require a response by someone from the Alaska Permanent Fund Corporation. REPRESENTATIVE CROFT indicated he had attempted to call Ron Lorensen and had left a message. He had also called Eric Wohlforth, an attorney who is a trustee on the board; Mr. Wohlforth had preferred that Representative Croft talk through counsel. Representative Croft agreed that an executive session would be best when the appropriate people could be present. Number 2323 CHAIRMAN GREEN announced the committee would hold HJR 25 over and hear it in executive session, probably on Monday, April 28.