SENATE BILL NO. 39 An Act relating to memorial scholarship loans. Co-chairman Halford directed that SB 39 be brought before committee and referenced a draft CSSB 39 (Fin) (9-LS0442\C) which he advised contains the contents and provisions of both SB 36 (BRINDLE SCHOLARSHIP LOANS) and SB 39. He then called for questions from members. None were forthcoming. Senator Zharoff MOVED that CSSB 39 (Fin) pass from committee with individual recommendations. No objection having been raised, CSSB 39 (Fin) was REPORTED OUT of committee with zero fiscal notes from the Dept. of Public Safety and Dept. of Education (Postsecondary). All members signed the committee report with a "do pass" recommendation. SENATE BILL NO. 84 An Act making a special appropriation to the principal of the permanent fund; and providing for an effective date. Co-chairman Halford next directed attention to SB 84 and noted two draft Senate Finance committee substitutes. He explained that one version creates a continuing appropriation while the other leaves $250 million within the earnings reserve account so there is no question about the implication in any combination of interest rates with regard to the permanent fund. The appropriation would also "count against any use by a simple majority in the constitutional budget reserve." The Co-chairman then voiced a preference for version (9-LS0639\C, 2/23/95) instead of (9-LS0639\G, 2/28/95). JACK FARGNOLI, Office of Management and Budget, came before committee. He referenced earlier noted concerns regarding the original bill and advised that the proposed CSSB 84 (Fin) changes only one item in that list of concerns. He then voiced his understanding that the proposed Finance committee substitute would hold the dividend harmless "by leaving $250 million in the reserve account balance." That does not reach other concerns such as the majority or three- quarter vote on releases from the budget reserve, potential adverse impact on the state bond rating, removal of reserves without a plan or provision for a fiscal emergency, etc. Further, by removing a large amount of money, it preempts a good part of the mandate of the fiscal planning commission. Use of a well articulated and reasoned reserve policy would seem to be a key part of any fiscal plan in both the short and long term. (Senator Sharp arrived at this time.) The Governor's position on both the original bill and proposed Finance committee substitute is "somewhere between opposition and no position, yet." Mr. Fargnoli asked that the committee allow ongoing fiscal discussions in both the administrative and legislative branch to continue. He stressed that consideration of repayment of the constitutional budget reserve, forward funding of education, etc. are linked both in policy and magnitude. Deliberations in the conceptual stage are not sufficiently set to make a decision on any one item and particularly not on the appropriation proposed within SB 84. Senator Rieger asked if the Office of Management and Budget had conducted analysis of the size of an earnings reserve that would be needed to support a five-year-average payout rule, as presently in statute. Mr. Fargnoli responded negatively. Senator Rieger voiced his understanding that the earnings reserve account is to provide a backup for such a payout. Mr. Fargnoli responded by saying that if the question is whether the earnings reserve balance should be used in some proportion for current uses and for other provisions, he would personally agree "that's probably something we should aim at." That has, however, not been articulated or developed. Senator Rieger next advised of his understanding that the payout rule for calculation of dividends is based on a five-year average. It would then seem that in a down year with no moneys in reserve, the program would be unable to pay "on a five-year average." (The five-year average could be higher than performance for a particular year.) Mr. Fargnoli acknowledged that in that situation the "exceptional limit provision" would activate, and the dividend would be limited to "what's in the balance of the reserve account and the current earnings." Senator Rieger asked if it makes sense to have a policy establishing the amount which should be reserved, based on the context of the five-year payout rule. Mr. Fargnoli reiterated that the administration has no policy on the issue. He voiced his personal belief that a policy should be developed within the context of other larger questions involving use of the fund and net income. Senator Zharoff voiced his understanding that in order to ensure that the legislature would not be able to "get into the CBR with a 50% vote," a balance of $500 million is needed in the earnings reserve account. Mr. Fargnoli concurred in that understanding. Leaving $500 million in the balance might effectively hold harmless the requirement of a three-quarter vote. Senator Randy Phillips MOVED for adoption of CSSB 84 (Fin) version 9-LS0639\G, 2/23/95. No objection having been raised, the "C" version of CSSB 84 (Fin) was ADOPTED. Senator Zharoff advised of concern that a balance of $250 million in the earnings reserve would not protect the three- quarter vote on the CBR. He then MOVED to increase the balance to $500 million. Co-chairman Halford referenced testimony from the director of the Legislative Finance Division that something "in the range of $450 million" would be needed. The Co-chairman then advised of his belief that both that need and the "dividend averaging argument, based on the past history of the fund, were red herrings." However, in an attempt to deal with both arguments, it appears reasonable to leave $250 million in the fund. The total amount taken out for averaging over the past fifteen years is "somewhere around $50 million." That argument has thus not proven to be the history of the fund or the dividend or inflation proofing. Speaking to the constitutional budget reserve, Co-chairman Halford said that if the remaining $250 million is added to other reserves, it would add $300 or $400 million to "whatever the budget was." In theory, reducing the earnings reserve down to $250 million would make it easy to "get a little bit out of the constitutional budget reserve, but it wouldn't be enough to do the budget balancing that the Governor is proposing . . . ." The question would still have to be reach by a three-quarter vote to meet the Governor's proposed $450 or $470 million from the constitutional budget reserve. Senator Zharoff reiterated that he would be more comfortable if $500 million remains in reserve. He then voiced his preference for maintaining the earnings reserve account in tact until the fiscal planning commission has done its work and made recommendations. He restated his motion to delete $250,000,000 at page 1, line 4, and insert $500,000,000. Co-chairman Halford called for a show of hands. The motion FAILED on a vote of 2 to 5. Senator Donley concurred in concern that the proposed appropriation would severely limit ability of the fiscal planning commission to do its job. Senator Randy Phillips MOVED for passage of CSSB 84 (Fin) with individual recommendations. Senator Rieger said that while he would not oppose movement of the bill, he wished to register concern that it would occur before inflation proofing protection for the permanent fund has been dealt with. Projections by the permanent fund corporation evidence how the earnings reserve account "runs out at some time out in the future," and the principal of the fund is short changed because of insufficient funds to cover the dividend and inflation proofing. He said he would be more comfortable with the legislation if it were combined with a measure "which reprioritized the use of the permanent fund earnings, so that inflation proofing were first." While the proposed appropriation places additional moneys in principal, it could accelerate the date at which "we fail to inflation proof." That is the reservation. No objection having been raised, CSSB 84 (Fin) was REPORTED OUT of committee. Co-chairmen Halford and Frank and Senators Phillips and Sharp signed the committee report with a "do pass" recommendation. Senator Donley signed "should be reviewed by Financial Planning Commission before further consideration." Senator Zharoff signed "same comments as above" in concurrence with Senator Donley. Senator Rieger signed, "Do not pass until inflation-proofing has first priority on annual earnings."